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Brokers - what is the ltd co BTL market like now?

Journalist: John Fitzsimons, Freelance

ended 25. October 2022

Hello brokers

Hamptons stats out this week found that there are now more than 300k limited companies set up just for holding property https://www.mortgagesolutions.co.uk/news/2022/10/24/buy-to-let-companies-pass-300000-as-rising-rates-pressure-profits-hamptons/

This is an area of BTL that's become more common in recent years, but I'd love to get your thoughts on the state of it currently. 

  • Is it now the dominant path for landlords? 
  • Has the advice process changed at all now that there are more lenders/products to choose from?
  • Is there still a price premium compared to holding property in your own name?
  • Which lenders stand out? Is there anything the market is missing right now?
  • And how has it been impacted by the recent turmoil?

 

 

 

5 responses from the Newspage community

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Rita Kohli
Managing Director at The Mortgage Stop
In recent years, the number of landlords purchasing property through limited companies has grown significantly. As experienced landlords look for ways to reduce their tax burden, more and more are turning to limited companies. However, most clients—especially first-time landlords—still prefer the traditional route because it is a process with which they are already familiar. There is no doubt that the limited company route has become more popular in recent years. However, it is still not the dominant path for landlords. The 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 to dissuade inexperienced landlord's clients in particular. The advice process has evolved; we always recommend our clients get independent legal and tax advice to ensure they are doing the right thing for their unique circumstances, and, in many cases, clients want to know the difference in interest rates between the two routes before starting down a particular route. What we're seeing is that lenders' criteria are becoming increasingly different, with specialists in certain areas, and 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. Lenders are evolving however, and there are even some that make it easier to refinance portfolios of properties in one go. Once portfolios start becoming varied and mixed then specialist lenders are usually more flexible. Whilst we have seen that many first-time landlords are being deterred by the higher interest rates making the ROI of their investment less palatable, the events of recent weeks have had a mixed reaction; a number of our clients are taking a wait and see approach with some even considering releasing equity in the hope that they can capitalise on possible falling house prices whilst others have continued with the planned purchase.
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Riz Malik
Independent Financial Adviser at R3 Wealth
Company buy-to-lets have been majorly impacted by the fallout from the mini-budget. 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. Unless stress tests improve, lenders will see limited deal flow over the next quarter, as the loans being offered will be insufficient. I have a pile of deals on my desk that simply do not work under the current conditions. I have already told my wife that the only bag she will be getting this Christmas is a bag for life. As some of these lenders do not offer product transfers due to their funding, you could also see 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 SVR. The independent legal advice required by most lenders also can add hundreds to the cost of financing. Finding a solution to this would be a quick win. However, unless the rental calculation is resolved this is not enough to resucitate the market.
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Rob Peters
Principal at Simple Fast Mortgage
It's super small minded to judge whether to purchase property within a limited company or personal name just based on comparing the interest rate. On average a limited company mortgage will cost circa 1% more than it's personal name counterpart. However, serious investors look at the big picture, and the majority will chose a limited company structure. 2017 saw the removal of mortgage interest relief which ultimately meant personal investors could not offset the mortgage interest against rental income. This is a big one. It's like running a business but not being able to take into account your biggest expense and at the same time having the income assessed for tax. This one item could offset any difference in the initial interest rate. There's no control over income for property held in a personal name. It's going to go on the self-assessment for that tax year. Whereas investors can chose when and how to take money from limited company as part of a larger planning strategy. Income can even be allocated to other shareholders. A limited company brings masses of flexibility both now and in the future. For instance, having an alphabet share structure means that income can be allocated to other individuals without necessarily giving up ownership of the company. This can be really useful for tax and succession planning and many investors might have their children and partners involved in the company too. If they don't work or have lower incomes, there is the potential to extract profits with less tax to be paid. Selling a property results in stamp duty, selling shares does not. Holding a property and mortgage in personal names means you are liable personally. Holding this though a limited company provides an element of risk control as it is the company who is primarily liable. Whilst all investors should seek advice specific to their own circumstances and objectives, when choosing the right strategy there's certainly more to consider than head line interest rates.
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Imran Hussain
Director at Harmony Financial Services
Is it now the dominant path for landlords? Going forward, many landlords who have gone and received proper tax advice for their individual circumstances may consider ltd company buy to let mainly down to the tax changes which impede landlords holding properties in their personal name Is there still a price premium compared to holding property in your own name? Yes typically ltd company buy to let products from certain lenders carry a slight increase in rate typically anywhere from 0.5 - 1% as a premium.  And how has it been impacted by the recent turmoil? The recent turmoil has meant the stress tests for buy to let simply make many deals no longer viable or affordable as the loan amounts being achieved are no where near what's required which means there are less properties available for the private rental sector.
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Edward Checkley
Managing Director at Advias
Holding property in a Limited Company structure is much preferred for landlords as you can put through your mortgage interest as an expense for tax purposes, retain profits and make pension contributions. Now that lending rates have increased significantly, lenders are stress testing mortgages at rates of 6.5% or 7%+. This means that many portfolios will fail lending assessments and even more so for higher rate tax payers who personally own property and need to pass an interest coverage ratio of 140% or 145% at the applied stress rate. Since the inception of the tax changes, limited company lending has become much more popular, and in this regard, lenders have shifted and provided much improved criteria and lending options. The premium for holding property and limited company structure is now only slightly higher. Many specialist lenders that strongly support this market are finding it difficult to be competitive given the current market conditions, pushing out the price of limited company Buy to Let mortgages. Whereas before, you could borrow at around 4% in a limited company structure, mortgage rates are now 6% to 7% plus, and even more so for specialist property such as HMOs or multi-unit blocks, Since Liz Truss has resigned and Rishi Sunak has become the Prime Minister, 5 year swap rates have come down circa 70 basis points, it is my hope that lenders will be able to follow market pricing by reducing their rates and there be a return to some competitiveness in the marketplace.