Buy to let mortgages are a standard financing option for landlords purchasing a rental property or expanding their buy to let portfolios. There are two primary options – either applying for a buy to let mortgage as an individual and operating as a self-employed landlord or registering a company to manage your property business.
Both solutions have pros and cons, but it is essential every landlord understands the potential tax efficiencies of trading through a company structure and how this impacts the mortgage products they may be eligible for.
Think Plutus runs through this specialist form of property financing to help you make informed choices about the best mortgage options. We also explain how limited company buy to let funding differs from general buy to let mortgages suitable for landlords applying as private individuals.
The Basics of Buy to Let Limited Company Mortgages
One of the main reasons a large proportion of landlords choose to incorporate a company rather than managing a rental property as a self-employed person is that trading through a company can prove beneficial in terms of tax exposure and personal liability.
In the past few years, staggered changes to tax allowances and tax-deductible expenses have meant many self-employed landlords are subject to higher taxation against their property rental income, as costs previously fully deductible are now not.
However, buy to let mortgages designed for limited companies are more niche products. While several reputable banks, building societies, and specialist lenders will consider this type of mortgage agreement, fewer options are available.
As with any specialist mortgage financing, we always recommend landlords work with an independent, experienced, specialist mortgage broker. Some of the most competitive limited company mortgages are not advertised through mainstream routes and are only available through established networks, where lenders accept applications from the selected brokers they choose to partner with.
Benefits of Mortgaging a Buy to Let Property as a Limited Company
When you incorporate a limited company, the business is a separate legal entity from you. Director’s fiduciary duties and any guarantees you offer can impact your liability, but in general, a company owner is not personally liable for debts belonging to the company.
HMRC also applies a different tax treatment to property financing costs incurred through a limited company. In the past, individual landlords often traded as self-employed taxpayers and could deduct all of the expenses associated with buy to let financing from their income before declaring and paying income tax.
The revised system, introduced in phases, means landlords are now eligible for up to a 20% tax credit against the interest paid on mortgage borrowing. This effectively means that higher-rate taxpayers are 20% to 25% less well-off on the top proportion of their incomes and pay higher tax liabilities even if their earnings have remained static.
Landlords who incorporate a limited company can claim all of their mortgage interest costs as a tax-deductible expense, where financing expenditures are an allowable business outgoing and deducted from the company turnover before arriving at a taxable net profit.
Tax Rates on Rental Profits for Limited Companies
Limited companies are subject to corporation tax rather than income tax. From April 2023, the tax rates are as follows:
- 19% for companies with a profit of under £50,000.
- 25% for companies with profits of £250,000 or more.
Tapered relief applies to companies earning between the two thresholds. Still, the maximum tax rate remains 25%, significantly lower than the upper 45% income tax rate that applies to personal incomes of £125,140 or above. However if you wish to take rental profit as personal income you will also have to pay dividend tax or setup PAYE and payroll.
As the owner of a limited company, you pay corporation tax against your net profit after deducting all mortgage interest costs. Conversely, as a self-employed landlord, you are liable for income tax against your rental profit, less the 20% tax credit against your mortgage interest, at the relevant tax bracket.
Registering a business and applying for a limited company buy to let mortgage may, therefore, mean you can reduce your tax burden and increase the net profitability of your rental property or portfolio. However, it is important to note that any drawings deducted from the business remain subject to personal income tax.
Property owners who purchase rental properties in a partnership may find the benefits of trading through a limited company even more compelling. The respective shareholders have limited financial liability if the company fails and can split their earnings into salaries and dividends calculated as a share of the net profits.
Special Purpose Vehicle (SPV) Limited Company Structures
Landlords typically incorporate an SPV rather than a standard limited company. SPVs are similar to any other limited business but are a specific category of company designed for property-related organisations.
Registering an SPV works the same way as any other company but is relevant for landlords and rental property investors if the sole or primary business activity is buying, selling, renting or managing properties.
For more information about incorporating an SPV and other factors, such as filing annual accounts, please refer to our guide covering How to Set Up a Limited Company for Buy to Let.
Eligibility Criteria for Limited Company Buy to Let Mortgages
Limited company buy to let mortgages are specific products created to allow incorporated businesses to apply for property purchase financing, where the property is primarily a rental investment. Some lenders will consider both private residential accommodation and commercial rental properties, whereas others focus on either area of the rental market.
Most lenders prefer applicants who have an incorporated SPV, although some may be comfortable considering other company formations. For example, a business that is already established and trades as a limited company may be able to use a buy to let mortgage product to purchase a rental investment – even if the business is not primarily involved in property or has another main area of trade.
Criteria also depend on the lender, which is why an initial assessment of your position and the finances involved is necessary. We may recommend one or several lenders who fit your requirements well or are more likely to approve your application based on an evaluation of their lending policies.
The below criteria are the norm, although it is worth noting that these terms are not universal, and some lenders will have stricter or more flexible lending rules.
Lenders typically expect a limited company to provide a deposit of at least 15% on a buy to let mortgage. Deposit thresholds are higher since a lender may perceive commercial lending as a higher risk than private or residential mortgages.
Mainstream lenders tend to have the lowest maximum loan-to-value limits, which indicate the greatest proportion of the property purchase value they are prepared to offer. For example, if the LTV is capped at 70%, a limited company will need a deposit of 30% as a minimum to qualify.
Interest-only buy to let mortgages may have a higher deposit requirement. However, affordability assessments may be easier since the monthly mortgage cost will be lower than a capital repayment product.
The amount you can borrow through a buy to let mortgage will also depend on the projected rental income you expect to make. The standard is to require evidence of a rental valuation of at least 125% of the monthly mortgage cost, where lenders need assurance that the income generated will comfortably cover the mortgage payments.
