Limited Company HMO Mortgage
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Limited Company HMO Mortgage
Paul Holland is back to explain how and why you might buy a House in Multiple Occupation (HMO) through a limited company.Limited Company HMO Mortgage
Can I get an HMO mortgage through my limited company? How does it work?
You can buy a HMO through a limited company, and it’s actually becoming increasingly popular for landlords as there are a lot of tax benefits.
The process is more complex than if you were to buy it in your personal name, and there are fewer lenders at your disposal. It’s more time consuming, and costly. But hopefully, this podcast will explain why, despite all those things stacking up against it, you would still buy property through a limited company.
What criteria does a limited company need to meet to be eligible for an HMO mortgage?
You’re usually going to purchase property within a limited company with something called an SPV, which stands for Special Purpose Vehicle.
You need to register that at Companies House, similar to any other limited company, and you need to have the right SIC codes. Two are very important – you must have at least one of them.
68100 is ‘the buying and the selling of your own real estate’. The second code is 68209, ‘letting and operating of leased real estate’. They’re the two SIC codes to have listed on the limited company you open up with Companies House.
You’re also going to need to have a good personal credit score. People often think they can set up a limited company to get around bad credit when buying a property. That’s not the case, as there’s still a credit check.
Some lenders have a minimum income requirement on top of that – commonly about £25,000 per annum. Each lender also has their own property criteria, which is similar to any other type of application.
Most lenders require you to have your own residential property in the background, too. They will also need some personal guarantee from you, as your limited company won’t have any history. It’s not a trading company.
How much deposit does a limited company need for an HMO mortgage?
You’re usually going to need a minimum deposit of 25%. But the maximum loan size is going to be driven by the potential rent from that property, and so you may need a little more. The minimum is 25%, but it could be 30% or 35% depending on the actual property and its rental yield.
Can I get an HMO mortgage under a limited company as a first-time landlord?
Yes. You’ll be dealing with fewer lenders from the whole market, but I can think of a few. There’ll be a limited pool of lenders for first-time landlords.
That brings with it other difficulties, because as soon as you add in other criteria and affordability, it can really pigeonhole you down to one or two lenders, which might not mean you get the most competitive option.
What if the limited company has poor credit? Could I still get an HMO mortgage?
With any mortgage application you put in, regardless who owns them, the applicant is assessed – whether they are the company director or buying it in personal names.
When someone buys a property via a limited company, it’s almost always going to be via that SPV, the Special Purpose Vehicle. It’s not a trading company, won’t have history and it’s not going to have credit. So the 100% owner/director or multiple directors are credit checked.
Credit is always going to be an important factor, and we should all be striving towards a good credit score anyway. So just bear that in mind.
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Can I remortgage my HMO properties into a limited company?
You can’t remortgage them into a limited company. A lot of people think that because they own the limited company, they own the property, so it’s just remortgaging. It’s not quite like that. The company is a separate entity altogether.
In fact, you’re going to need to sell the property from your personal name into the limited company. You can do it, but because it’s a sale, you will incur stamp duty on that transfer. It could still be worth doing, so sit down with a broker and crunch the numbers. But it’s a sale, not a remortgage.
Is it worth buying an HMO property? What are the pros and cons of an HMO mortgage through a limited company?
In my opinion, it’s definitely worth buying an HMO. If you’re going to do that, it’s generally going to be better for you to buy it through a limited company. Most of the benefits are related to tax efficiency.
By being more tax-efficient, you can grow your property portfolio business much faster. You’re probably in it for profit, because it’s a business, and the main benefit is profitability. That probably outweighs the cons.
The drawbacks are upfront costs, because it’s going to cost you more initially – but will be worthwhile long term. Plus, there’s the cost in your time. Doing anything through a limited company is going to take more administration than in your personal names.
But that additional profit is always going to outweigh the cons. In my opinion, if you’re in a higher rate tax bracket, or expect to be with the rental income from that purchase, it’s going to be more beneficial to buy it through a limited company.
Are HMO mortgages more expensive for a limited company? What costs are involved with an HMO mortgage?
Upfront costs are definitely higher via a limited company, but it’s going to be worth it in the long run. While there are a couple of nuances with limited companies, generally it’s the same costs, fees and associated expenses as with a normal purchase.
On stamp duty, you’re going to be hit with the surcharge because it is an investment property. You’re going to have broker fees if you instruct a broker, and solicitor fees because you’ll need legal work.
The lender will charge you to go out and value the property, and there will probably be mortgage product fees. One additional cost you may not get with a standard purchase is independent legal advice. You will need to pay for that, but it’s usually around £300 or £400.
How do I get an HMO mortgage as a limited company? What’s the process? How can a mortgage broker like Henchurch Lane help?
Let’s go through it step by step. First, you set up that limited company and make sure you use the right SIC codes that we mentioned.
Next, set up a bank account in the limited company name for all of your expenses and your income. Number 3, get your documents in order. You’re going to need to have identification, bank statements and income proof.
Step four is to speak to a broker, if you haven’t already. Get someone involved that knows where to go in terms of lenders. Whatever you spend on a broker, by the way, will be saved tenfold in other costs. It’s definitely worthwhile in these complex cases.
In addition, we help you pull together all the documentation that a lender requires for a limited company purchase – such as a business plan, a property schedule and personal guarantees.
Lastly, we submit the application for you, once you’ve decided on the lender. A solicitor carries out the legal work. Once you exchange and complete on that purchase, the fun begins with renovations and getting your tenants.
If you follow these steps, you will save a lot of time in not going back and forth between them.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
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