Buy-to-let mortgages - what you need to know
Posted on 19th November 2020 at 10:15
In the current global market amidst the pandemic, house prices have fallen meaning it could be a good time to invest in a buy to let property. However, if you don’t have the benefit of having a large sum of money available to you, then it is very likely you will require a buy-to-let mortgage.
There has been a dramatic decrease in the number of options available to potential property investors looking for a mortgage with 35% less buy-to-let mortgages since the beginning of March.
It has affected borrowers with small deposits as the vast majority of 80% and 85% mortgages being withdrawn from the market. However, they are still available with landlords wanting to borrow between 60-70% loan to value (LTV) being the least affected by the cuts.
Stamp duty has also been lowered for properties under £500,000 until March 2021.
Providing that you can prove you have the income from an employer and a good credit history to support your application, the process is straightforward and you will be accepted for a buy-to-let mortgage. But what are the steps needed to take if you are a company director or contractor, earning a steady income and wanting to buying a property or a portfolio of properties to let?
SPVs and Trading Companies
The first step is to decide which type of company you want to use:
SPV (Special Purpose Vehicle) - is set up for the sole purpose of buying a house. It is not an active business and is only set up to hold the property. Because of this, it is usually the business model that most company directors do with when they are renting out properties.
Trading Company - it operates in another industry rather than in property. Therefore, purchasing property won’t be the trading company’s main purpose.
These are both limited companies but the mortgage application process will be different depending on which type you decide upon.
Applying for a mortgage with your current limited company
Firstly, you will need to approach the bank who you would like to have the mortgage with. It is recommended that you speak to an Independent Financial Advisor (IFA) before deciding on a mortgage lender. Your accountant will then be able to advise you on the application process.
You will be required to show the lender all of the accounting paperwork relating to the company from day one, so ensure all of this is in order. This gives all the information the lender requires to see the current financial situation and projections for the company.
Obviously, this only relates to trading companies. If you are starting an SPV then there will be no financial history to look at as it won’t be operating until a property has been purchased.
The lender will also take into consideration the position of the directors of the company too. In the majority of cases, the director will need to take a personal guarantee. If there is more than one director, they will both have to take the guarantee. It is necessary to have this in place as the mortgage would pass on to them if the company ceased trading. For example, if for whatever reason the company was unable to pay its debts, including a mortgage, then the lender can pursue the directors.
This means that you need to ensure your personal finances are as strong as your company’s whether you are looking to get a mortgage as a trading company or as an SPV.
Using your current company for a mortgage
There are a few factors to consider when deciding whether to set up an SPV or purchase through a trading company:
Time: if you are in a rush to buy a property to let, then setting up an SPV is probably the better option. Due to there not being much for the lender to have to look through, the application process is a lot quicker.
Price: there are a lot more options available when you apply for a buy-to-let mortgage as an SPV. Due to this, it is most likely you will get a mortgage at a better rate, compared to a trading company.
Financially Stable: It could still be worth applying as a trading company as there are many good options available, providing that you have been trading for at least two years and are in a stable financial position. Your accountant can advise you on this.
Letting the Property: The majority of landlords who let their properties to tenants, will buy them through an SPV. As no other form of trading needs to be associated with the property, it allows them to invest in property as a side income (or as a main income for professional landlords). There is also no requirement for a limited company to already be formed as it is created solely for the purpose of purchasing the property.
When you have spoken to your accountant and/or financial advisor, you should feel more confident enough to make an informed decision regarding purchasing a property and the application process.
For more information or tailored advice about applying for a mortgage – whether personally or through a limited company or an SPV – feel free to book a call in with us to discuss your requirements - we'd love to hear from you.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
Share this post: