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Limited Company mortgages and personal guarantees

buy to let Oct 10, 2020

THE QUESTION

Are there lenders who do not require a personal guarantee on limited company mortgages?

THE ANSWER

Look at it from the lenders point of view.  You, as the shareholder and the owner of your company, can decide to shut your company down overnight.  There is nothing the lender can do to stop you.  That potentially weakens their security.  If you stop making the mortgage payments for any reason, they cannot control that either.

Their last resort with a non-paying borrower is to repossess, then sell the property to recoup their money. In the majority of cases, the fact they lent you only a percentage of the property value e.g. 75% would ensure they can fully recoup their money from the sale of the property.  If for any reason that does not fully cover what they lent you plus their expenditure incurred in repossessing you, there will be a shortfall and this is where lending to a limited company becomes an issue.

If they had lent to you in your personal name they would naturally come after you for the shortfall.  However, they lent to your limited company.  If your limited company was still trading they would come after it for the shortfall, but if you have shut the company down they would have nothing to chase.  They couldn't come after you because they didn't lend to you, they cannot chase the company either because it doesn't exist anymore.

Now put yourself in the situation that you had personally lent money to the limited company of another investor, or anyone else, they didn't repay you and had shut down the company you lent to, how would you get your money back?

A personal guarantee gives the lender the ability to ask/demand that you personally make up the shortfall in the above scenario.  It is not an unreasonable requirement for the personal guarantee to act as a defence mechanism against you and your ability to shut your company down.

The simplest way to avoid a personal guarantee is to borrow in your own name, not via a limited company, but then you lose the advantages that a limited company offers you.  So, not wanting to sign a personal guarantee is like having your cake and eating it.  A broker may find you a lender that will not require a personal guarantee, but expect the rate you are charged to reflect the additional risk the lender is having to take by not requiring a personal guarantee.

You are running a property business and you take actions to mitigate risk to your business i.e. your tenants are made to pay a deposit, why?  In case they damage the property.  A mortgage lender lending to your limited company wants a personal guarantee from you to mitigate the risk to their business - its business.

 
 
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