Personal Eligibility Criteria
Depending on the nature of the limited company, a lender may ask for directors to provide personal guarantees. Newly established companies and those without alternative security to offset the lender’s risk are more likely to need a personal guarantee.
The specific guarantee required will depend on the lender and the risk profile they assign to the application, but a guarantee is often a necessity if the company is applying for buy to let mortgage financing of 50% or more of the property purchase value.
A lender may also require any landlord applying for a mortgage through a limited company to provide evidence of a separate income above a minimum annual value. This criterion does not always apply, and some lenders will require the company owner to prove they have either savings or a regular income above a threshold value.
Although limited company mortgages are a business debt, lenders will usually evaluate the owner or director’s age, where they may set a maximum age at which a new applicant will be considered. This part of the assessment is related to the lender’s risk, so the personal circumstances of the owner or director may have an influence, regardless of the company’s trading history or profitability.
Lending Rules for Different Property Types
Since limited companies are commercial mortgage applicants, a selected lender will apply varied rules and restrictions, with greater flexibility often available from niche lenders who specialise in commercial lending or buy to let mortgage products.
They may have a cap on the maximum number of properties within a landlord’s portfolio that they will lend against or a maximum value of lending available to any one commercial applicant. However, there are also lenders who focus on portfolio mortgages and will lend on any number of properties provided the applicant is compliant with other criteria.
The property type will also be a factor, where lenders across the spectrum of mortgage products are often reluctant to lend against properties deemed ‘non-standard’. That might refer to anything from a rental property with a thatched roof to a timber-framed building or a multi-storey apartment block.
HMO property investments – houses of multiple occupations – are also a more specialist mortgage prospect since the lender will need to ensure the landlord or the business they trade through is appropriately licensed by the local council.
Interest Rates on Buy to Let Limited Company Mortgages
Interest rates vary significantly, and the rates you are offered will depend on all of the eligibility criteria outlined above. As a very rough guide, low-risk limited company buy to let mortgages can begin from around 4.5%, depending on product fees and base rates at the time of the application, and extend upwards of 7%.
The rates a lender offers will also depend on whether you wish to apply for a variable rate or a fixed-term rate, where the interest is pre-agreed at a static rate for a number of years. The Think Plutus team can provide further guidance if you are unsure which option will be most suitable or wish to discuss the potential for rates to change and make either mortgage basis less favourable.
Some lenders charge higher interest rates for limited company mortgages than for another buy to let products, but those specialising in buy to let lending may offer similar rates for any applicant.
Rental Yields on Limited Company Buy to Let Property Investments
Your rental yield is a calculation that indicates the profits generated through a buy to let asset as a percentage of the property value. Yields are a meaningful metric, not only in terms of passing lender affordability assessments but in establishing whether a new buy to let property is a viable investment.
The Think Plutus Rental Yield Calculator is free to use if you are unsure of the rental yield achievable. Simply use the sliding scales to select the property value and monthly rental income, and the calculator will automatically work out the yield for you.
As a rough guide, a yield of 4.5% is considered a good average in the southeast, with higher yields available in some regions, reaching roughly 6% further north in cities such as Manchester.
However, landlords should also consider the capital appreciation opportunities available, where a higher yield may be perceived as advantageous in the short term but may also mean the property is likely to be a higher risk based on the location, the construction and the nature of the property.
Although a lower yield might indicate lower profits, historically, properties with a stable yield perform better in terms of long-term appreciation. Both factors should be included in your decision-making and when comparing different potential buy to let investments.
Further information about comparing rental yields is available through our previous guide, What Is a Good Rental Yield.
Support From a Limited Company Buy to Let Mortgage Broker
As we have seen, there are multiple considerations when deciding whether to apply for a buy to let mortgage as a limited company or private individual, and it is important to assess every option carefully to ensure the rental property investments you make are profitable and secure.
Should you need professional guidance at any stage of an application, when deciding how to manage your rental portfolio or comparing buy to let financing solutions, please contact the Think Plutus team at your convenience.
We are wholly independent, whole of market, and have access to a broad network of lenders and mortgage products, delivering support and information throughout to help our clients make confident choices about the mortgages, lenders and repayment structures that are best aligned with their expectations.
Frequently Asked Questions
Is it Possible to Apply for a Buy to Let Mortgage as a Limited Company?
Yes, many landlords incorporate a limited company called an SPV (special purpose vehicle) for this exact reason. Buy to let lenders will usually consider both commercial businesses and private landlords, although the products and rates you qualify for will differ.
Which UK Lenders Offer the Most Competitive Buy to Let Mortgage Products for Limited Companies?
There is no one lender that will be appropriate for every limited company since much depends on the value you wish to borrow, the deposit available, the trading history of your limited business, and the property itself. We recommend niche lenders, building societies, and specialist buy to let mortgage providers, based on a thorough assessment of your requirements and finances, ensuring whichever lender you choose is well-positioned to accept your application.
Are Buy to Let Limited Company Mortgages Available on an Interest-Only Basis?
Interest-only mortgages are the standard in buy to let financing and are available to both a limited company and individual applicants. Repayment mortgages may be available, although they tend to be a more tailored product available from a smaller pool of potential lenders.
What Is the Advantage of Working With a Buy to Let Mortgage Broker?
As your broker, Think Plutus acts on your behalf, researching the market, suggesting products or product packages, negotiating with your preferred lenders and overseeing your application to streamline the process and improve your chances of a fair and swift funding offer.
We commonly work with landlords transitioning their portfolio to a limited company as a tax efficiency and liability protection exercise and can help whether you are buying a rental property as your first investment or are a seasoned landlord in search of more competitive financing.