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Buy to Let Mortgages: Personal vs Limited Company
Theo Makris from Pia Financial Solutions joins the Mortgage & Protection Podcast to talk about Buy to Let mortgages.
What is a Buy to Let mortgage?
It’s a mortgage sold specifically to people who buy property as an investment rather than as a place to live.
The typical scenario is where someone wants to buy another property and rent it out to a tenant. With that rent they will pay the mortgage company and hopefully gain some profit too.
What is the difference between a Buy to Let mortgage and a residential mortgage?
A Buy to Let mortgage is strictly for investment purposes, so you can’t live in that property. A residential mortgage is the mortgage you take out for your own home.
Generally, you will need a bigger deposit for a Buy to Let mortgage and you tend to borrow at higher interest rates.
How is personal Buy to Let different to limited company Buy to Let?
This is something that’s become popular in the last couple of years. Five years ago limited company Buy to Let was very rare. It’s generally come about because of tax law changes.
The key difference is that with personal Buy to Let you own the property in your name. With a limited company Buy to Let, a company owns that property. So the mortgage offer and the title deeds will be under a company name.
What are the advantages and disadvantages of company Buy to Let?
The main advantage of owning a property as a limited company is to save on tax, especially if you’re a higher rate taxpayer. A company pays corporation tax, which is lower than income tax.
It is definitely worth talking to a tax specialist and an accountant for advice, because the decision will depend on your specific situation. You also need to consider both your income now, and what it might be in five or ten years time.
Another side to the limited company is that you keep your finances and your credit profile separate. So if you have a non-paying tenant in that property who has unsettled debts and bills are being paid up, the company is liable for that: you are not exposed personally.
A big disadvantage, though, is that letting property as a limited company is more expensive. Lenders will charge higher arrangement fees, interest rates are higher, and you have to do annual accounts which means appointing an accountant.
So it’s really important to take a holistic view and weigh up which option will work best for you personally.
Do limited companies pay stamp duty on Buy to Let?
Yes, in any scenario. Even if you are a First Time Buyer and a first time landlord, you will pay both stamp duty and the additional rate for Buy to Let.
Can I transfer my Buy to Let property to a limited company?
Yes, but the word ‘transfer’ is misleading, because you are actually selling the property to the company. So it’s a purchase transaction.
We deal a lot with these and it’s important to make sure each client understands how it works. One of the important aspects is that the company can purchase that property at below market value.
As an example, imagine a property was bought for £200,000 and the owner wants to move it into a limited company. They can sell it to the limited company for £100,000. There’s no deposit because the equity is already there, so you can use ‘gifted equity’ as a deposit. However, stamp duty will still be charged at the full market value.
What are the criteria for a Buy to Let mortgage?
There are a few typical criteria when you’re looking for a Buy to Let mortgage:
- A good credit score.
- To already own your own home
- A minimum income of £25,000
- A deposit worth 25% of the purchase price
If you meet all four of these you will have your pick of the lenders. But if you don’t meet one or more, you will still potentially get a mortgage. For example, many retired people with a small income successfully get a Buy to Let deal. The main thing is that the rent you charge will cover the mortgage payment by a certain factor.
What deposit do I need for a Buy to Let mortgage? Does it differ for personal and company mortgages?
Generally, if you have 25% deposit as a company or an individual, you’ll have access to most of the lenders. On the limited company side, a few will only go up to 70% loan-to-value, so you need 30% deposit.
For personal mortgages, a few lenders will allow a 20% deposit. But of course, the smaller your deposit, the higher the interest rates.
How much does a Buy to Let property cost?
Ït depends on the type of the property, the area and the part of the country you’re in. Clearly a Buy to Let in the North of England will cost less than a similar property in the South.
It’s important to be aware that many lenders have minimum valuations for a Buy to Let. It tends to be around £75,000. Some lenders will go as low as £50,000 valuations, but below that amount, you start struggling to find a mortgage provider.
How much will I be able to borrow?
Every lender has what we call a stress rate calculation, which is the way they decide how much they will lend to you based on the rent. They tend to use lower stress rates with a limited company, which means you can borrow slightly more than under a personal name.
It’s important to research rental rates and property costs thoroughly. In the South, house prices are high, and while rents are also high, there is a disparity between the two. You may need to borrow more to make up the difference.
Is it illegal to rent out a house without a Buy to Let mortgage?
If you buy a house with a residential mortgage with the intention of letting it out, that’s basically a breach of terms and conditions of the lender. It’s mortgage fraud.
However, if you have purchased the house as a residence and have lived there for several years, you can discuss the option to let with your current lender. Some will allow this, while others won’t – in which case you can remortgage to a Buy to Let product instead.
Is it illegal to live in your own Buy to Let property?
Again, if you get a Buy to Let mortgage and then live in the property, this is mortgage fraud. The terms and conditions of a Buy to Let state that you must not live there or let it to any family members – it has to be an unconnected party.
How do you set up a limited company?
Most people just go to their accountants – it’s straightforward and can be done within a day. You can even set one up yourself online with a bit of research.
Interest-only versus repayment on a Buy to Let mortgage?
With a repayment mortgage, each month you’re paying back both the interest and the capital of the loan.
With an interest only mortgage, you’re only paying back the interest. Your monthly payments are lower on an interest-only basis, but at the end of the term, you will still have to repay the amount you originally borrowed in full.
When you buy your own home, it tends to always be on a repayment basis. At the end of 25 years, if you have paid all your monthly payments, you’re debt free.
Many people choose interest-only for Buy to Let, seeking to pay as little as possible to generate cashflow. They could put this towards another property or set it aside to reduce the overall loan in the future.
Many landlords assume that they can sell the property to repay the loan at the end of the term – but this is a risky approach. We recommend having a clear exit plan.
Do I need a solicitor for Buy to Let?
Yes, if you’re purchasing property you will need a solicitor, whether it’s through a limited company or personal.
Many lenders offer free legals on mortgages which reduces the cost, but you will always need independent legal advice before buying a property.
How many Buy to Let properties can I own?
There’s no specific limit, but there is a classification. Once you have four properties, you’re classed as a portfolio landlord. At this point different regulations apply, affecting how a lender works out your affordability.
As a result, many lenders will only go to three properties. Above this you’ll need a specialist mortgage investment lender.
How can a Mortgage Broker help?
An important benefit of working with a broker is limiting any mistakes. Mistakes can be costly, especially with something as large and as important as a mortgage.
If you’re serious about property investment and achieving your goals, it’s worth paying for the right advice. You wouldn’t do your own conveyancing forms, divorce proceedings, or your own business accounts – it’s the same with mortgages.
We help you design a financial plan and set your future goals. Plus, we’ll make sure you’ve done the research – so you know the level of demand for rental property in your chosen area, the kind of tenants you would expect.
We’ll help to build a good team around you: a mortgage adviser, solicitor, a letting agent and insurance agent.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Some buy to let mortgages are not regulated by the Financial Conduct Authority