Understanding deposits can save limited company mortgage completions

Advisers have had to spend a considerable amount of time already understanding a whole raft of changes so they can continue to advise their buy-to-let clients appropriately.

The changes to the mortgage interest tax relief in particular, has meant many investors are now considering limited companies for their buy-to-lets.

Indeed, many investors are still unaware of this particular change and its impact.

We are now seeing some receive their first increased tax bills as the phasing starts and these investors are turning to mortgage advisers for guidance on options.

There is a common understanding in the market that advisers should not get involved in tax advice, but recommend the client speaks with a specialist tax adviser.

If, after receiving the appropriate advice, the client decides to move their portfolio from individual names into a limited company, this is where the adviser needs to ensure they have sufficient knowledge of this particular area specifically.

Key questions

For example, does the client want to use an existing trading business or set up a new special purpose vehicle (SPV) and what is the difference?

Which lenders will accept a trading business and what Standard Industrial Classification (SIC) codes are acceptable to a lender for an SPV?

Will the lender you wish to recommend require a personal guarantee, a debenture or a floating charge?

What do these mean, what are the implications and how will you explain these to the client?

Who will be underwritten? Is it just the directors and majority shareholders or all shareholders?

Another important consideration is how will the deposit be funded.

Moving a property from individual names to a limited company is not a refinance, it is a sale and purchase and therefore the limited company will need to have funds to cover a deposit.

This may be do-able for one property, but what about if ten properties are being transferred at the same time?

Will the lender you are considering accept a concessionary purchase or a director’s loan to the company.

If they accept a director’s loan, will they allow this to be a paper transaction rather than a physical transfer of the cash?

Majority declined by deposits

Being able to present to the lender’s underwriter exactly how the deposit will be managed is key for the underwriter to understand and approve the application.

One lender recently advised me that they reviewed all their declines for these types of applications; 60% had been declined due to a misunderstanding around the deposit but it could have proceeded if both the adviser and the underwriter had had the correct understanding.

By spending some time to fully understand these areas, advisers can ensure they are in the best position to give the right lender recommendation that won’t lead to future complaints, while taking advantage of this big opportunity.

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