The increasing number of limited company landlords don’t need limited options

Limited company landlords are making up an increasing proportion of the buy-to-let market. Changes to the tax setup for landlords in recent years has made it much more attractive for them to purchase within a limited company wrapper rather than in their own names.

Figures from Hamptons last year pinpointed the enormous jump seen over the last five years in the numbers of limited companies. There are now more than 300,000 limited company landlords, and they represent around 40% of all purchases made by investors.

For landlords making the switch to a limited company structure, it’s an alternative to being taxed on their rental income. This structure was already appealing given changes introduced by the Government and regulator but has become even more compelling as the interest rates on buy-to-let mortgages have increased of late.

In recent months we have seen lenders forced to revise their product ranges off the back of rising SWAP rates and speculation around Bank of England Base Rate rises. And even when products are available, pricing can have a big impact, and not just on the tax that landlords pay but in affordability assessments.

Clearing the ICR hurdle

A big concern for any landlord arranging mortgage finance at the moment - whether they own the property in their own name or through a limited company - is the interest coverage ratio (ICR).

ICR is a significant part of affordability assessments - lenders have to be responsible in ensuring that the rental income from a buy-to-let property will be more than sufficient in meeting the interest charged on the loan.

However, as rates have risen so quickly, it has put landlords in a particularly tricky position when it comes to meeting those ICR requirements. Trying to make the sums add up has become more challenging, with some feeling the only option is to impose enormous rent hikes on their tenants or increasingly, revert to Top Slicing and use background or earned income to supplement the rental income.

That’s a difficult prospect at the best of times, let alone given the current economic climate when many landlords will be keen to give quality tenants a little support in the hope of retaining them for a long period.

Delivering what limited company landlords really need

This challenge was at the heart of our thinking at Mansfield Building Society when we relaunched our limited buy-to-let proposition last month. We know how crucial this sort of lending is going to be for landlords, not only in the current environment but in the years ahead, to fully grasp the issues that property investors face in meeting the higher ICR requirements.

By launching a product as a discounted rate with a percentage completion fee, we wanted to help landlords be better positioned to deal with the affordability challenges. The higher initial fee meant that we could offer the product at a lower interest rate, giving landlords a badly-needed helping hand in clearing the ICR challenge.

We have since followed up that initial launch with a five-year fixed rate limited company buy-to-let product, again driven by our commitment to helping landlords thrive during the more challenging affordability environment.

That sort of approach only comes from really understanding the market, and recognising that there is a way for smart and nimble lenders to offer a practical solution to the mortgage dilemmas that buy to let borrowers currently face.

Flexibility makes a difference

Not only is it crucial for lenders to truly understand their borrowers, there’s also a strong need for lenders to be flexible in how they operate. Even when there is a limited company vehicle, there can still be a perceived complexity and we’ve seen a range of scenarios, from furloughed self-employed accounts to complex background credit criteria.

At Mansfield Building Society we take great pride in embracing a more versatile way of viewing applications, allowing our underwriters to really get to grips with what’s important about an individual case.

The last few years have thrown plenty of challenges at borrowers of all kinds and this has combined with rising interest rates to create a perfect storm.

By taking the time to understand borrowers and the challenges they face, from product design to lending assessment, lenders can truly support brokers and their clients.