Buy-to-let is a growing sector of the industry, as you can see from the Council of Mortgage Lenders’ gross lending data from 2010 to 2011. But I want to focus on an area of the market that, in contrast to the mainstream buy-to-let sector, has gone in the opposite direction.
In recent years there has been little appetite from buy-to-let lenders to lend to limited companies and there is a myth that this type of lending is far riskier than standard buy-to-let.
But is it really so risky? I doubt it. Most investors who use limited companies do so because it is tax-efficient. They are also more likely to be experienced landlords. They tend to make better residential investment decisions, select higher yielding properties and understand the rental market.
Risk has also been mitigated by stricter lending criteria. These days a borrower’s credit history must be squeaky clean and lenders are looking closely at repayment ability, debt service-to-income ratio, property value and rental income. Surely all this must reduce the likelihood of experienced limited companies defaulting.
So why don’t more lenders lend to limited companies? First, their systems do not allow for limited company applications.
Second, to sort this out they would have to up-skill their underwriters to enable them to understand the complexities of an ongoing trading business or special purpose vehicle limited company.
Finally, they would have to put aside more risk capital.
There are currently only a handful of serious lenders in this space, including Aldermore, Kent Reliance, Paragon Mortgages and Shawbrook Bank, offering in the region of 40 products between them. This represents only a 10th of buy-to-let product availability.
Kent Reliance and Paragon prefer the relative safety of lending to SPV limited companies backed by directors’ personal guarantees. SPV limited companies are registered to conduct business solely in buying, managing and letting buy-to-let property. Most lenders prefer that the number of directors is restricted to two.
Borrowers using SPVs can expect to get up to 75% LTV, with a couple of niche products up to 85%.
Specialist commercial banks such as Aldermore and Shawbrook will also lend to trading limited companies as well as SPVs but borrowers should lower their LTV expectations to around 70% due to the stricter rent-to-interest cover requirements.
Most lenders in this space like to see previous landlord experience of at least a couple of years when lending over 70% LTV.
As more lenders enter buy-to-let, surely it can only be a matter of time before they respond to the needs of professional investors? But limitations on computer systems must be rectified if lenders are to support investors in this growing part of the property investment market.