Can an LTD company take out a mortgage in the UK?

There are many ways to invest in real estate, but if you plan to operate on a larger scale, you will probably do so through a limited company. Although taxes are not our speciality, today we will look at how legal entities (companies) can finance their purchases on the real estate market. It will probably come as no surprise that a commonly used tool for this is a Buy-to-Let loan, but we guarantee that this article will contain information that may surprise you. So what do you need to know about mortgages granted to LTD companies?

Why are LTD companies used to purchase real estate?

From our observation, any Foreginers living in the United Kingdom have been getting richer for quite some time now. Hard work, careful spending and motivation to develop have meant that many of our compatriots have a large amount of cash at their disposal, which ultimately needs to be invested in something. While purchasing a single flat to rent out does not require a complex business structure, managing an entire property portfolio is a time-consuming and sometimes risky undertaking.

However, as the scale of the business grows, so do taxes, which in extreme cases can reach 45%. According to Falcon Accountancy,one of the biggest advantages of LTD companies is their low taxation, which is accompanied by a reduction in business risk. Both of these features mean that many landlords rent out flats through a company.

SPV, or special purpose vehicle LTD

It should be clearly stated that banks in the United Kingdom do not, as a rule, grant Buy-to-Let loans to companies that operate in areas other than property rental. Therefore, if you run a shop, construction company, accounting office or any other business, you will still need to set up a new entity. This is known as an SPV, or Special Purpose Vehicle. Only when you are the director of such a legal entity can you apply to the bank for a loan.

What do you need to do to obtain a mortgage for an LTD company in the UK?

If you have already applied for a loan, you may now be wondering on what basis someone would lend a new company, with no credit history or historical income, an amount of two hundred, three hundred or even five hundred thousand pounds. However, just because an underwritercannot rely on historical data does not mean that they are unable to assess risk and creditworthiness.

Personal guarantee

First of all, the** bank will require an additional guarantee. You can provide it yourself, but it can also be provided by someone else, such as a family member or friend**. The guarantor is responsible for repaying the loan if the Ltd company gets into financial trouble. As you might expect, when granting a loan to a company, the bank will also check the financial situation (income and credit score) of the guarantor. This is all to reduce the risk of problems on their part. What is really interesting, however, is that underwriters will take into account the financial condition of other companies you own - your financial situation will be analysed from every angle.

The bank may not require a guarantee if the company has a positive credit history and is already generating profits from rentals. However, if you are just starting out, you must be prepared to provide a guarantee.

Business plan

Banks are aware that investing in real estate usually pays off. Nevertheless, analysts require hard figures. When applying for a loan, you will be asked to provide information about the property you are purchasing, which will allow them to estimate the rental income. You will only get a loan if the expected income is sufficient to cover the monthly instalments. In the case of a Ltd company, typical business expenses, such as accounting and legal services, will also be taken into account.

Deposit

The third and final piece of the puzzle is making an appropriate down payment. The lender will require you to make a down payment, which is generally no less than 25% of the value of the property being purchased. This is, of course, significantly more than in the case of houses purchased for residential purposes, where only 5% of the transaction price is sufficient.

Due to the requirement to make a deposit, prepare a business plan and issue personal guarantees, using a Ltd company to invest in real estate will not reduce your risk to zero. However, this does not mean that an SPV is pointless, which we will discuss in a moment.

What are the benefits of using an LTD company to take out a mortgage?

There is no denying that the greatest benefits of this solution are tax benefits. The director of an LTD company has many more options for settling accounts with HMRC than a self-employed person, whose income tax can be as high as 45%. By using Personal Allowance and paying dividends, directors can legally pay less tax than high-earning self-employed persons. The situation becomes particularly advantageous when the investor is the sole owner of an LTD company, registered as an SPV, and can decide on dividends at their own discretion.

In addition, there is another very important issue. Interest paid to the lender is recognised as a tax-deductible expense, so the company will pay less Corporation Tax. Considering that Buy-to-Let loans are practically entirelyInterest-only products, calculating costs and profits will be a very easy task.

It is also worth noting that by running your business through a Ltd company, you reduce the risk of losing your property due to failures in other ventures. The formal separation of business branches means that if one source of income turns into a source of losses, the others will remain safe.

The time to repay the capital is approaching – what are my options?

As we have already mentioned, investment loans are almost always interest-only loans. This means that during the loan period, the company only pays interest, and the principal is repaid at the end. When the time comes to repay the principal, you have to decide what you want to do with your property.

The most popular option among investors is to repay the loan by taking out a new one. This ‘rolling’ of debt provides the company with liquidity, although it means that it remains in a state of constant indebtedness. To reduce the risk, the directors of some Ltd companiesremortgage from time to time, reducing the amount of borrowed capital thanks to previously accumulated profits.

Alternatively,** you can also decide to sell the property and repay the loan with the proceeds**. This strategy works particularly well when house and flat prices are rising, which has indeed been the case over the last 40 years. However, it should be remembered that the entire profit from the sale of the property will be taxed at the equivalent of Capital Gains Tax, ranging from 19% to 25% depending on the company’s income.

Finally, some people repay the loan with their private funds or from the profits generated by the company. From a business point of view, this is obviously the least profitable solution, but on the other hand, you do not have to worry about interest rate increases. By deciding to buy the property, you free yourself from the bank, which will no longer be able totake it over under any circumstances.

How you proceed depends on your strategy. However, our experience shows that people who think about the future of their families usually strive to pay off their properties as quickly as possible, even if this slows down the growth of the business.

What if the value of my property decreases?

A very undesirable situation that can happen to an investor is a decline in property value. This means that the investment will generate a lower than expected return, zero return, or a loss. In the worst case scenario, negative equity may occur, which is a phenomenon where the value of the property is lower than the outstanding capital. When the loan period ends and the value of the investment has fallen, a serious problem arises. So what should you do in such a situation?

As a rule, property prices rise in the long term. So, if you follow this line of thinking, it would be worth holding on to the property for a longer period of time. This can be done by buying it outright, repaying the entire capital or, if you do not have sufficient funds, remortgaging. If you decide on the latter option, remember that due to the decline in property value, the LTV ratio has risen sharply. To improve the terms of your next loan, it would be a good idea to allocate a larger amount to your own contribution so that the LTV ratio falls to a safe level. If the decline in the price of your property was caused by a temporary slump, when prices return to normal, this measure will definitely pay off.

Summary

Taking out an investment loan for an LTD company is entirely possible. However, it is important to remember that for this purpose, you need to set up a new company that will deal exclusively with real estate investment, i.e. an LTD SPV company with SIC code 68209 (Letting and operating of own or leased real estate). Be prepared that, at least at the beginning of your investment adventure, you will have to become a guarantor, which means that in a crisis situation, you will be liable for the mortgage with your assets.