A question I’m often asked is whether it’s necessary to give a personal guarantee with a buy to let mortgage.
In fact it’s often put as a statement rather than a question along the lines of “If I need to give a personal guarantee then I don’t want to apply for a mortgage”.
So I can see that there is quite a lot of confusion around this issue and I thought it might be good to talk about it and my experiences.
The general rule is that if you take out a buy to let mortgage through a limited company, you as director and/or shareholder will be required to give a personal guarantee, a PG.
Why is that?
Because some investors naively assume that if they buy a property into a limited company, the limited company affords them full protection and, taken to its extreme, some more dubious investors assume that they don’t need to pay back the mortgage because they, personally will be protected by the limited company structure. In other words, if their Limited Company defaults, they can shrug their shoulders and say “Well, it’s nothing to do with me”.
Clearly that would be a ridiculous situation.
Obviously, no lender is going to want that to happen and they are not going to allow that to happen.
So the way they protect themselves is to make sure that there is a personal guarantee in place provided by the directors/shareholders.
Many lenders require them only from the directors, some want non-director shareholders to sign as well.
Different lenders have different small print within their guarantees but, by and large, they allow the lender to come after your personal wealth and assets if, after the Limited Company defaults on the mortgage and they then repossess the property, there’s a shortfall after sale.
Of course, the shortfall could include their costs of administration, their legal fees, their management costs, and any other costs that they can think of which they will load onto you as part of the repossession process .
Faced with having to sign a personal guarantee some investors panic and decide that there’s too much risk In buying a property through a limited company.
I don’t see it that way. The way I see it is this.
If you buy a property in your own name, the bank will still expect you to pay the mortgage back. As you sign the mortgage deeds and the documents there’s an explicit expectation that you will pay the mortgage back.
If the property is in your name but you default on the mortgage, the bank are still going to repossess and sell to recoup their mortgage, and if there is a shortfall they will again come after your personal wealth and assets.
I’m putting the case very simply and there may be legal differences and technical differences, but in my mind there’s not much practical difference in either instance. And, to be honest, if you intend, as you should, to repay the mortgage then surely there isn’t a problem.
The one big difference is that most, if not all, lenders will require you to take independent legal advice as you sign a personal guarantee. This will involve going to a solicitor who’s not involved in the purchase or the grant the mortgage, and who will then take you through the terms of the personal guarantee , and will witness your signature as you sign the guarantee itself.
This can be expensive. I’ve paid £500 per director when taking out a mortgage.
But it my opinion it’s still worth it (and not just because of the benefits of being an investor) because the tax advantages you have in a Limited Company over a 20 or 30 year period will more than outweigh the cost of the ILA (Independent Legal Advice).
Of course, there’s more to it from the solicitor’s point of view than just having you in their office for 20 or 30 minutes and going through the paperwork, and witnessing the signature.
In preparation for the meeting they need to go through all of the paperwork from the lender, which can be significant, even excessive, so that they can fully understand the small print of the guarantee that you’re signing. So although for us there may only be 20 minutes of activity, for the solicitor there could be several hours.
At least, that’s what they tell me.
Because I’ve regularly refinanced properties within my portfolio I must have signed 100 of these, and so I always joke with the solicitor now as I sign the guarantee, that it is completely meaningless. If I ever find myself in the position where one property needs to be repossessed, then I assume my whole portfolio would be needed to be repossessed.
And if, I’m being repossessed I assume that economic and financial circumstances will be so dire that none of the lenders are going to get very much out of selling the portfolio.
So if they are all hoping to make up the shortfall from my personal assets, then those who are further down the chain are going to be sorely disappointed, because presumably most of it will be taken by those who get their guarantee redemptions in quickest!
In other words, there’s no way my personal and private assets will come anywhere close to covering all the guarantees I have signed, but they still make me sign them anyway!
So, I see the whole thing as being a totally hypothetical exercise nowadays, but one which we just need to do to play the game.
Is purely the cost of doing business.
So the short answer to the question “do you have to give a personal guarantee with a buy to let mortgage?” is, if you’re borrowing for a limited company, which nowadays most of us are because it’s the more tax efficient way to buy properties, then yes.
Can you take out a limited company buy to let mortgage without a personal guarantee?
I very much doubt it.
My suggestion would be that you just accept that this is the system, I’m not saying it’s a great system, but it is what it is.
If you want the money, you’ll need to sign the form.
If you’re buying the right properties, in the right location, at the right price, and you have the right rental demand to keep them let and cash flowing, then hopefully, you’ll see it as I do, that the whole thing is a purely hypothetical exercise, and the guarantees will never need to be called in.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://thepropertyteacher.co.uk
PS. By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same.
For more details please go to:
https://thepropertyteacher.co.uk/the-successful-property-investors-strategy-workshop
