Lenders tend to relax the stress testing when it comes to rental calculations. Usually, in a personal name, rental income must cover 145 per cent of the mortgage payments stressed at 5.5 per cent, but when lending to a limited company, it is common for this to be stress tested at just 125 per cent.
However, costs vary depending on whether you are buying in a limited company or as an individual. Mortgage costs are often higher for a limited company. Depending on the structure of the company, they will be taxed differently. It is also necessary to take into account things like CGT and additional stamp duty costs before deciding if buying in a limited company is the most appropriate option for you.
For those purchasing in their personal name, generally the monthly rental income must cover the mortgage payment by 140 per cent if the client owns fewer than four properties, increasing to 155 per cent if they own four or more. They also assume a stressed interest rate of 5.5 per cent to protect the borrower should the Bank of England interest rate fluctuate upwards, or the initial rate plus 1.55 per cent, ensuring the mortgage will be covered.
Key points
- One of the primary reasons for the growth in limited company buy-to-let ownership is the different tax treatment
- Lenders tend to relax the stress testing when it comes to rental calculations
- Owners of more than four buy-to-let properties will soon have to disclose all property details
When buying as a limited company, the monthly rental income only needs to cover the mortgage payment by 125 per cent, with the stress test remaining at 5.5 per cent, or the initial rate product interest rate plus 1.55 per cent. This allows the borrower to fully maximise the borrowing.
There is also the advantage of opting for a five-year fixed rate, which will mean the lender will use the payrate in their rental assessment. The same 125 per cent/140 per cent/155 per cent still applies as this continues to give the lender security by locking the client into the term, so they will not suffer from any rate increases.
Changes to the market
If you own more than four buy-to-let properties (known as a portfolio) at the end of September, you will have to disclose all property details – that is, any income, expenditure or wear and tear – of all properties when it comes to re-mortgaging.
Portfolio landlords will still enjoy the same tax efficiencies, but their portfolio will be assessed as one, rather than on the merit of each individual property. Although the properties will be stress tested at the same rate of 125 per cent, and the process of buying in a limited company remains the same, this will have a big impact on a landlord’s ability to obtain finance.
For example, if one property in the portfolio performs less favourably than the others, this will have an impact on the underwriting of the portfolio as a whole, regardless of whether some are held in a personal name and others in a limited company.
