Risk of limited company BTL mortgage prisoners on the rise ‒ analysis

According to data from Hamptons this week, there are now more than 300,000 active limited companies which were set up to hold property. That is more than double the number from five years ago, with the last two years alone seeing more than 100,000 new buy-to-let businesses established.

Brokers told Mortgage Solutions that the structure has become particularly popular with higher rate taxpayers, with lenders taking the opportunity to introduce diverse products and criteria. However, there were warnings that it has been rocked by the turbulence of the last few weeks, with the threat of mortgage prisoners emerging unless something changes. 

The growth of limited company landlords

While ‘accidental’ and one-off landlords were starting to sell up, professional landlords were adding to their portfolios via the limited company route, said Jane King, mortgage adviser at Ash Ridge Private Finance.

She explained that while the market had become larger in recent years, the advice process remains the same.

“There are a few more lenders to choose from, but it is still a very small number, and for those with larger portfolios we now have to consider the LTV of the whole portfolio rather than just the individual subject property,” she added.

Rita Kohli, managing director at The Mortgage Stop, said that while the number of landlords purchasing through limited companies has “grown significantly”, most still prefer the traditional route.

“The [limited company] process is more complex and often costs more in legal fees, financing costs ‒ usually higher product fees and interest rates ‒ and crucially tax advice.  These additional steps in the process all add up to dissuade inexperienced landlord clients in particular.”

Rob Peters, principal at Simple Fast Mortgage, said that it would be “small minded” to judge the right route for ownership based solely on the interest rate.

He continued: “On average, a limited company mortgage will cost circa 1 per cent more than its personal name counterpart. However, serious investors look at the big picture, and the majority will choose a limited company structure.”

A question of tax

Limited company buy to let has “come into its own” for higher rate taxpayers, explained Lewis Shaw, owner of Riverside Mortgages, suggesting that the number of landlords tuning to this form of ownership will continue to rise.

He added: “Whilst there is an increased cost of mortgage rates, for many, the tax benefits outweigh the costs. The recent mini Budget is on its way to hiking rents nationally, further harming private renters with above-inflation rental costs. The private rented sector is in a mess.”

Richard Campo, founder of Rose Capital Partners, said that he always advises clients to get tax advice immediately, in order to work out the right route for them.

He said: “We recommend they get tax advice before we act, as there is no point setting up a mortgage for a client that isn’t tax efficient, hence why we work with accountants on this point and recommend ones if the client does not already have one. The fact more lenders are coming in and therefore pricing is coming down makes it more tempting, but I think the tax treatment is the biggest factor.”

The best lenders for limited company buy to let

Campo said that the specialist lenders stand out within company buy to let, naming the likes of Kent Reliance, Pepper and The Mortgage Lender as being particularly good to work with.

However, he noted that there is a downside to using them, namely that they can be more expensive, which is “why we don’t use them that often”.

He continued: “Ultimately, our job is to get the best terms for our client, so if we have to use a lender that is more difficult to work with, so be it. That is our issue, not the clients, we just need to be clear on setting expectations on what the process will be like.

King pointed to Paragon Bank and Precise Mortgages as lenders who deliver for limited company landlords.

Kohli suggested that the criteria employed by lenders are becoming “increasingly different”, leading to some becoming specialists in particular areas.

“In some cases, it’s hard to tell if a client will be approved until you understand the full picture. This is partly because of the tight affordability assessments required for higher-income clients, especially since the events of the last few weeks. However, it’s still possible to get buy-to-let loans approved – you just need to know where to look.”

Dealing with the turmoil

According to Campo, the limited company buy-to-let market has dealt “very well” with the market turmoil seen in recent weeks, noting that borrowers can often benefit from a lower interest cover ratio (ICR) than if they were borrowing in their own name.

He added: “It just shows how complex the market is and why you don’t just need mortgage advice, but also tax advice when looking at buy to let these days.”

However, Riz Malik, director at R3 Mortgages, argued that this sector had been “majorly impacted” by the fallout from the mini Budget.

He said: “As a large proportion of lenders in this market have external funders, their pricing is heavily impacted by the financial markets and the recent volatility has not helped.”

Malik added that he has a “pile of deals” on his desk that don’t work under current conditions.

Malik cautioned that some of the lenders active in this market do not offer product transfers, which could mean a growing number of mortgage prisoners.

“They may be unable to move lenders as they cannot refinance the required amount and therefore may be doomed to stay on the SVR.”

Edward Checkley, managing director at Advias, noted that many lenders in the market were “finding it difficult to be competitive” given the current conditions.

He explained: “Whereas before you could borrow at around 4 per cent in a limited company structure, mortgage rates are now six per cent to seven per cent plus, and even more so for specialist property such as HMOs or multi-unit blocks.”

Checkley added that he hoped that with swap rates now coming down since the latest change in Prime Minister, lenders would be able to cut their rates “and there would be a return to some competitiveness in the marketplace”.