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Financing Deals – Be Professional and Build a Solid Track Record

Is obtaining finance getting easier or harder? Peter Hemple reports

Research released in March showed that landlords with bigger portfolios  have swung dramatically to using limited company status for new purchases, highlighting the ongoing switch in the BTL market as landlords reshape their portfolios.

The research conducted online in December 2018 among a sample of almost 500 landlords that are members of the National Landlords Association (NLA), found that nearly two out of three (64%) of landlords with more than four properties who plan to buy this year will use limited company status. Across the market as a whole 44% of all landlords planning to buy will use limited company status but that drops to 17% among landlords with one to three properties.  

More than six out of 10 landlords planning to fund new purchases this year will still use a traditional BTL mortgage, regardless of whether an individual or a company. However, the study found 73% believe lending criteria and portfolio application process changes introduced by the Prudential Regulation Authority (PRA) are making it more difficult to secure mortgages while 57% say the changes will slow applications down.

Limited company status is growing in popularity as the phased reduction in mortgage interest tax relief does not affect limited company landlords who can continue to offset mortgage interest against profits - which are subject to Corporation Tax of 19% instead of income tax rates. The interest coverage ratio on limited company applications is also lower than for most individual landlord applications.

Alan Cleary, managing director at Precise Mortgages, says: “The buy-to-let market is changing and the switch to greater use of limited company status is one aspect of the development underlining the increasing maturity of the sector. There are good reasons why limited company buy-to-let is dominating the purchase market and we expect that will continue to be the case this year and next. Brokers and customers however need expert specialist support when buying as a limited company or considering switching to limited company status as there are considerable costs involved.”

Splitting the portfolio up
I ask Alan why there has been such a big move towards buying as a limited company. He replies: “The reason converting to a limited company is so popular is because of the tax changes from the autumn 2015 Budget. Landlords can charge less tax relief so it has become more expensive to own a rental property, especially if you are a higher rate tax payer. Also, if your properties are located further south, the rental yields are likely to be lower so the tax change is more likely to affect you.”

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