Giving personal guarantees for a limited company?

by Readers Question

8:06 AM, 5th February 2020
About 10 months ago

Giving personal guarantees for a limited company?

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Giving personal guarantees for a limited company?

After buying a number of properties in joint names, my wife and I formed a company in 2019 to continue to build our portfolio. Both mortgage companies that we have used have asked for us to sign personal guarantees and mandated that we receive independent legal advice before we sign the guarantee. I have been quoted over £550 to receive such advice.

Initially I thought signing the guarantee wouldn’t make us any worse off than if we bought the properties outside of a company. However, after the receiving legal advice I’m not so sure. I went into the first session thinking as long as we continued to pay the mortgage and behave professionally there was little to be concerned about. However, one gem we discovered in the small print was that the mortgage company can demand full repayment of the loan within 14 days without reason. You have substantially less protection obtaining a mortgage via a company versus doing it privately.

Presumably there are many landlords on this forum who have been asked to sign similar guarantees? Has anyone any pearls of wisdom to offer? They certainly make you feel uncomfortable… did you just close your eyes and sign? Does anyone know someone who has lost out for no fault of their own by signing such a document? I spoke to one solicitor recently who said you would only sign such a document if you had no other choice. Not inspiring advice.

Many thanks

James


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Comments

David Lawrenson

12:18 PM, 11th February 2020
About 10 months ago

Interesting article, pointing up one aspect of the higher cost when borrowing this way.

I would be interested in hearing from mortgage brokers re their view on whether the higher interest rates charged by lenders, where the loan is through a company structure, can e really justified in terms of higher risk or other factors.

How do they justify the higher rates?
Will they likely come down closer to where the loan is in individuals name, due to higher competition / more experience of lenders?

Interested in your views.

David Lawrenson
http://www.LettingFocus.com

Mark Alexander

21:19 PM, 11th February 2020
About 10 months ago

My group action case against the West Brom proved that lenders cannot just call in a long term loan unless the borrower is in default.

The West Brom issued thinly veiled threats when we took them to Court, pointing out they had the right to call in the loans with 30 days notice without having to give a reason. The Judges ordered that clause was not lawful, unless the borrower was in default. As the case was ruled on at the Court of Appeal by three very senior judges it is now case law.

David Lawrenson

8:23 AM, 12th February 2020
About 10 months ago

Hi Mark,

Yes, it was a very fine day at the court of appeal that afternoon when it started to become obvious that Leveson, unlike the High Court judge clown, "got it" and we were likely going to win.
And you will forever be a bit of a hero in the landlord community for driving the whole thing forward.

Mark, as a former broker, I was interested in hearing from mortgage brokers re their view on whether the higher interest rates charged by lenders, where the loan is through a company structure, can e really justified in terms of higher risk or other factors.
How do they justify the higher rates?
I am sensing the margin has come down a bit, but will they likely come down closer to where the loan is in individuals name, due to higher competition / more experience of lenders, in future?
What's your view please?

Kind regards
David Lawrenson

Mark Alexander

8:32 AM, 12th February 2020
About 10 months ago

Reply to the comment left by David Lawrenson at 12/02/2020 - 08:23
Hi David

Pricing of loans is based on these factors:-

1) Risk
2) Demand
3) Cost of underwriting

Risk has not changed changed for Ltd Company BTL lending, bit it has for personal BTL lending due to the impact that S24 has on affordability.

Demand for Limited company lending has increased whilst demand has decreased for individual BTL lending and NTL lending as a whole has also increased. Accordingly, lenders are having to fight for what little business there is in the Ltd Company BTL sector. That is one of the reasons the pendulum is swinging in terms of pricing.

The cost of underwriting an individual BTL mortgage is now higher than the cost of underwriting a Ltd Company BTL mortgage. This is because underwriters do not need to factor the impact of Section 24 into affordability when considering a Ltd Company BTL mortgage. Accordingly, that also point towards the pendulum swinging in favour of Ltd Company BTL mortgages becoming cheaper than personal BTL mortgages in future.

i trust that helps?

David Lawrenson

12:29 PM, 12th February 2020
About 10 months ago

Thanks Mark,

Very useful indeed.
I guess lenders can also flex the added risk (due to S24) of the individual BTL by actually lending at lower LTVs and making the rent to interest ratio more onerous, in future too.

Given what you have said, I'm somewhat surprised that "company BTL" interest rates are not already lower than where it is an individual borrower. I guess it takes time for the pennies to drop for lenders on something still relatively new.
Would that be a fair comment?

Thanks
David

Mark Alexander

14:15 PM, 12th February 2020
About 10 months ago

Reply to the comment left by David Lawrenson at 12/02/2020 - 12:29
Yes

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