Limited company buy-to-let mortgages

A limited company buy-to-let mortgage is a loan to a UK company that buys or refinances a property let to tenants. The company owns the property and is the borrower, while the directors and main shareholders are assessed alongside it and usually guarantee the loan personally. Lenders also test the expected rent against the mortgage interest.

Landlords use companies mainly because of how rental profit is taxed. Mortgage interest is treated as a business cost for a company, while individual landlords receive only a basic rate tax credit on their finance costs. Whether a company suits a landlord depends on their tax position, plans and other income, so accountants usually advise on the structure.

Most lenders prefer a company set up only to hold property, often called a special purpose vehicle, with property letting codes registered at Companies House. Some also lend to trading companies or to companies with more than one activity, but fewer lenders do and the terms can differ. Newly formed companies with no accounts are widely accepted.

Lenders look at who owns and runs the company. Directors and shareholders with a significant stake are credit checked and usually give personal guarantees, and some lenders set a limit on the number of shareholders or on overseas ownership.

Lenders test that the expected rent covers the mortgage interest by a set margin, calculated at a stressed interest rate. For company borrowers the required margin is often lower than for higher rate taxpayers borrowing personally, because the company pays tax on its profit, not income tax. This can support a larger loan on the same rent.

The stressed rate and margin vary by lender, product and fixed period, and five-year fixes are sometimes tested at the pay rate. Some lenders allow a director's personal income to top up a weaker rent figure, while others rely on rent alone.

How lenders assess the rent for houses in multiple occupation and other property types is covered in the buy-to-let mortgages section, which also explains the wider rental market.

Deposits for limited company buy-to-let mortgages are usually at least a quarter of the price, with some lenders accepting less and others asking for more on certain properties. Rates for company borrowers have moved closer to personal buy-to-let rates as more lenders have entered the market, but pricing and fees still differ between lenders.

Legal costs are often higher for company purchases, because the solicitor also deals with the company documents and the personal guarantees, and directors usually need independent legal advice on the guarantee. Stamp duty for companies buying residential property includes the higher rates for additional dwellings.

A personal guarantee is a promise by a director or shareholder to repay the company's mortgage if the company cannot. Nearly all limited company buy-to-let lenders ask for one from each director and from shareholders with a significant stake. It means that the protection of limited liability does not usually extend to the mortgage itself.

Lenders often ask the guarantors to take independent legal advice before signing, so they understand what the guarantee covers. The guarantee is part of the reason lenders assess directors' personal credit and income.