If you are looking to purchase a buy-to-let property at the moment, the chances are you are considering making that purchase through a limited company.
We are receiving an increasing number of buy to let mortgage applications from limited companies due to the differences in tax treatment.
A key benefit is the treatment of financial costs (e.g. mortgage interest). Recent tax changes mean that individuals letting residential property cannot treat mortgage interest as an allowable expense. However, at the time of writing, financial costs are still an allowable expense for those letting property as a limited company.
Limited companies can also be beneficial for those paying the higher rate bands of income tax. As limited companies are taxed on property income at corporation tax rates and can then issue dividend payments to their shareholders.
Note, using a limited company is not the best approach for everyone and in some cases, you could pay more tax by using a limited company, for example, capital gains tax can be higher. Seek professional tax advice if you are unsure of the right approach for your circumstances.
We might not be able to advise on tax, but we can advise on the difference in available mortgage products if you were to buy through a limited company.
The key differences in buy-to-let mortgages when using a limited company:
It can be possible to borrow more through a limited company than as an individual. The two key factors that determine how much you can borrow on a buy-to-let mortgage is the loan-to-value ratio and expected rental income.
Loan-to-value is defined by the amount borrowed divided by the value of the property. There is no difference here between the mortgage products available to a limited company and an individual. Lenders will typically lend up to 80% of the property value on purchases within a limited company.
The rental income stress test is different for individuals as to limited companies. If you are a higher rate tax-payer then the Income Cover Ratio the lender will use is likely to be 145% when purchasing as an individual. However, if the same purchase is made through a limited company this stress test is lower at 125%. Which means that borrowers who might have been restricted by the value of rental income may be able to borrow more through a limited company.
Using a limited company is unlikely to change the mortgage term available to you. You can borrow over a term of 35 years as a limited company and the term available is assessed by the age of the applicant. Older borrowers are unlikely to be able to borrow over a longer-term just by using a limited company.
Equally, fixed-rate mortgages for limited companies are similar to products offered to individuals, 5-year, 3-year and 2-year fixed interest rates are available. No changes there.
Cost of Finance
Not all lenders are the same, and amongst the 250+ different lenders we work with, the treatment of limited companies is not equal.
We have lenders who offer the same deals to individuals as they do to limited companies. With current deals for limited companies as low as 2.8% fixed interest for two years + £995 application fee, based on a 75% loan to value.
However other lenders who offer competitive rates to individuals will charge one percentage point more interest and double the application fee to limited companies.
In short, there are many good mortgage deals available to limited companies but the choice is reduced compared to individuals. Use a Commercial Finance broker rather than a Residential mortgage broker to access rates from the whole of the market.
Limited Companies with non-property SIC codes
A final note, when seeking a mortgage it will be a lot easier if your limited company is used exclusively for your property business. If you use an existing limited company that also has activities which do not relate to the property, it will be harder to access mortgages and in some cases, lenders will seek further protection, e.g. a floating charge across the whole business.
Setting up a new company is quite simple, costs £12 and the government provides a step-by-step guide, available here.
Whether you buy through a limited company or as an individual, Liberate can help you get the best rates and terms on Buy-to-Let, Commercial and Portfolio Mortgages, contact us today for a free consultation.