Limited company buy-to-let has changed the market
Mark Davies (pictured) is managing director of Link Mortgage Services
I wrote in an earlier post that buy-to-let was evolving at a pace and that the rush to incorporate so many investor borrowers would inevitably create a different looking market.
And so it has come to pass. According to Mortgages for Business’ Buy to Let Index, the number of buy-to-let lenders lending to limited companies has risen by 47% over the past year. 22 buy-to-let lenders now lend to limited companies – up from 15 in Q3 2017 and the total number of mortgage products available to them has more than doubled since Q3 2017 – from 263 to 628. The result has been that 44% of buy-to-let transactions now made by limited companies – up from 42% in Q2 2018
This change in market behaviour should not surprise us. We are only just over a year from last September’s changes issued by the Prudential Regulation Authority, the 3% stamp duty surcharge on second homes in April 2016 and a withdrawal of tax relief by 2020.
We’ve already seen that the more stringent rules on buy-to-let lending has meant the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders but many have also embraced the business model of Houses of Multiple Occupancy in an effort to improve yields unaware of the many more stringent rules that accompany these kinds of dwellings.
Limited company structures do not come without their challenges and costs for all concerned. They not only affect individual borrowers’ tax positions but also demand skills in lenders such as understanding how company structures and law affect lending positions.
Completely new companies have no trading history or track record of success upon which lenders can base their decisions. Without any credit history it’s hard to establish the chances of the loan being repaid. In these circumstances, the lenders that do consider such applications often ask for personal guarantee’s from the directors, so that should the mortgage not be repaid the directors become personally responsible.
There may be additional administrative costs related to operating as a limited company, and in some instances it can be more complicated to transfer property and assets. When a property is sold via a limited company, it is subject to corporation tax, rather than capital gains tax. While the rate of corporation tax is lower than the rate of capital gains tax, an individual benefits from the capital gains tax allowance, which does not apply to a company.
There is the expectation that people borrowing through companies realise there are no blurred lines. A limited company has its own legal personality, which is separate to the individuals who participate in it. Rent the company earns cannot be spent on things other than business activities without these becoming a taxable wage or benefit. Because the extraction of money has to be through salary and dividends that money is subject to rules under the companies act and there is tax to pay for the recipient/shareholder.
It is when things go wrong that expertise is really in demand. A company does not retain the same rights an individual in the law or in practice and these has implications for tenants and landlords. A lender that has lent money to fund the purchase of a borrower’s home may be sympathetic when circumstances cause a borrower to get into mortgage arrears.
Further, the mortgage lender has a regulatory duty to help that borrower address the problem. However, where money has been lent on what is effectively a commercial enterprise, the lender may not be prepared to listen to excuses and may be much quicker to initiate repossession proceedings once a borrower gets into mortgage arrears. In some cases where arrears have built up on a buy-to-let property, the lender may appoint receivers to administer the property and accept any rents being paid.
Clearly, proper management of these loans and the processes for recouping losses in the sector now requires levels of expertise previously not required. From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend and experienced professionals if things do not go according to plan.