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Limited company buy-to-let criteria is the battleground for lenders

Half a decade ago, there would have been few in the mortgage market who might have predicted limited company buy-to-let as one of the major growth areas in the years ahead. Without reckoning on some considerable government and regulatory intervention, how could they know?

But, that’s exactly what the buy-to-let sector and landlords have been subjected too, and while there appears to be no let up in that regard, the market has shifted to accommodate how landlords might wish to take their portfolios forward and how they can try and secure the mortgage interest tax relief which has been steadily cut for those holding properties in their own names.

While we might not have seen a big move of existing rental properties into limited company vehicles – blame the stamp duty increase for that – landlords are now much more likely to purchase new properties within a limited company vehicle, and because of this, even our very biggest buy-to-let lenders have needed to respond to the shifting nature of the sector.

Indeed, as time goes by, and landlords see how the ongoing cuts to mortgage interest tax relief impact on their profitability, you can’t help wondering if – even with the large stamp duty outlay – landlords might feel they need to bite the bullet and move existing properties (held in their individual names) into those limited companies.

I suspect that if these landlords are looking at holding these properties over the very long-term then a decision might be made to take the stamp duty hit now, rather than later when the property’s value might increase that payment. It is though a fine line to tread as a mortgage adviser and the last thing you should be doing is weighing into such a debate if you’re not also a specialist tax advisor.

Instead, if your client comes with you and wants to discuss this, and they have not already done so with their tax specialist and secured their advice, then you might want to curtail any conversation until they have done so. It may well be the right thing for the client to do but you don’t want to be the individual blamed for such ‘advice’ if its later found out not to be.

Overall, however, the growth in limited company business has come predominantly via new purchase activity and, as mentioned, there are now few buy-to-let lenders who are not offering products for this type of lending. Just last week the Saffron Building Society launched its limited company buy-to-let mortgage and while it perhaps won’t have the considerable impact that its mutual cousin, Nationwide, did when it moved into the sector, it is another potential product option for advisers with clients in this market.

Indeed, you might perhaps say that the limited company buy-to-let client is now incredibly well served in terms of product numbers, and the real battleground for lenders is around the criteria they offer to landlords. Pricing is competitive but what seasoned portfolio landlords are likely to want is a significant degree of flexibility in terms of the administration burden placed upon them in trying to secure a mortgage.

We’ve certainly seen a shift in this direction too, with a number of lenders not requiring business plans now or insisting on a complete run-down of every other property in the portfolio, when it is unrelated to the property which requires a mortgage. While the client’s existing portfolio should be understood, and I completely understand why lenders don’t want to be over-exposed to one landlord or indeed certain types of property, lenders might be historically viewed as over-sensitive in this area. Again, that appears to be changing as increased competition has made itself felt.

There is also an argument that we are at saturation point when it comes to buy-to-let propositions. I saw a recent roundtable of ostensibly bridging lenders who voiced a similar concern and appeared to be coming to the common-sense view that, while they might wish to be involved in the buy-to-let market, unless they could come to it without something new and unique, or they were willing to go incredibly high up the risk curve, there appeared little point in them moving in that direction.

Overall, however, when it comes to finance options, the market appears to be rosy for landlords. Wider problems around increased costs and decreased profitability might persist, but the tenant demand is there, and if they can get new property at the right price, in the right area, within the right tenant demographic, then buy-to-let remains a strong investment for them. And advisers will be fully in demand to work out the best finance to support their activities.

Source: Mortgage Introducer

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Limited company buy-to-let has changed the market

I wrote in an earlier post that buy-to-let was evolving at a pace and that the rush to incorporate so many investor borrowers would inevitably create a different looking market.

And so it has come to pass. According to Mortgages for Business’ Buy to Let Index, the number of buy-to-let lenders lending to limited companies has risen by 47% over the past year. 22 buy-to-let lenders now lend to limited companies – up from 15 in Q3 2017 and the total number of mortgage products available to them has more than doubled since Q3 2017 – from 263 to 628. The result has been that 44% of buy-to-let transactions now made by limited companies – up from 42% in Q2 2018

This change in market behaviour should not surprise us. We are only just over a year from last September’s changes issued by the Prudential Regulation Authority, the 3% stamp duty surcharge on second homes in April 2016 and a withdrawal of tax relief by 2020.

We’ve already seen that the more stringent rules on buy-to-let lending has meant the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders but many have also embraced the business model of Houses of Multiple Occupancy in an effort to improve yields unaware of the many more stringent rules that accompany these kinds of dwellings.

Limited company structures do not come without their challenges and costs for all concerned. They not only affect individual borrowers’ tax positions but also demand skills in lenders such as understanding how company structures and law affect lending positions.

Completely new companies have no trading history or track record of success upon which lenders can base their decisions. Without any credit history it’s hard to establish the chances of the loan being repaid. In these circumstances, the lenders that do consider such applications often ask for personal guarantee’s from the directors, so that should the mortgage not be repaid the directors become personally responsible.

There may be additional administrative costs related to operating as a limited company, and in some instances it can be more complicated to transfer property and assets. When a property is sold via a limited company, it is subject to corporation tax, rather than capital gains tax. While the rate of corporation tax is lower than the rate of capital gains tax, an individual benefits from the capital gains tax allowance, which does not apply to a company.

There is the expectation that people borrowing through companies realise there are no blurred lines. A limited company has its own legal personality, which is separate to the individuals who participate in it. Rent the company earns cannot be spent on things other than business activities without these becoming a taxable wage or benefit. Because the extraction of money has to be through salary and dividends that money is subject to rules under the companies act and there is tax to pay for the recipient/shareholder.

It is when things go wrong that expertise is really in demand. A company does not retain the same rights an individual in the law or in practice and these has implications for tenants and landlords. A lender that has lent money to fund the purchase of a borrower’s home may be sympathetic when circumstances cause a borrower to get into mortgage arrears.

Further, the mortgage lender has a regulatory duty to help that borrower address the problem. However, where money has been lent on what is effectively a commercial enterprise, the lender may not be prepared to listen to excuses and may be much quicker to initiate repossession proceedings once a borrower gets into mortgage arrears. In some cases where arrears have built up on a buy-to-let property, the lender may appoint receivers to administer the property and accept any rents being paid.

Clearly, proper management of these loans and the processes for recouping losses in the sector now requires levels of expertise previously not required. From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend and experienced professionals if things do not go according to plan.

Source: Mortgage Introducer