Limited company landlords facing higher mortgage costs
Limited company landlords rushing to incorporate in order to preserve mortgage interest relief on their buy-to-let portfolio may still end up paying more.
Lenders such as OneSavings Bank have reported increasing buy-to-let applications from limited companies but research by broker Private Finance shows that any savings made by keeping mortgage interest relief may be surpassed by the higher costs of a mortgage deal for a company.
A limited company borrower can expect to pay 3.41% for a two-year fixed 75% loan-to-value (LTV) mortgage deal, compared with 1.92% for personal borrowers, according to Private Finance.
Analysis by the broker found that only landlords with multiple properties benefit from a limited company structure, with four properties being the tipping point.
Landlords looking to repurchase existing homes into a limited company are also likely to lose out as this move triggers costly capital gains tax and Stamp Duty.
The research took a base salary of £35,000 and the average UK rental income of £11,010 from Zoopla to see what a landlord would owe on an average property worth £192,045.
Based on this scenario, a 75% LTV mortgage at 1.92% would cost a personal borrower £2,765 a year, while a limited company at 3.41% would pay £4,912.
The table below shows how savings are only made once relief can be claimed across four or more properties.
| Two properties | Individual | Limited company |
|---|---|---|
| Gross income (salary + rental income) | £57,020 | £57,020 |
| Annual mortgage interest costs | £5,531 | £9,823 |
| Total tax bill | £10,902 | £7,117 |
| Net income | £40,587 | £39,764 |
| Three properties | ||
| Gross income (salary + rental income) | £68,030 | £68,030 |
| Annual mortgage interest costs | £8,296 | £14,735 |
| Total tax bill | £14,753 | £8,276 |
| Net income | £44,981 | £44,704 |
| Four properties | ||
| Gross income (salary + rental income) | £79,040 | £79,040 |
| Annual mortgage interest costs | £11,062 | £19,646 |
| Total tax bill | £18,604 | £9,435 |
| Net income | £49,374 | £49,644 |
Shaun Church, director of Private Finance, said: “The option to invest through a limited company has come under the spotlight recently as landlords look for ways to offset recent tax changes.
“But landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.
“Larger landlords might find the tax benefits associated with limited company ownership outweigh the higher cost of mortgage borrowing.
“Each investor is different and there’s no one-size-fits-all solution.”
The research comes as figures from broker Mortgages for Business’ Limited company landlords Buy to Let Index showed limited companies made up 77% of applications in the first quarter of 2017 and 78% in the second.
Steve Olejnik, chief operating officer of Mortgages for Business, said: “Landlords are increasingly looking to Limited company landlords structures because of the benefits they bring in the form of tax efficiencies and softer affordability testing. The structures are not without their hurdles, however, and we recommend all our clients take professional tax advice before deciding how to proceed.”
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