Commercial Or Personal Buy-To-Let Mortgages?
Experienced landlords know a thing or two about the market and work with lenders and accountants to help them retain as much of their rental income as they can by avoiding tax hikes announced in the Government’s annual budget.
The most current advantageous setup for landlords is using a Limited Company
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Following the Chancellors announcement of tax changes, the mortgage market shifted swiftly. Mortgages for Business is a UK specialist lender, which also compiles research data quarterly and publishes it on its Buy-to-Let Index.
This showed that applications from Limited Companies since the announcement rose from 15% of all commercial B-T-L mortgages to 38% in only 6 months. It showed that commercial borrowers are setting up Limited Companies because it’s tax efficient, at least for now anyway. It’s likely to change in the future.
The Type of LTD Company Matters to Lenders
There are specialist lenders that cater only to Limited Company borrowers. Some of those lenders specify they work with SPV Limited Companies exclusively. An SPV Limited Company is one that only trades in one specific category. For landlords, that category is SIC code (category) L, which is for Real Estate, based on the official Government Condensed List of SIC Codes.
“Section L: Real estate activities
68100: Buying and selling of own real estate
68201: Renting and operating of Housing Association real estate
68202: Letting and operating of conference and exhibition centres
68209: Other letting and operating of own or leased real estate
68310: Real estate agencies
68320: Management of real estate on a fee or contract basis”
Source and further information: http://resources.companieshouse.gov.uk/sic
When you set up a Limited Company, you have to select a trade classification when filing with Companies House (which is required) describing the economic activity your business does. That can be up to four different business classifications, but the more you have, the more diverse your revenue sources are going to be.
A Limited Company for the sole purpose of managing rental property is set up a little differently from other trading activities. In the mortgage industry, commercial lenders are looking for a very specific type of business, one that is set up as only a Special Purchase Vehicle LTD company, and how you do that is based on how you file your company set up with Companies House. Only listing your business activities as Real Estate, which then gives you a SIC code in category L.
Then when managing your company, you wouldn’t have any other revenue streams related to other types of business activities listed. Only property income would be on your Limited Company accounts. If you have any other sources of income, they’d be best kept separate using a separate company so you can access the majority of commercial lenders and their product range. Your accountant will be able to advise you on the issues multiple companies can raise and the most applicable setup for your business activities.
The key point is that B-T-L specialist commercial lenders are interested in Real Estate businesses only!
For commercial lending, this is when the market opens up to a wider range of B-T-L mortgage products. It lets you enter into a new marketplace that’s not open to personal lenders. The reason is that there’s far more underwriting involved because of debentures, and fixed and floating charges which affect how the charges are applied in the case of defaults. It sets priorities for lenders.
The Commercial sector is more appealing to portfolio landlords, more so just now because of the tax changes. Landlords with 15 or more properties in their portfolio are exempt from the 3% tax hike and the exclusion of interest payments on Buy-to-Let mortgages.
Personal investors in property pay Income Tax and the interest paid on the mortgage is not excluded. Only when there are 15+ properties in the portfolio can the interest be added as a business expense and therefore tax deductible.
The difference to tax paid is Income Tax vs Corporation Tax and it’s something that you will need advice from your accountant on before deciding to set up a Limited Company, especially for SPV purposes solely for property management.
It should be pointed out that landlords do not have to operate under a Limited Company. There are Buy-to-Let mortgages available catering to those investing in property for additional income rather than operating solely as a business, although you are still required to declare your income to HMRC.
If you’d rather keep things simple, there are B-T-L mortgages available for personal borrowers and not just catering to commercial borrowing. Even if you’ve bad credit, you can still branch into the Real Estate sector and later look into having a Limited Company if it makes financial sense further into your venture.
For homeowners, particularly those reaching retirement age, the concept of equity release offers a unique way to unlock the capital tied up in their property. Equity release schemes allow individuals to either borrow against the value of their home or sell a portion of it. This provides a lump sum, regular income, or both, depending on the chosen product. This solution is popular among seniors looking to supplement their pension or cover unexpected expenses.
There are two main types of equity release products: lifetime mortgages and home reversion plans. A lifetime mortgage is essentially a loan secured against your property. The homeowner retains full ownership of the home and there’s no requirement to make monthly repayments, as the loan and accrued interest are typically repaid when the property is sold, usually after the owner’s death or if they move into long-term care.
A home reversion plan involves selling a portion, or all, of your home to a reversion company while retaining the right to live there rent-free for the rest of your life. The percentage you retain will always remain the same regardless of how property prices fluctuate, meaning if property prices rise significantly, the portion of the home’s value you do not own can increase significantly.
The “Can I Release Equity From My House Under 55” question is one often posed by younger homeowners. Traditionally, equity release products have been designed for older homeowners, typically those aged 55 and above. However, equity release under 55 options has become more accessible in recent times. It’s essential to consult with a specialist to understand the implications and benefits fully.
Commercial Mortgage Buy To Let
The problem is with a commercial mortgage buy to let is the loan to value can be as low as 50% with some lenders. If you look at cheap houses for sale in Durham you could consider buying them for cash.
Secured loans, sometimes known as homeowner loans, are loans secured against an asset, typically the borrower’s property. This means the lender has the added security of knowing that if repayments aren’t met, there’s an asset they can claim, usually the borrower’s home.
The primary benefit of a secured loan is that it often comes with lower interest rates compared to unsecured loans. They can also offer larger borrowing amounts and longer repayment terms. For these reasons, secured loans are frequently used for significant expenses like home improvements or debt consolidation.
However, the primary risk associated with secured loans is the potential loss of the asset (usually the home) if the borrower cannot keep up with repayments. It’s crucial to be confident about the ability to repay the loan before securing it against your property.
For those considering this option, fixed-interest loans offer the advantage of predictable monthly payments, ensuring that the interest rate doesn’t fluctuate during the fixed period.
Retirement Interest Only Mortgages
Retirement interest-only mortgages, often abbreviated as RIO mortgages, are a relatively new product in the UK mortgage market. These mortgages are similar to standard interest-only mortgages but with a crucial difference: there’s no fixed end date. Instead, the loan is repaid when a specific life event occurs, like moving into long-term care or upon the death of the borrower.
The primary advantage of a RIO mortgage is that monthly repayments only cover the interest, making them more affordable than regular repayment mortgages. The loan’s principal amount remains unchanged and is paid back at the end of the mortgage term.
For older borrowers, understanding the available mortgage options is crucial. Many banks and lending institutions have age limits on their standard mortgage products. However, specialized products cater to the older demographic. Nationwide mortgages for over 70s and remortgages for over 60s offer solutions tailored to the needs of this age group.
Moreover, for homeowners looking to switch their mortgage products, it’s beneficial to compare remortgage rates and find a deal that best suits their financial situation.
In the ever-evolving mortgage landscape, staying updated with the latest products and rates is crucial. Whether it’s understanding ut bank offerings or getting insights into the current remortgage landscape, thorough research and consultation with mortgage professionals can make the difference between a good and a great mortgage deal.
Owning a property is one of the most significant investments most people make in their lives. Leveraging this investment, whether through equity release, secured loans, or tailored mortgage products, can significantly impact one’s financial health. As always, potential borrowers should seek advice and thoroughly evaluate their options before making a decision.