For those considering investing in property via a limited company structure, there’s a new trend that’s been emerging in the UK: Lenders are increasingly requiring more substantial personal guarantees for buy-to-let landlords.
The Shift in Lenders’ Requirements
Landlords who opt for buy-to-let mortgages under a limited company structure have always been subjected to certain conditions. However, recent data indicates a significant shift in lenders’ requirements. Specifically, they’re now demanding a more substantial personal guarantee.
What does this mean? Essentially, if a landlord were to fall into arrears, lenders could then lay claim to the landlord’s personal estate. It’s a measure of security for the lending institution, ensuring they can recoup their investment if the landlord defaults on their mortgage.
The Numbers Tell the Story
According to an analysis from Purbeck Personal Guarantee Insurance, there has been a stark increase in the average personal guarantee requests from lenders. In 2021, the average was approximately £328,000. By 2022, this number surged by 55% to around £509,000.
However, this rise in personal guarantee requests is juxtaposed with a decline in the average limited company buy-to-let mortgage amount. In 2021, the average mortgage amount was just over £1.1m. Fast forward to 2022, and this figure had fallen to £948,000. The data suggests a clear trend: lenders are seeking a larger portion of the mortgage as security.
Why This Matters for Prospective Landlords
Todd Davison, the managing director of Purbeck Personal Guarantee Insurance, sheds light on the broader implications of this trend. He highlights that around 40% of buy-to-let mortgages currently operate within a limited company structure. Industry research also suggests this percentage is likely to grow.
However, there’s a concerning counter-narrative emerging. Research conducted by Capital Economics indicates that the rental income – the lifeblood for many landlords – is diminishing due to rising operational costs. This financial strain might lead to an increase in arrears and subsequently, forced sales.
Advice for Landlords
Considering these shifts in the market, it’s crucial for potential and current landlords to be well-informed and prepared.
- Seek Professional Advice: Before committing to a limited company buy-to-let mortgage, landlords should seek professional financial guidance. Understanding the intricacies of these mortgages and the associated risks of signing a personal guarantee is crucial.
- Risk Reduction: Knowing the risks is one thing; mitigating them is another. Landlords should explore options like Personal Guarantee Insurance, which can provide a safety net in challenging times. Furthermore, considering options like sharing the guarantee can also spread the risk.
Conclusion
The property investment landscape is in flux, with lenders becoming more cautious and demanding higher personal guarantees. While the appeal of buy-to-let properties remains strong, landlords need to navigate this new terrain with eyes wide open.