Call us today: 0345 450 4660
Image showing two men in a business meeting

How Does a Buy-to-Let Limited Company Mortgage Work?

Buy-to-let mortgages has become a popular option for those who can afford it. Property is generally more stable than the stock market, (which has been increasingly volatile in recent years). In essence, you’re purchasing a property to rent, hoping the rent will cover the mortgage costs. When it works, you eventually own a house that you have paid little for and can earn an income from.

There are two ways in which to own a rental property: as a private landlord and as a buy-to-let limited company. It’s worth reading this guide and then talking to a mortgage adviser to make sure you choose the right option for you.

Image showing the words "Buy-to-let" next to a model house

Introduction to limited company buy-to-let mortgages

Put simply, buying a property through a limited company means creating a limited company which purchases the property for you. In contrast, a private landlord simply buys the property in their name.

The primary difference when applying is that, as a private landlord you own the property. As a buy-to-let limited company, the company has a mortgage and owns the property.

Buying via a limited company is often the easiest route if you’re buying with several other investors.  It’s also an effective way to reduce your liability if you or the company has financial issues.

What are the eligibility criteria for buy-to-let limited company mortgages

Buy-to-let mortgages are generally interest only. The company will have to save the capital separately, allowing them to purchase the house at the end of the mortgage term or sell it.

In general, lenders will look at the same criteria for lending as when issuing a private mortgage:

  • Demonstrating that the limited company has enough income to cover mortgage payments. Lenders generally like the income from the property to be at least 125% of the monthly payments
  • Good credit history – the company’s credit history will be checked. Any company director will probably also need their credit history checked
  • Lenders may wish to check your income to ensure you can assist the limited company if required
  • Your age – some lenders are reluctant to lend if you, or the other directors, are already past retirement age
  • Deposit: it’s rare for a lender to want less than 20% of the property value. Some want over 30%

It should be noted that the limited company must be set up exclusively for buying, selling, and managing property. It’s advisable to check you meet the above criteria before you speak to your mortgage specialist.

Benefits of a buy-to-let limited company mortgage

The biggest benefit of buying through a limited company is that you’re not liable for missed mortgage payments. However, there are several other benefits you should be aware of:

No income tax 
As a private landlord, you’ll have to pay income tax at the relevant rate on any rental income received. If you’re close to the top bracket this can push you over which could have a significant impact on your rental income.

Limited companies don’t pay income tax on the rental income. However, they do need to record all income and expenses then pay corporation tax on the profit. Corporation tax is currently either 19% or 25%, depending on the size of your company.

Expenses are deductible
Private landlords cannot deduct mortgage interest and other financial costs, limited companies can, effectively reducing your taxable profit and the tax you need to pay.

Mortgage rates and fees: what to expect

Mortgage rates for buy-to-let mortgages are generally higher than for private landlords. That’s because individuals have less liability, and this increases the risk for the bank. To compensate for this, they use higher interest rates.

There are also fees for establishing the limited company mortgage and an array of fees connected with purchasing a house. This includes surveys, stamp duty, and legal fees. There will probably also be an arrangement fee which will be higher than with a private mortgage.

On the plus side, as you’re paying interest only, the repayments will be lower. In addition, you can pay the mortgage off early by paying off part of the loan each year. You will need to check if there are any penalties for paying all or part of the mortgage early. 

Image showing a business man holding a tablet

The application process for a limited company mortgage

It’s generally more complicated to apply for a limited company mortgage than it is to get a private mortgage. It pays to organise everything first:

  • Make sure you have at least a 25% deposit – you can release equity from existing property to secure this
  • Check your credit history and that of the limited company, it needs to be good
  • Speak to a specialist mortgage advisor to help you find the best deal
  • Prepare all your paperwork – ID, proof of earnings for you and the company, tax returns, 
  • Apply for a decision in principle, effectively confirming the business will get a mortgage subject to proving the statistics you’ve provided in the mortgage application
  • Find your desired property and settle on a price
  • Supply the lender with the necessary proof to release the funds, pending survey results
  • You’ll need a lawyer to handle the paperwork

Property management and mortgage repayment strategies

Every buy-to-let property needs to be looked after. This covers annual inspections, maintenance, dealing with repairs, and of course, finding tenants and collecting rent. If you have the time, you can do this yourself. However, it can be surprisingly time-consuming, which is why many private and limited company landlords use a property management service. They take care of everything for a small monthly fee, it’s deducted from the rent before they pass it on to you.

As mentioned, with a limited company buy-to-let mortgage, you’ll only need to pay the interest per month. The company will have to save the money to repay the capital borrowed at the end of the mortgage. You need to consider the right strategy:

  • Divide the capital amount by the number of months the mortgage lasts and save that much each month
  • Speak to professionals about an appropriate repayment vehicle, such as a stocks and shares ISA or investment bonds

It’s best to decide this before you complete the purchase. This will allow you to put the right amount of money away every month and repay the mortgage capital on time.

What you need to know when comparing lenders

It’s recommended you use a mortgage specialist, they’ll help you find the best deal. If you’re doing it yourself, make sure you check the interest rate offered, the term of the loan, and any early repayment fees.

It’s also a good idea to check the reputation of the lender. You can do this on social media. Just remember, negative reviews aren’t the end of the world, it’s how the lender handles the issue that matters.

Risks and mitigation strategies

The biggest risk of a buy-to-let limited company is that the property is empty, leaving the business with no income and unable to pay the mortgage and other fees. The simplest approach to prevent this is to use a property management firm which guarantees a percentage of your property income. You can also make sure the company, and you, have funds in reserve to cover any issues.

Conclusion: Is a buy-to-let limited company mortgage right for you?

A buy-to-let limited company isn’t the right option for everyone, especially as you’ll have to prepare accounts and file them. However, if being a private landlord will push you into a higher tax bracket, or you wish to purchase a property with other people, the limited company buy-to-let mortgage may be the best idea.

As always, proceed with caution and contact us for a consultation today.

If you need help with your mortgage, call us today: 0345 450 4660

Make an Appointment

Send a request and we’ll schedule a meeting