Buy to Let Self-Employed
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Buy to Let Self-Employed
Richard Campo joins us to talk all about Buy to Let mortgages for the self-employed.
What should you consider if you are self-employed and looking for a Buy to Let mortgage?
The main requirements are the same, which I’ll touch on in a bit more detail. The key difference with a Buy to Let mortgage is that the main driver is the rental income of the property. Once you tick the minimum requirement boxes then it’s all based on the rental assessment.
The minimum requirements are that you have been trading for a minimum of a year or two years, and then it’s all about the interest cover ratio (ICR). That’s something where banks build in a buffer, in case interest rates rise and to allow for the maintenance costs of the Buy to Let. That isn’t dependent on your income.
Some banks are more generous if you earn less and less generous if you earn more. The reason is the higher tax rate. We’ll get into how that works later.
In terms of limited company Buy to Let vs buying in your own name, it’s more or less the same. It’s easier with Buy to Let in some ways because it is a bit of a tick-box thing. Your income isn’t needed to afford the whole loan. There are ways of utilising your income but that’s not the main thing.
Don’t forget that there’s a High Net Worth exemption for Buy to Let as well. So if you own £3 million worth of assets or if your income is over £300,000, you can disregard everything I’ve just said. In that situation banks can just take a risk-based view on you, which is more flexible.
Should I Buy to Let as an individual or through a limited company?
That’s a question for your accountant, not me. Whether you’re self-employed or not, the first thing to do before you go down this path is talk to an accountant or a property tax advisor who can tell you whether it’s more beneficial for you to go through a limited company.
It really does depend on your overall situation. That interest cover ratio (ICR) is a bit more generous for a limited company than in your personal name, because the highest rate of corporation tax is lower than the highest rate of income tax. That means you can typically borrow a bit more if you buy through a limited company. But the classic trade off is that some costs are higher through a limited company – interest rates are a little bit higher. The fee might be a little bit higher. But if the tax is lower, we need to look at it in the round.
You can work with an accountant to look at your potential income, the rental income and a few tax scenarios. I would urge everyone to at least look at buying through a limited company, especially if you’re a higher rate tax earner. There are some major benefits to doing that. Plus, more and more people go down the limited company route because of their forward plans. If you’re holding a property and you want it to be your pension, or for your children to benefit from it, it’s actually easier to transfer shares because there are no stamp duty implications.
What is a special purpose vehicle (SPV)?
SPV comes up a lot – it’s like an off-the-shelf company for a very simple transaction. If you buy a property through a company and you want to sell it or rent it, that’s very simple, and it’s what these companies are for. You can do it yourself.
I suggest you get an accountant set it up correctly, and brokers can help you with this too. When you do create an SPv it’s absolutely essential that you get the right SIC codes, which set out the authorisations of the business.
To sell, rent or maintain a property there are about 7 or 8 acceptable SIC codes to a bank. We can send you a list of the acceptable ones and it’s very easy to do. It just saves a lot of hassle and problems down the line to get it right the first time.
How do lenders assess income for a self-employed Buy to Let mortgage?
It’s the same as with a regular mortgage. The main things a bank will look at are your salary, dividends, net profit or something called your total profit. That’s your profit on ordinary activity before tax. You’ll see that as a line on your accounts – which no one looks at but it’s actually the true profitability of your business.
For Buy to Let most banks want you to earn £25,000 or more. The main assessment is the rental income as I mentioned. What a bank will do is ignore the interest rate you pay now, choose a higher one and apply the interest cover ratio – which is typically 125%-145% above that.
Let’s say a bank might assume a stress rate of say 6% – that’s not the rate you pay on the mortgage. It’s what they think rates might go up to. They start with an interest rate of 6%, multiply that by 145% and divide by 12 – that’s what your rental income should be.
In London that’s quite a tough calculation. Some banks are more liberal or will let you use your income and other bits and pieces which we’ll touch on in a moment.
What is top slicing and how does it work?
Top slicing is great for higher earners. In London and the south east where we’re based, it’s tough to meet that ICR calculation as rental yields aren’t that high. They are going up quite a bit at the moment but it’s still tough. So, for example, if you want to borrow 75% or 85% the property value just doesn’t work in higher value areas.
Let’s say a bank has done that calculation and says to borrow the amount you need on this property, you need a rental income at £3,000 a month. But the surveyor and estate agent say you’re going to get £2,500 – that’s a £500 shortfall.
Where top slicing comes in is that a bank will assess your personal income to see if you have a surplus of £500 or more each month. If so, they’ll still grant you the loan.
Your mortgage payment is likely to be way less than that, but it’s all about seeing what happens if interest rates rise over time.
Is there anything else we need to consider for somebody who is self-employed looking for a Buy to Let mortgage?
I’ve tried to keep this simple and short and failed miserably, because it’s really complicated.
A lot of people might go to their existing lender to get a Buy to Let – but they’re not all great at Buy to Let – and a lot of the Buy to Let providers don’t deal with the public. They want us to give advice, as it’s a non-regulated sector which means there’s a whole different flow of how things work. Brokers understand how this works and have access to exclusive products.
So we can deal with banks that you can’t access directly yourself. So I would engage with a broker as early as possible. We can make your life a lot easier – if you’re running your own business you’re going to have your hands full already. We’ll talk you through everything and find you the right lender. That saves you a lot of time and, ultimately, money when you think about the tax position, ICRs etc. Just let us do the heavy lifting and get you the right outcome.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.