Is a Buy-to-let Mortgage More Expensive?

Buy-to-let mortgage advice for limited companies

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Buy to Let Mortgages for Limited Companies

A Buy to Let mortgage is specifically for people who wish to rent their property out, using it as an investment rather than somewhere to live. Those who are renting out their home are unable to get or use a standard residential mortgage.

Buy to Let mortgages are typically more expensive than residential mortgages, translating into higher monthly mortgage payments, and such an investment property usually requires a minimum deposit of between 25-40%, depending on the lender and the value of the property.

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The majority of borrowers will take out an interest-only mortgage for their rental property, meaning that they will only pay off the interest accrued each month, paying off the full mortgage amount (also known as the ‘capital debt’) at the end of the agreed mortgage term. Landlords will usually use the rental income from their tenants to make their monthly mortgage payments.

What if you’re borrowing as a limited company?

There are a number of benefits to purchasing a buy-to-let property as a limited company rather than as an individual, including the fact that you won’t pay income tax on rental income. Instead of the rental income being added to your personal income and increasing your Income Tax band, it will be charged at the rate of corporation tax, which is currently 19%. You can also deduct expenses, such as mortgage interest, from your rental income, as they will be considered business expenses. These benefits are especially helpful for higher rate taxpayers who want to be more tax efficient with their earnings.

As with any mortgage, there are certain eligibility criteria that you need to adhere to. You will need to be a Real Estate Special Purpose Vehicle (SPV), registered within the UK. This is a regular limited company which is used solely for a particular purpose; in this case, to purchase and rent properties. If you already have an existing business, it’s recommended that you keep it entirely separate from your Buy to Let venture, as a hybrid arrangement can become complicated and have financial implications further down the line.

Most lenders also won’t take on portfolio landlords, so to access the best possible mortgages for limited companies, you will need to have less than three or four properties in total.

You should note that you will still be expected to pay stamp duty on the properties you purchase, and this is currently set at 3%. For Buy to Lets, this applies to all properties purchased.

We would always recommend that you speak to a specialist accountant to understand the tax benefits and implications for your specific circumstances.

The advantages of borrowing towards a Buy to Let mortgage as a limited company

The process is quick

You can set up a Buy to Let company really quickly, usually in around 20 minutes, and for as little as £12. All you’ll need is a company name, an address and the details of your directors and shareholders.

Many lenders will only lend to businesses that are listed under specific Standard Industry Classification (SIC) codes, most commonly:

  • 68100 - Buying and selling own real estate
  • 68209 - Other letting and operating of owned or leased real estate
  • 68320 - Management of real estate on a fee or contract basis

Your finances – and assets – can be easier to manage

Whilst it can be tricky to transfer ownership of an individual Buy to Let mortgage, if you’ve borrowed as a limited company, it will be listed under the ownership of the company rather than as part of your personal estate. This means it may be possible to avoid additional taxes such as stamp duty, inheritance tax and capital gains tax. This is particularly useful if you plan to pass your business onto family members in the future.

The liabilities are different

With a personal Buy to Let mortgage, you will be liable for any associated debts. But if you purchase a rental property as a limited company, the debt lies with the company rather than you as an individual. Retaining profits within the company can also help protect you from tax liabilities as profits are seen as business profits rather than ‘capital gains’.

It should be noted that many lenders will require personal guarantees for a Buy to Let mortgage of this type, so you won’t necessarily be absolved of all financial responsibilities.

The disadvantages of buying a property through your limited company

The additional costs

Setting up and managing a Buy to Let company isn’t without its own expenses and processes, and this is something that should be taken into account when making your purchase decision. You will need to consider:

  • Preparing your accounts for HMRC
  • Corporation tax
  • Filing at Companies House
  • Associated legal fees
  • Potential annual audits

Limited company Buy to Let mortgages can be more expensive

Many lenders will charge higher interest rates for Buy to Let mortgages through limited companies in comparison to those built for individual borrowers. There are also fewer lenders available who offer this type of mortgage, giving you less choice when it comes to securing competitive interest rates.

It’s not always as good a deal as it seems

Whilst purchasing your rental property in this way can seem like a no-brainer, the way you receive income from a company Buy to Let property can be quite complicated, and not always as financially beneficial as it first seems.

