Limited liability partnership (LLP) mortgages

Navigating the world of business finance can be a complex task, particularly when exploring the unique financial products tailored for specific business structures. One such financial product is a limited liability partnership (LLP) mortgage. An LLP mortgage is a loan product specifically designed to cater to the needs of LLPs – a popular business structure in the UK, that combines elements of partnerships and corporations.

This type of mortgage allows LLPs to secure properties for their operations or investment purposes, just as individuals might secure a residential or buy-to-let mortgage. Understanding the intricacies of LLP mortgages, from eligibility criteria and interest rates to the influence of an LLP’s financial health, is crucial for those considering this financing option. By doing so, LLPs can better leverage these tailored loans to fuel growth and enhance their business operations.

What is a limited liability partnership (LLP) mortgage?

A Limited Liability Partnership (LLP) mortgage refers to a mortgage loan taken out by an LLP. An LLP is a unique type of business partnership that combines elements of corporations and partnerships. It offers the benefit of limited liability to its members, similar to a corporation, but allows profits to be distributed among its members like a partnership.

When it comes to a mortgage, just like an individual or a corporation, an LLP can also apply for a mortgage to purchase property. The property could be for commercial purposes such as an office building, retail space, warehouse, etc., or it could be for investment purposes, such as rental properties.

The LLP itself, as a separate legal entity, is the borrower in this case and is therefore responsible for repaying the mortgage loan. The process for obtaining a mortgage involves demonstrating the LLP’s ability to repay the loan, which may include providing evidence of the LLP’s income, its business plan, and sometimes the personal credit history of the partners.

The key characteristic of an LLP mortgage is that it allows the partners to shield their personal assets from being used to satisfy the LLP’s debts or liabilities. If the LLP defaults on the mortgage, the lender can only go after the assets of the LLP and not the personal assets of the partners (unless a personal guarantee has been signed). This is what is meant by ‘limited liability’.

Please note that the rules and regulations regarding LLP mortgages may vary depending on the jurisdiction and specific lender requirements. As always, it’s important to seek legal and financial advice before entering into any mortgage agreement.

Can you get a mortgage in a limited liability partnership? 

Yes, a Limited Liability Partnership (LLP) can obtain a mortgage. An LLP is a legal entity separate from its partners, which means it can own property, enter into contracts, and thus, can apply for and obtain a mortgage.

However, the process and eligibility criteria may vary compared to individual or standard corporate mortgages. Lenders often consider the LLP’s financial health, the income it generates, its credit history, the business plan, and the value and type of property being mortgaged.
Moreover, lenders might also consider the personal financial circumstances and credit history of the LLP’s partners. In some cases, they may require personal guarantees from the partners. This means that if the LLP is unable to repay the mortgage, the partners could be personally liable, despite the LLP’s nature of limited liability.

Mortgages for LLPs are commonly used for commercial property purchases, such as office buildings or retail spaces, or for investment properties. Depending on the lender and the specific circumstances, an LLP could potentially also secure a residential mortgage, especially if it’s for a property that’s going to be rented out.

As with any mortgage application, it’s recommended to consult with a financial advisor or mortgage broker to understand the best options and potential impacts on personal and business finances.

How do these mortgages work? 

Limited Liability Partnership (LLP) mortgages work similarly to other types of business or commercial mortgages. However, there are a few specific considerations due to the unique nature of LLPs. Here’s a general overview of how they work:

1. Application: The LLP applies for a mortgage from a bank or another lending institution. As part of the application, the LLP will likely need to provide a detailed business plan, financial statements, income details, and information about the property being mortgaged.

2. Credit Assessment: The lender will assess the LLP’s ability to repay the mortgage. This involves examining the LLP’s financial health, cash flow, profitability, and credit history. The personal financial circumstances and credit history of the LLP’s partners may also be considered.

3. Property Assessment: The lender will also assess the property being mortgaged, including its value and suitability as collateral. This often involves a professional property valuation.

4. Loan-to-Value (LTV) Ratio: The LTV ratio will be determined based on the value of the property and the amount the LLP wants to borrow. Lenders typically lend a certain percentage of the property’s value (e.g., up to 70–75%). The LLP needs to provide the remaining amount as a down payment.

5. Mortgage Approval: If the lender is satisfied with the LLP’s creditworthiness and the property’s value, they may approve the mortgage. The specific terms of the mortgage, including the interest rate, repayment period, and any special conditions, will be set out in a mortgage agreement.

6. Repayment: The LLP then repays the mortgage over a set period, usually through monthly payments. These payments include both the principal (the original loan amount) and interest.

