The way that many landlords invest in property has changed in recent years. As the government has stripped back the tax relief on offer to regular landlords, investing through a limited company has become ever more attractive, since these purchases still qualify for some relief.
Tom Molloy is intermediary sales manager Mansfield Building Society
The way that many landlords invest in property has changed in recent years. As the government has stripped back the tax relief on offer to regular landlords, investing through a limited company has become ever more attractive, since these purchases still qualify for some relief.
Coupled with other benefits, like the potential for paying less tax on rental incomes, and it’s perhaps little wonder that increasing numbers of landlords have looked seriously at limited companies as a positive route for their investing.
In fact, a study from Hamptons last year found that 2020 saw a new record set for the number of companies set up specifically to hold buy-to-let properties, with more than 41,000 businesses established.
Yet as brokers know only too well, limited company borrowing can come with additional challenges. Not only is it an area that some lenders still shy away from, but doing so can also mean facing a more expensive mortgage deal.
Treating borrowers differently
Too often landlords have had to pay a higher price for adding to their portfolio if they purchase through a limited company, rather than as an individual, as a result of the higher interest rates levied on limited company buy-to-let products.
That isn’t necessarily fair - purchasing through an SPV is a perfectly legitimate way to invest in property, and does not have to involve the lender taking on any additional risks which could justify that higher rate.
It’s an issue that we have addressed with our recent repricing of our buy-to-let range, bringing the rates on limited company borrowing with a personal guarantee in line with our standard buy-to-let products. It means that, irrespective of how they are structuring their portfolio, buy to let landlords can face the same rates with us.
The reality is that limited company borrowing is only likely to become more common in the years ahead, and discriminating against some borrowers based on their investing structure is not appropriate. It’s an area of the market calling out for competition and innovation, which ultimately can only benefit brokers and their clients.
Do I need a guarantee?
Another area where limited company borrowers are often treated differently is with personal guarantees. It’s common for lenders to require borrowers to put a personal guarantee in place, to provide the additional security for the loan.
Yet there will be occasions when providing that sort of guarantee simply isn’t an option for the borrower. Is that really a good enough reason to prevent them from accessing the funds they need for their investments? Should the absence of a personal guarantee really be a deal breaker if the borrower is otherwise a perfect prospect?
At Mansfield we take a different view, offering a limited company buy-to-let product without the requirement for a personal guarantee. While borrowing in this way may incur a slightly higher rate than would be the case with a guarantee provided, it shows that the perceived complexity (that may otherwise scupper a case elsewhere) does not have to be an insurmountable challenge for lenders who focus on flexibility and a personal approach.
Viewing borrowers as individuals
For some lenders, an automated process that puts borrowers into clearly defined boxes, and judges them based on how well they fit into that box, is appropriate.
Unfortunately given the world in which we live, that can be an awfully black and white approach, which leaves far too many perfectly good borrowers unable to access the funding they require.
We prefer to take a more flexible approach at Mansfield, building a team of experienced underwriters who have the authority to really dig into a case to better understand the exact circumstances.
By taking that extra time to get to know the borrower and what they are looking to achieve, it means that we are better placed to judge the application properly, and can help more borrowers as a result.
Intermediaries really value that flexibility and understanding. Brokers know only too well that the days of borrowers falling into clearly defined ‘vanilla’ categories are behind us, and a more detail-based, flexible approach is required.
It’s at the heart of how we operate at Mansfield, and I have no doubt that in the years ahead lenders who embrace that way of assessing borrowers will stand out from the crowd and win the long-standing backing of brokers across the market.