It’s worth noting that the rental income you receive belongs to your company, not to you, so withdrawing it can be complicated.

There are two ways you can pay yourself:

  • In dividends. You can get £2,000 worth of dividends tax free every financial year, and after this you will pay tax based on your income tax rate.
  • In your salary. You can pay yourself as an employee of the company, meaning you’ll need to be registered for pay as you earn (PAYE) and pay the taxes associated with being an employee, such as national insurance and income tax. Your company will also be required to pay employer’s national insurance, which amounts to an additional 13.8% on top of your monthly salary. This is generally the more expensive option.

You won’t be able to take advantage of capital gains tax allowance

With individual Buy to Let mortgages, if you sell your property, you will receive a certain amount of capital gains tax allowance. This benefit isn’t available when a limited company sells a property, so you will need to bear in mind whether the amount of profit you make from your sale will counteract this.

What fees are associated with purchasing and owning Buy to Let properties?

As with any mortgage and property ownership, there are a range of fees associated that you need to take into account before completing your purchase and deciding whether you can afford it. These include:

  • Stamp duty, surveyors’ fees, and other purchase charges
  • Tax on rental income
  • Building and landlords’ insurance
  • Rent insurance (optional)
  • Letting agents’ fees (if you choose to use them)
  • Maintenance and repairs for the property, or possibly ground rent

You should spend some time reviewing landlord regulations and responsibilities prior to committing to a Buy to Let mortgage. This is something we’re always happy to help with.

What happens at the end of my term?

If you take out an interest only Buy to Let mortgage, you will need to pay off the full value of the remaining mortgage at the end of the term. This can be done with another mortgage, by selling the property, or with cash if you have access to it. You can also choose to extend your mortgage at this time, if you want to.

If you choose to sell your property, you could stand to make a profit if the housing market has improved since your purchase. However, if prices have fallen, you will still need to pay off whatever market value is at the time of sale.

Selling your Buy to Let property

If you choose to sell your property, the process is quite similar to selling any other property in terms of the fact you will need to have it valued and then advertised, usually via an estate agent. If your property is tenanted, it may be easier to sell it to another landlord so that your tenants can stay in situ. You can choose to sell your property vacant, but it’s wise to be aware of your tenant’s rights in terms of notice periods.

If you’re selling before the end of your mortgage term, you are likely to be subject to an early repayment charge. Depending on the length of your term and how early you’re selling up, this will usually be between 1-5% of the remaining balance.

How to find the right Buy to Let mortgage for your circumstances

There are a huge number of options when it comes to investing in a Buy to Let property, especially if you want to put the purchase through your limited company. It’s always worth seeking specialist advice when trying to understand which option is best for you. At CLS, we work with a range of expert brokers who are experienced in this area of the market and can introduce you to the most appropriate deals from suitable lenders. We can help to guide you through each of the different financial options in a simple and easy to understand way, giving you the reassurance that you’re making the right choice.

We can also provide access to our trusted professional partners, such as insurers and solicitors, should you need them.

We are dedicated to offering you a fully rounded service, ensuring you get the best possible outcomes and a product that is best suited to your individual needs.

How the process works

At CLS, our process has been designed to make your mortgaging experience as quick and simple as possible. All you need to do is send us some details and we will get in touch to start finding you the best possible deal.

Wherever possible, we will provide you with a range of options and will be on hand to talk you through each of them so that you can decide which will work best for you.

We’re happy to take over the application process for you, meaning you can rest safe in the knowledge that your mortgage is being dealt with by the professionals. We will provide regular updates so that you know where you are in the process and can always answer any questions you may have throughout the journey.

We also offer face-to-face mortgage advice throughout Essex and the South East of England, as well as an online mortgage advisor service via telephone and email to customers throughout the UK.

If at any point you’d like to discuss your options with us, change any information or just want to talk anything through, our friendly team are always here to help.

Why choose CLS?

We are the UK’s number one specialist mortgage advisors and have worked with thousands of applicants to help them secure the right deal in all kinds of circumstances. Whether you’ve got poor credit, a complex income or are purchasing an unusual Buy to Let building, we have seen it all – and we’ll know exactly how to assist.

We have access to the best limited company Buy to Let mortgage rates, so you can be sure that you will always get the best deal with us.

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Gemma May

Mortgage Advisor

Gemma May

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