Large HMO Mortgage

HMO Mortgages For SPV Companies

SPVs offer a tax efficient way to own HMO properties, but require specialist mortgages. Get the best deal with ABC Finance.

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ABC FinanceLimited Company HMO Mortgages

Author: Lee Hemming CeMAP

20+ years experience in HMO Mortgages

HMO mortgages for a Limited Company are growing in popularity and help HMO landlords reduce their tax bill on their residential property investments.

Limited company HMO mortgages grew in popularity after section 24 was introduced, which impacted landlords tax bills.

Limited companies are outside of the new tax rules and represent a fantastic way for landlords to protect their rental yield.

Can I set up a limited company to buy and sell HMO properties?

Yes, setting up a limited company for your property investments is a popular, and often sensible, decision. Companies opened for this reason are known as special purpose vehicles (SPVs).

There are pros and cons to opening a limited company to manage your property interests.

Benefits of a limited companyDrawbacks of a limited company
You’ll enjoy a degree of separation between your personal and business financesSome lenders charge a higher interest rate to limited companies than they would a private buyer
Corporation tax on rental yields is lower than income tax, and mortgage repayments can be declared a business expenseLimited companies will not benefit from capital gains allowance or any stamp duty holidays
Business profits can be used to finance further purchases if desired, or paid as dividendsAny dividends you do take will be taxed if you exceed your tax-free allowance
It’s easier – and cheaper – to inherit a  business than private property through a willYou’ll need to keep strict records and will likely need to hire an accountant to manage your finances

If you’re interested in opening a limited company to purchase and manage property, use it exclusively for this. The purpose of such a business is streamlining your finances, not complicating them further by amalgamating your affairs with another trading business.

Once your limited company is operational, however, you may have more options open to you when looking to enhance your property portfolio. You will theoretically be eligible for a limited company mortgage and all that entails.

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What is a limited company HMO mortgage?

A limited company HMO mortgage is essentially the same as a typical HMO mortgage, but with one key variance. The mortgage loan will be assigned to and repayable by a business, not an individual.

They allow you to purchase or a refinance an HMO property, by securing a mortgage against the property.

The terms and conditions of lending will be slightly different for a limited company. You will likely need to pay a higher interest rate than you would as a personal applicant.

Can I get a limited company HMO mortgage?

If you are named as a director or other “responsible person” on the books of a limited company, and you own an HMO property of your own or wish to purchase an HMO, you can apply for a limited company mortgage.

Discuss your circumstances with a specialist mortgage broker to ensure you receive the best possible deal.

Can a brand new company get an HMO mortgage?

Yes, a brand new company will be welcome to apply for an HMO mortgage. As these mortgages are considered a higher risk, most lenders prefer to lend to borrowers with experience in property letting.

If your business is new, but you have a track record of managing rental properties as a private individual, your application is likelier to be looked upon favourably. If you are brand new to all aspects of this line of business, you will need to convince a lender that you can reliably make repayments – and potentially put up a larger deposit.

Even if you are new to the business and property worlds alike, you may still gain an HMO mortgage – especially if you employ the services of a professional broker.

Just brace yourself for a potentially higher interest rate. HMO mortgages are already typically offered at a higher cost than their residential counterparts.

If you have no track record of successfully managing a property portfolio, the risks of lending to you will need to be negated.   

What interest rate will I pay for a limited company HMO mortgage?

The interest rate you will be assigned for a limited company HMO mortgage depends on your personal circumstances. The less risk you pose to a lender, the lower an interest rate you are likely to be offered.

Even if you run a thriving portfolio and can show evidence of experience in the property sector, expect to pay at least 4% in interest – if not higher. HMO mortgages tend to run at higher interest than typical residential mortgages, and using a limited company could add another bump.

The lump sum you can lay down as a deposit will also influence the interest rate a lender is happy to offer you. Most HMO mortgages will only be provided at a 75% loan-to-value ratio, so you’ll need a 25% deposit.

We briefly touched upon the benefits and drawbacks of limited company HMO mortgages at the top of this article, but let’s elaborate a little more on why this approach to purchasing property has grown so popular.

If you’re retired and thinking about succession plans for your property portfolio, leaving the business – and all of its interests – to somebody in your will is much easier than willing them a property. Yes, the recipient will inherit mortgage debt attached to the business, but they will not need to pay inheritance tax on the property portfolio.

The separation of personal and professional property interests will also benefit you. Suppose you own three properties and run three concurrent mortgages – one residential mortgage attached to a family home you live in, and two investment HMO mortgages that are purely professional interests.

You’ll likely need another mortgage if you wish to sell your family home and upgrade to a larger alternative. If all three properties are attached to your personal accounting, the application process will be messy and elongated. However, if the two HMO mortgages are tied to a limited company, your search for a new family home can proceed unencumbered.

Separation of business and personal finances can also help your personal credit score. HMOs with three, four, five, or more occupants mean that you rely on numerous people to pay their rent on time.

If some of your tenants cause you problems in this regard, meaning you’re late on a mortgage repayment, it’s arguably better to have this on a business credit history than personal.

Finally, we have perhaps the most compelling reason of all to take out a limited company HMP mortgage – the financial savings this approach will offer.

Imagine you take out an HMO mortgage as an individual and bring in a rental yield of £3,000 per month. This will be considered taxable income by HMRC, and if you bring in over £80k PA from all revenue sources, you’ll need to pay an income tax rate of 40%. If you’re paying £2,000 per month on mortgage repayments for this HMO, there is very little profit left after tax.

Now, picture the same scenario but with a limited company HMO mortgage. You can bring in the same rental yield of £3,000 per month, though your monthly mortgage repayments may be more significant due to higher interest rates and shorter repayment terms.

However, these repayments can be written off as a business expense on your tax return, and corporation tax is just 19% of your income after expenses. If you manage your investments wisely, this could be a considerable saving in the longer term.

Keep reading – Large HMO Mortgages

Can you lend to borrowers with bad credit for a limited company HMO mortgage?

Bad credit does not necessarily prevent you from gaining a limited company HMO mortgage, but it will make an already-challenging application that much more complex.

Starting a limited company to obtain an HMO mortgage can seem like a way to mask bad credit in your personal life. Any financial difficulties in your past will quickly be discovered, so there is little point in trying to trick a lender.

Discuss your credit history honestly and openly with a mortgage broker and see what deals they can find. Bad credit will almost certainly disqualify you from access to prime mortgage rates, but specialist lenders may still be willing to work with you.

Just ensure you weigh up the long-term consequences of taking out a limited company HMO mortgage with such a lender, ensuring you are not setting yourself up for more financial challenges in the future.

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