Yes - when buying property in an SPV Limited Company the directors and shareholders are often required to sign personal guarantees.
The personal guarantee requirement is mostly compulsory, except in exceptional cases where the Loan to Value (LTV) is very low. In such cases, a charge on the company as a whole may be taken - through this is a rare occurrence.
Asking a lender to take a risk by lending you the money, but requesting to not to give those same guarantees personally. As you imagine is not looked upon lightly.
A personal guarantee is a backstop - if the asset depreciates or missed payments. The lender has the equity (minimum 15% Deposit) as a safety buffer first. Therefore offering a personal guarantee may be seen as a medium risk. With the personal guarantee released on full repayment to the lender (such as selling the property).
In recent times the buy-to-let mortgage market has seen a significant switch in how landlords buy properties. An increased amount of corporisation.
Landlords are now, in more significant numbers, forming Limited Company's to buy, hold and rent out properties. The companies are typically new, perhaps a day old. Have no income or assets!
So how can the company get a mortgage? Mortgage lenders ask for a Personal Guarantee.
A personal guarantee gets around the "limited liability" an LTD Company typically offers and puts you the shareholder/director on the line for the debt.
Allowing a mortgage lender to assess your circumstances, your income and your assets. It has given them reassurance that in the event of a default they can pursue any unpaid amounts from you.
Most mainstream mortgage lenders require a personal guarantee. Though not all!
A personal guarantee, as above, aim to limit the lender's liability and risk. Obtaining a buy-to-let mortgage without a personal guarantee is possible If purchased at Low Loan to Value (LTV).
As a general rule, the few lenders that offer this, are looking at 60-65% Loan to Value (LTV).
With equity of at least 30-35% in the property, the lender can feel secure that they will get their funds back in the event of a default.
The reason for such substantial equity required it to allow them to add any missed mortgage payments, fines and allow for housing price fluctuations or damage to the asset.
With the rarity of lenders offering buy to let mortgages without a personal guarantee. There is a premium to pay, at mortgage rates today an LTD Co SPV at 65% can enjoy mortgages at 2.49% without a personal guarantee 2.94%.
Copyright © 2019 Bespoke Finance Direct Limited. All Rights Reserved.
Bespoke Finance Direct Limited is authorised and regulated by the Financial Conduct Authority (No. 715805).
Bespoke Finance Direct Limited is registered in England and Wales (No. 09623432) at 31 Church Lane, Pudsey, LS28 7LD.