Limited company directors and the limited companies themselves can obtain mortgages.
However, getting a mortgage through a limited company isn’t as straightforward as obtaining one personally. Lenders assess various factors such as mortgage affordability, the length of time the company has been trading, and the structure of the company.
Cleerly can guide you through your options for mortgages for both property investment in its various guises, and also buying residential property as a property owner.
When applying for a mortgage through a limited company for investment, for established companies, lenders typically scrutinise the financial stability of the business to ensure it can meet mortgage repayments. They may consider personal guarantees from directors or shareholders to mitigate any potential risks associated with lending to a corporate entity.
Whether it is for personal use as a home, or for investment, idirectors seeking a mortgage will need to have their company affairs in order and be prepared to provide detailed information about their business operations. Working with a specialist broker like Cleerly, who understands the complexities of securing mortgages for limited companies, can help streamline the process and increase the chances of success.
Differences between a trading company and a Special Purpose Vehicle (SPV)
When considering the differences between a trading company and a Special Purpose Vehicle (SPV), it's important to understand their distinct purposes for existing in the first place.
SPV
An SPV is a legal entity, specifically created for a single purpose, often to hold property assets.
Unlike a trading company that engages in various business activities, a property SPV's sole function is to own and manage property investments. This focused nature of SPVs allows for easier management of assets and liabilities related to specific properties.
SPVs are commonly used in various financial transactions and investments to isolate risks and protect the investors involved.
Characteristics of an SPV include its limited scope of activities, ring-fenced assets and liabilities, and its ability to raise capital independently.
The most common type of SPV in the UK is one set up to own and manage property assets. Cleerly regularly arranges mortgages for SPVs. To help understand what an SPV can do, here is a case study demonstrating the benefits.
SPV case study
An IT contractor working on a daily rate contract, and his partner who was a permanent employee for the local authority, were looking to use money from the contractor’s company for a deposit on a buy a 3-bedroom buy-to-let house in Reading.
Cleerly’s challenge: The contractor and his partner were first time landlords with no experience of managing an investment property alongside their full-time work.
A newly established SPV was going to be used to acquire the investment property.
The contractor’s earnings via his consultancy company were low last year as he was using an umbrella company for a period of time on a previous contract.
Cleerly’s solution: A mortgage application was submitted to BM Solutions, a division of Lloyds Bank, in December and offered in January after two weeks. The property purchase has completed and the property is fully tenanted with professionals. Cleerly’s clients intend to buy another property later this year, and given that the applicants are no longer first-time landlords, they should have even more lenders to choose from.
Given we didn’t have the first idea about which lenders to talk to, we were delighted that we ended up with a lender who offered competitive rates and was part of a large bank who offered low rates. Our Cleerly Mortgage Consultant was excellent from start to finish, and it was reassuring to know they would patiently answer all of our questions, especially when explaining how rental stress tests work. Thanks also to our accountant who recommended we speak with Cleerly at outset.
Challenges limited companies face when applying for a mortgage
When it comes to applying for a mortgage, limited company directors often face unique challenges that can make the process more complicated. One of the main reasons is that lenders may view limited company directors as self-employed individuals, even though HMRC does not pigeon-hole them this way.
This discrepancy in how lenders and HMRC perceive limited company directors can lead to difficulties in proving income and financial stability when applying for a mortgage. Where lenders will usually require the latest three months payslips for employees, an employed Director of a trading company who has a significant shareholding will be asked to provide company trading accounts over a number of years. This additional burden can prolong the mortgage application process.
Another challenge that limited company directors may encounter is the length of time their company has been trading.
Lenders typically prefer applicants who have a longer trading history, usually at least one year or more. Limited company directors who have traded for less than a year may find it harder to secure a mortgage due to this requirement.
Navigating these challenges requires careful planning and preparation. Limited company directors should be proactive in gathering all necessary documentation, including accounts and tax returns, to support their mortgage application. Seeking advice from a specialist mortgage broker like Cleerly, who specialise in working with trading companies and SPVs, will help streamline the process and increase the chances of approval.
How will mortgage lenders assess your income as a ltd company director?
Lenders assess your income in a different way compared to employees. Mortgage lenders typically consider both your PAYE salary paid by the company, and any dividends you receive as a shareholder of the company. They will typically want these figures from the latest two tax years, although some lenders can work with just the latest year.
Some company directors only draw what they need from the business and retain part of the profits. It's important to note that lenders may not rely on company profits when evaluating your income. Instead, they will revert to the combination of your salary and dividends to determine your overall affordability, as this is money that has actually come into your personal bank account.
There is a smaller number of lenders who can assess director income based on company profits plus salary, which can be advantageous for those who retain profit.
Generally, this will only work for those who own 100% of their business, or the joint shareholder will need to be on the mortgage application too. For spouses who own all of the shares in the company between them, this can work well.
Understanding early in the process how mortgage lenders will assess your income as a limited company director will help to avoid delays later on. Preparing for the application process is important when there is potential complexity, and Cleerly’s experienced Mortgage Consultants can help you do this.
Can a ltd company get a buy-to-let mortgage?
Yes, the good news is this is something that can be done, for both SPV companies and for trading companies that trade for a non-property purpose.
The popularity of mortgages for limited companies is on the rise due to the tax advantages they offer compared to individual ownership for landlords. By using a limited company structure, landlords can potentially benefit from lower tax rates and more efficient ways of managing their property portfolios.
It's essential for limited companies considering a buy-to-let mortgage to seek advice from a specialist mortgage provider early on, so the likelihood of being accepted is known. They can guide you through the process and help you find the best mortgage option tailored to your company's needs and financial situation.
Cleerly can help with the planning and securing competitive financing– there is more information in Cleerly’s guide to getting a mortgage for limited companies.