For reasons that have been extensively covered elsewhere (largely boiling down to “tax”), more and more investors are deciding to buy properties within a company.
Many of these investors want to use a mortgage to buy the property – and this is where lots of confusion and misunderstandings kick in. While you'll need a mortgage broker to take you through the finer points of what's available, in this article I'll set out the main “structural” issues that often confuse investors looking into this for the first time…
Trading company v SPV
For our purposes, a “trading company” is one that has a primary activity other than owning property. For example, a manufacturing company might buy the building it operates from, or an IT contractor (who's set herself up as a limited company) might buy a residential property with cash that's built up within the business.
An “SPV” is a company that only exists for the purpose of holding a property. For example, I might set up a company called “RobProp Ltd” and have that company buy a house. The company doesn't conduct any business activity at all – it just holds the property, has rent coming in and expenses going out. The SPV might hold one property, or over time more properties might be bought and held in the same company.
Both a trading company and an SPV are limited companies – and other than this distinction of convenience (which is my own, and isn't used by HMRC), there's no difference between them. You register the company in exactly the same way in both cases, and there's nothing special you need to do to make a company an SPV or prevent it from being one.
So it's not really a “true” distinction, but it is useful for understanding some key points when it comes to limited company mortgages.
How lenders see the difference
If a trading company wants to buy a property with a mortgage, the lender will need to look at the performance of the company. How strong is its balance sheet? What are its outgoings? What projections is it making for the coming years? That's because if the primary activity of the company suffers (for example, the manufacturing company loses its biggest client) it might be unable to make its mortgage payments – or could even go bust.
For an SPV, none of this matters: all it does is hold the property, so there's no risk from its primary activity running into difficulties. But there's another challenge: the company has no financial standing at all, because (if it's buying its first property) it doesn't do anything yet.
The role of the directors
In both cases, a lender will normally take a personal guarantee from each company director. This just means that if the company ceases trading or is unable to pay its debts, the lender can pursue the directors personally for the money owing: you can't just say “oh sorry, the company failed” and expect the debt to be written off.
This is particularly important in the case of an SPV (especially a new one), because the company doesn't have any ability outside of property to generate cash to pay its obligations. It's therefore the ability of the directors to pay their debts, rather than the company, that matters to the lender. We'll come back to this shortly…
How long must the company have been running for?
There's a common misconception that a company needs to have been trading for a certain number of years in order to get a mortgage.
If a company wanted to get a business loan (for example, a manufacturing company wanted a loan to buy a new machine to increase production), this would be true. But for mortgages for SPVs, this isn't the case: you could set up an SPV today, and apply for a mortgage tomorrow. (Actually, you could even apply for the mortgage before the company exists at all.)
This is because – again – the company isn't really relevant here: it's all about the directors.
So, where this leads us is…
To summarise, for the majority of investors who are thinking about using a limited company to invest through (primarily for the tax advantages), the situation is:
- Your company doesn't need to have been trading for any length of time: you can set up a company online now for £20, and use it to apply for a mortgage immediately.
- You, as director, are what matters. The lender will want to see that you can meet your obligations – by looking at your job, income, credit history etc – in exactly the same way as they would if you were taking out the mortgage in your own name.
- You will be asked to give a personal guarantee – meaning that you're personally on the hook for the company's debt.
Effectively, the company is just a “tax wrapper”: the company takes out the mortgage to get more favourable tax treatment, but from the lender's perspective it's still all about you.
What if I already have a trading company?
Say you're an IT contractor operating as a limited company. Should you use that company to buy property?
You should take advice from an accountant – which I'm absolutely not – on this point, but in terms of mortgages it'll be simpler to set up a new company to buy the property (an SPV). It means that the lender won't have to get to grips with the performance of your existing business, and it maintains a separation in case anything goes wrong in either business.
What about getting the money into this new company to serve as a deposit? Again, I'm not an accountant and this isn't advice, but investors often find it useful to make an inter-company loan: so the trading company lends the deposit to the new company, to save the director needing to draw the money out personally then put it into the new company.
How does the process of getting a mortgage for an SPV differ from an individual?
Really, it doesn't: because again, it's a pseudo-personal mortgage anyway. There are a few points you'll need to consider though:
- The lender will tend to charge a higher arrangement fee, because they've got more paperwork to look at: there's now you and the company to consider.
- Your solicitor will generally charge more for the purchase too. They'll need to check the company's articles of association and prepare board minutes, which is straightforward but extra work nonetheless.
- You'll generally be required to obtain independent legal advice about the personal guarantee you need to give. This means that another solicitor (who isn't acting for you in the purchase) makes sure you understand what you're guaranteeing, and watches you sign. For the lender, this means you won't be able to wriggle out of it later by saying you didn't understand what you were signing – and for you, it can mean extra expense in paying for this extra appointment with a solicitor.
What is the mortgage market like for limited companies?
It's improving all the time. Because so many investors are going down this path as a result of the tax incentives, lenders are increasingly offering limited company mortgages so they can win investors' business.
However, at the moment there isn't as much of a range – and therefore rates are higher to reflect the lack of competition, and fees are higher due to the extra work involved.
You'll also need to consider that limited company lending can be particularly limited for more “niche” investments. For example, say there are six lenders in the whole market who will lend against properties that cost less than £50,000. If four of these lenders don't offer loans to limited companies, you've now only got two to choose from.
You should use a broker to fill in the finer details, but that's the gist of getting a mortgage for a limited company. It's a bit more expensive and a bit more complicated but there's nothing magically different about it – it's just a case of weighing up the tax (and other) advantages against the disadvantages, and choosing what works best for you.