Getting a mortgage for a buy-to-let
Posted on 13th June 2019 at 15:21
When you decide you are interested in investing in a buy-to-let, unless you are in possession of a large lump sum, you will more than likely need to apply for a mortgage. As we all know, this involves finding the right property, and then going to the bank to see if they will lend you the required amount needed to make the purchase. The bank will take a look at your financial situation to see whether they think that you are going to be able to take on such a huge loan.
Providing you can prove that you have the income from an employer to support your application and a good credit history, the bank will (hopefully) accept your application and you can then proceed with the rest of the purchasing process. For contractors and company directors, proving that you have a steady income - enough to cover the cost of the mortgage - can be a lot more complicated – so what can you do to overcome this hurdle when it comes to buying a property, or a portfolio of properties if you’re looking to let to tenants?
Trading companies and SPVs
First of all, you need to figure out the best type of company for you to use. You have two options: a trading company or an SPV (Special Purpose Vehicle). The former is a company that operates in another industry other than property. That means that buying property won’t be the trading company’s main purpose.
An SPV company is different, though, as it will have been set up for the sole purpose of buying a house. It’s not an active business and has only been set up to hold the property. Because of this setup, it’s usually the way business model that most company directors looking to rent out to tenants go with.
Both of these types are limited companies, but there will be distinct differences in the mortgage application process, depending on which one you are set up with.
Getting a mortgage with your current limited company
One of the first things you will need to do to start the mortgage application process is to approach the bank that you want to apply to. It’s a good idea to speak to an independent financial advisor (IFA) before you decide which mortgage lender to approach, and then your accountant will be able to assist you with the actual application process.
The bank will want to see all of the books and accounting related to the company, so be sure to have all of your paperwork in order for your very first meeting as the bank will be keen to see all of this right from day one. This will give them an idea of the type of money coming into the company and what your future projections are. Obviously, the stronger financial position your company is in then the more likely you will be able to get a mortgage through your business.
Of course, that’s just for trading companies. If you start an SPV just to buy a property, then there won’t be any current financial position for the bank to make a judgement on. After all, it won’t be operating until it has actually purchased its first property.
Considering the directors
The bank will also want to consider the directors of the company as well. In most cases, the director of a company will need to take a personal guarantee. If there is more than one director, then they will each have to take this guarantee. This is necessary as the mortgage will pass onto them in the event of their company coming to an end. For instance, if the company is not able to carry on paying its debts including the mortgage, then the lender will be able to pursue the directors for payment.
So, even if you are happy that your company is in a strong financial position, you will also need to make sure that you are on an equal playing field with your personal finances as well. This is the case whether you are looking for a mortgage for a trading company or an SPV – so make sure you are ready either way.
Should I use my current trading company for a mortgage?
You might not be asking yourself whether it’s best to set up an SPV just to buy a property or if it is wiser to go through a current trading company. There are a few different factors to consider...
If you are in a hurry to purchase a property, then setting up an SPV could be the best option for you. As there is relatively little for a bank to scrutinise with these types of companies, you will find that the application process should be a lot quicker.
If you do apply for a mortgage with an SPV company, you will find that there are a lot more options available. Because of that, you can often find many mortgages at better prices compared to those that are available for trading companies.
That doesn’t mean that there’s no point trying to get a mortgage through a trading company. You will also find plenty of good prices for mortgages as long as you have been operating for at least two years and are in a really stable financial position – obviously, your accountant will be able to advise you on this.
Letting to tenants
As previously mentioned, the majority of landlords who rent out their properties to tenants will usually buy houses and apartments through an SPV. This allows them to invest in property as a side income (or, for some professional landlords, as their main source of income), as no other form of trading needs to be associated with the property. There’s also no requirement for a limited company to already be in place as one can be created just to buy the property.
Once you’ve spoken with your accountant and/or a financial advisor, you will hopefully feel confident about making an informed decision regarding the purchase of a property and applying for a mortgage.
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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