So this week I had the pleasure of speaking to a group of new investors. We discussed all things finance related, and some of the questions they had were really great questions, so I thought i would summarise some of the Q&A for our readers.
What are the differences between personal name and limited company mortgages?
Firstly, we are not tax advisors! The person to speak to in relation to tax and and to seek advise in this are, you need to speak to your accountant. Find one who is tax qualified, with knowledge of the property industry, to ensure that you get the right help.
When applying for a mortgage in a limited company, the lender will still assess the credit worthiness of the Directors and Shareholders of the business because you are the driving force behind the company. You will sign a personal guarantee so if the business can not repay the debt, then you will be liable for repayment of the loan. The lender may also take a debenture or ‘floating charge’ over your company, for additional security.
From a lenders perspective, the stress test (the calculation to ensure that the rent covers your mortgage payment at an inflated figure to cover voids & interest rate increases etc), is lower than in a personal name, so it can mean you can borrow more where you’re rental income is tight. With some lenders, however, the interest rate and associated costs such as legal fees can be higher in a limited company. This does depend on the type of mortgage you are applying for and we can always talk you through your personal situation and the differences. This is more likely for more straightforward transactions. For more complex cases, HMOs and blocks of flats, for example, it is unlikely to make a difference.
With mortgages in your personal name, the stress tests are higher, so in some circumstances it can mean you can borrow a lower amount. Whether this is something that would affect you would depend on the type of property and individual figures. When we speak to you about your case, we will go through whether this is a consideration.
Are there any restrictions on timings when buying a property and then refinancing?
In short, no! Some lenders will have a ‘6 month rule’, which means you cannot refinance with them within 6 months of purchase but that doesn’t mean every lender does. It is generally high street lenders who do this. Where you have a more complex property or personal scenario (and are not relying on high street lending) it’s less of an issue. We can always compare rates and costs to see if it’s worth doing it quickly or waiting for 6 months.
How does experience affect what is available to you?
This really depends on your personal circumstances and the type of property you are looking at. Each lender has its own appetite towards risk, and it’s my job to match the lender to your circumstances. Generally a lender will want to see that you are growing your portfolio at a steady pace, so each new project can be a step up from your previous one but not too much – there are exceptions to this rule though.
We can talk you through your options, but there are lenders who will lend to first time landlords (for HMOs and single let’s) first time buyers for a buy to let and more complex properties with limited experience. What you need to remember is that it is always a risky decision and where you have less experience, the lender options are going to be more limited and generally more expensive.
It is worth thinking about your overall plan for the next 3-5 years for example. Where do you want to get to and how are you going to get there? Rate isn’t necessarily the most important consideration where you want to gain experience and you have a limited pot of money for deposits!
As always, please give us a call if you have a specific project you want to talk to us about.