Limited company or personal name for buy to let: how do lenders assess each?

The same tests, different numbers

Whichever route the property is bought through, a buy to let lender asks the same core questions. Does the rent cover the mortgage with a margin, is the loan to value within limits, and can the borrower stand behind the loan. Maximum loan to value is typically 75% on both routes. The difference is in how the rent test is calibrated and how the products are priced.

The interest coverage ratio gap

Lenders apply an interest coverage ratio, an ICR, which says the rent must exceed the stressed mortgage interest by a set margin. Limited companies and basic rate taxpayers are typically tested at 125%. Higher rate taxpayers borrowing in a personal name are typically tested at 145%, because mortgage interest relief in a personal name is restricted to a basic rate credit and the lender builds the extra tax drag into the test. The mechanics of the stress rate itself, including why five year fixes are often tested at the pay rate, are covered in our guide to how lenders stress test buy to let affordability.

The same rent through both tests

Take a property renting at £1,200 a month, £14,400 a year, tested at an illustrative 5.5% stress rate.

Through a limited company at 125%, the maximum loan is £14,400 divided by (5.5% x 125%), which is £14,400 / 0.06875, roughly £209,400.

In a personal name for a higher rate taxpayer at 145%, the maximum loan is £14,400 divided by (5.5% x 145%), which is £14,400 / 0.07975, roughly £180,500.

Same property, same rent, and the company route supports about £28,900 more borrowing. On a £280,000 purchase at 75% loan to value the ceiling would be £210,000 anyway, so the company route reaches the full 75% while the personal name route falls short and needs a bigger deposit. You can run your own rent and rate through our buy to let affordability calculator.

What claws it back

Company products are typically priced 0.3% to 0.5% above the personal name equivalent, and arrangement fees of 2% to 3% are common on the keenest rates. Directors give personal guarantees and usually pay for independent legal advice on them, and conveyancing on a company purchase costs a little more. The company also files annual accounts and a confirmation statement, which means accountancy fees every year, commonly £500 to £1,200 for a small SPV. None of these costs exist in a personal name.

The tax context lenders assume

Lenders do not give tax advice and neither do we, but the assessment gap exists because of tax. In a personal name, rental profit is taxed as income and mortgage interest attracts only a basic rate credit. In a company, rental profit is taxed at corporation tax rates, currently 19% to 25%, and mortgage interest is a deductible business cost, but money taken out of the company as dividends is then taxed again personally. Which position works out better depends on income, the size of the portfolio and how long the properties are held, which is a conversation for an accountant. The mechanics of the company route itself, SPVs, SIC codes and guarantees, are set out in our guide to buy to let through a limited company.

What usually decides it

In the cases we arrange, the pattern is fairly consistent. Basic rate taxpayers buying one or two properties often find the personal name route simpler and cheaper, since they get the 125% test anyway without the company costs. Higher rate taxpayers building a portfolio are the group for whom the 145% test bites hardest, and they are the group most often buying through an SPV. The trade off is borrowing power and interest deductibility against higher rates, guarantees and running costs. Marginal cases usually turn on how much borrowing the rent needs to support, which is exactly what the worked example above measures.