Everything you need to know about company buy-to-let mortgages
Over recent months there has been a significant increase in the number of landlords taking out mortgages as a company. With tax changes to buy-to-let set to come into effect in April 2017, a growing number of borrowers have set themselves up as a company in order to purchase residential property.
Lenders have reacted to the increase by offering a better choice of lower rates.
The process of setting up a company
In order to buy a property, you will need to set up a 'special purpose vehicle' (SPV). This can cost as little as £20 but it can be worth paying more to ensure you have the right paperwork. You then select the appropriate Standard Industry Classification (SIC) code relating to letting property.
The process of buying a property through a company is similar to buying as an individual. From 1 January 2017, lenders will have to use a 'stress test' rate of 5.5% to assess affordability and conduct a wider assessment of a landlord's finances. Most lenders have already changed their rental cover ratio from around 125% to 145% ahead of the changes.
These criteria will apply to company buy-to-lets as well as those being bought in an individual name.
Remember that the additional 3% stamp duty charge on people buying second properties will also apply if you're buying through a company. Once your company is up and running, you will have some additional responsibilities. Instead of self-assessment, you will have to complete annual returns and accounts and so you may have to pay an accountant to prepare these.
However, this is where the benefit of company borrowing could really lie. Firstly, the removal of higher rate interest relief doesn't apply, meaning you could save tax if you are a higher or additional rate taxpayer. Secondly, corporations pay a flat rate of 20%, which will fall to 19% in 2017 and 18% by 2020.
Company buy to lets rise sharply in 2017
New research from a leading building society has revealed that lending to landlords who have set up as a limited company has risen sharply this year.
The figures from the Kent Reliance say that 100,000 limited company mortgages were issued to landlords between January and September 2016, while the mutual also found that 11% of landlords say they have already 'incorporated', or have moved holdings to a lower-rate-tax-paying spouse or partner to limit their tax exposure. It also estimated that limited company loans will rise to 163,000 next year.
The Daily Telegraph reports this means that more than half-a-million landlords are set to take action to limit their tax bills.
As the demand for these mortgages increases, the choice of products has improved. Lenders including Metro Bank and the National Counties Building Society now offer deals, and rates have fallen sharply.
If you have a 35% deposit you can now take advantage of a three-year discounted variable rate at just 2.94% from National Counties. There is a fee of £945.
If you have a 25% deposit you can benefit from a 3.45% two-year fixed rate from Paragon. There is a 1.5% fee.