By By Pete Mugleston, Online Mortgage Adviser
The term ‘Ltd company mortgages’ is somewhat ambiguous, in that it can relate to 3 entirely different sectors of finance:
A) Directors of Ltd companies looking for a mortgage on a property they inhabit themselves.
B) Ltd companies set up purely for the purpose of creating a tax efficient investment vehicle, to the benefit of the directors when purchasing residential investment property.
C) Mortgages for Ltd companies purchasing commercial property for the actual business and its employees to occupy.
A) Being self-employed and running a business is great, owning a business even better, but unfortunately directors of ltd companies in need of a personal residential mortgage can face some tricky hurdles.
Instead of accepting just 3 months payslips for employed applicants, many lenders demand 3 years business accounts from directors who wish to illustrate the amount and reliability of the income used to meet mortgage repayments. The figures from these accounts that most lenders use to verify income is the dividend + salary drawn by that individual.
This can cause an issue for some borrowers who have ran a successful business with high profits, but chose to not withdraw all the income, leaving retained profits in the business. There can often be the situation where a director runs a business generating £100k of profit a year, but only withdraws say, £50k. This would usually limit borrowing to £250k and under, whereas if that director had chosen to withdraw £70k they could borrow up to £350k.
There may also be problems with businesses where profits have varied over the last 3 years, and if there is a decline in profits for the most recent year, several lenders will reject an application altogether. The market can be extremely varied, with lenders taking a completely different stance on income — some use the latest years figures only; some take an average of the last 2 years; some an average of the last 3. On this basis, new or growing companies will find it harder to borrow with lenders who average 3 years rather than using more recent figures. Directors of companies that have traded for less than 3 years are limited by which lenders can consider them, and those with only 1 years books will only have access to 4 or 5 lenders.
This doesn’t mean all hope is lost, as like commerce the world over, where there is difficulty there is opportunity, and some lenders take advantage of these gaps in the market being only one of few prepared to offer the finance. A specialist self-employed broker who knows this market should be able to help.
For instance, where 99% of lenders might only use salary + dividend to equate a directors’ income, a very small number of lenders will consider retained profits and or share of total net profit; Where most lenders want 3 years accounts, some lenders will accept 2 or 1; Where many lenders calculate income from an average of 3 years accounts, some calculate from an average of 2, and some even just the most recent year.
B) Investment vehicle Ltd companies used to purchase buy-to-let property
But to let property has become an extremely attractive proposition for investors, with savings rates being next to zero for the last few years and more recently house prices on the up it appears as though landlords are in for handsome returns as well as a capital increase.
Any income received from buy to let property is of course taxable, which can eat into returns — especially for the higher rate payer. As such, more and more investors are considering purchasing within a Ltd company, and those with large portfolios would be urged to do the same.
Borrowing on a mortgage in this manner can be tricky however, as these purchases are deemed ‘semi-commercial’ arrangements and most high street buy-to-let mortgage lenders wouldn’t know where to start. This limits the number of lenders available, and thus increases the cost, as does the increased risk of lending to a legally separate entity (as borrowers might be less inclined to pay should times get hard).
The good news is, you don’t need to have an existing business with years of accounting information to get started, in fact, several lenders will consider an application if you set up a brand new company from day 1 (the just ask for directors to have an income — some want minimum of 25k, some have no minimum income requirement). The company would be known as a Special Purpose Vehicle (SPV), and be registered as a non-trading entity, for mortgage and rental purposes only. Typically, existing businesses that actually trade in some form of business (i.e. Accountant / Financial advice / builder) wouldn’t qualify for an SPV mortgage and would need to consider a fully commercial arrangement.
The other benefit of having an SPV mortgage is that some lenders are happy to go up to 85% loan to value, reducing the amount of deposit required to purchase the property, whereas a fully commercial deal would usually require minimum 20-40% deposit.
C) Commercial mortgages for Ltd companies
The third type of Ltd company mortgage belongs to the businesses themselves. If you run / own a Ltd company and are looking to purchase a property as an ‘owner occupier’ or perhaps as a landlord to rent to another business — this is the arrangement for you. These are fully commercial, and as such if you are looking to borrow to fund the purchase you’ll need a commercial mortgage.
There are select lenders that offer this type of finance, and it’s a competitive market. Underwriting and product selection can be a more flexible process, with brokers occasionally being able to haggle rates down between lenders.
The criteria are vastly different to standard mortgages, where emphasis is placed upon the viability of the business to service the repayments, rather than the income of the directors. It can mean that the business either has to have been trading for 3 years to evidence income, or that the potential investment will bring in sufficient returns to cover it.
One of the main factors effecting commercial mortgages is the sector of the market the business is in, as the risk of the business impacts which lenders are willing to lend, and how much. For instance, a medical professional would be able to borrow to a higher loan to value than a restaurant owner.
There are various types of commercial mortgage, whether it be on an ‘owner occupier’ basis where the business buying the property runs from it, or a ‘non-owner occupier’ where another business or occupant is in the property. Typically owner occupiers are eligible for slightly better rates, lower fees, and occasionally better offers — for instance one lender currently offers a 2% cashback for owner occupiers and no cashback for other borrowers.
An under-utilised but potentially lucrative benefit of borrowing commercially, is that some lenders allow directors to make use of their SIPP pension. This offers great potential for those who want to take control of their own pension investment, and can include the SIPP owning a portion of the property alongside the business, which then pays rent back to the SIPP for its share. It can get slightly complex, but the benefits of this are not just limited to the tax efficiency of the SIPP, in fact those with a sizable pension pot will also be able to borrow against their SIPP at up to 50% of its value. This allows commercial directors the option of buying a property with a smaller deposit.
For example, a business wants to purchase a property for £1million with as little deposit as possible, and based on the sector, lenders require minimum 25% deposit. One of the directors has a pension pot of £200k, so borrowing in the SIPP could be for a further £100k, resulting in the SIPP owning a £300k share of the property. The business’s share will therefore be £700k, so if the deposit required is 25%, they need to find £175k. Had they not utilised the SIPP the business would have needed to buy the whole property on its own, so the deposit would have been £250k.