7. Limited Liability: If the LLP fails to repay the mortgage, the lender can take possession of the property to recoup their losses. However, the personal assets of the LLP’s partners are typically protected, unless personal guarantees have been signed.

It’s important to note that each lender may have slightly different requirements and processes. Therefore, it’s always advisable to speak with a mortgage broker or financial advisor familiar with LLP mortgages.

How much can an LLP borrow?

The amount that a Limited Liability Partnership (LLP) can borrow via a mortgage largely depends on several factors:

Property Value: The loan-to-value (LTV) ratio that the lender sets will determine the percentage of the property’s value that is eligible for borrowing. Typically, for commercial mortgages, lenders may offer an LTV ratio of around 60% to 75%, though it can vary.

LLP’s Income: Lenders will look at the LLP’s income or revenue to assess its ability to make mortgage repayments. They may use a multiple of the LLP’s annual income to determine the maximum loan amount. However, the specific multiples can vary based on the lender and the type of business.

Debt Service Coverage Ratio (DSCR): This is a measurement of the cash flow available to pay current debt obligations. Lenders typically look for a DSCR above 1, indicating that there is enough income to cover loan repayments.

Credit History: A strong credit history can also influence the amount a lender is willing to loan to the LLP.

Business Plan and Projections: For newer LLPs with limited financial history, a robust business plan with solid financial projections can help secure a larger mortgage.

Partners’ Financial Status: In some cases, lenders may consider the personal financial circumstances and credit history of the LLP’s partners when determining the maximum loan amount.

How to apply for a mortgage with an LLP

Applying for a mortgage as a Limited Liability Partnership (LLP) involves several steps and requirements, somewhat similar to those for an individual or corporate entity. However, there are some unique aspects to consider due to the structure and nature of an LLP. Here is a general guide:

Assess Your Needs and Capacity: Start by figuring out how much you need to borrow and assess the LLP’s capacity to repay the loan. Consider the LLP’s income, cash flow, creditworthiness, and the value of the property you plan to purchase.

Choose a Suitable Lender: Some lenders may have more experience or better products for LLPs. Research and compare the offerings from various banks and mortgage companies. Independent financial advisors or brokers can be helpful at this stage.

Prepare Your Application: This usually involves gathering a significant amount of information about the LLP, including:
    * Business plan and financial projections
    * Financial statements for the past 2-3 years
    * Bank statements
    * Details about the property you plan to purchase
    * Information about the partners in the LLP

Credit Check: The lender will usually perform a credit check on the LLP, and in some cases, also on the individual partners. They do this to assess the risk involved in lending to your business.

Property Valuation: The lender will likely require a professional valuation of the property you plan to purchase. They use this to determine the loan-to-value (LTV) ratio and to ensure the property provides adequate security for the loan.

Personal Guarantees: Depending on the lender’s policies and the specific circumstances, the partners in the LLP may need to provide personal guarantees. This means they agree to cover the loan repayments personally if the LLP defaults.

Submit Your Application: Once you’ve gathered all the required documents, submit your application to the lender. They will review your application and make a decision.

Approval and Agreement: If your application is approved, the lender will provide a mortgage agreement outlining the terms of the loan. Review this carefully and make sure you understand all the terms before you sign.

Which lenders will consider your application? 

The lenders that will consider your LLP (Limited Liability Partnership) mortgage application will depend on various factors, including the size and financial health of your LLP, the nature of the property you’re purchasing, your creditworthiness, and the specific mortgage products and policies of the lenders.

In the UK, a range of lenders offer mortgages to LLPs, including:

High-Street Banks: Major banks such as Barclays, HSBC, Lloyds, and NatWest have commercial lending departments that offer mortgages to businesses including LLPs.

Specialist Lenders: There are also specialist lenders that focus exclusively on commercial mortgages, including those for LLPs. These include lenders like Aldermore, Shawbrook Bank, and Paragon.

Building Societies: Some building societies, like Yorkshire Building Society and Nationwide, also offer commercial mortgages.

Private Banks and Lenders: Some private banks and lenders may offer commercial mortgages to LLPs, often for larger loan amounts or more complex situations.

What interest rates can I get on an LLP mortgage?

Interest rates for Limited Liability Partnership (LLP) mortgages can vary widely based on a number of factors. Rates generally ranged from around 2% to 6% per annum or more. 

Factors that might affect the rate include:

The Lender: Different lenders will offer different rates based on their business model, risk tolerance, and market focus. Specialist lenders might offer different rates than traditional banks or building societies.

The Creditworthiness of the LLP: Lenders will look at the financial health of the LLP, including its profitability, cash flow, and credit history. LLPs with stronger financials will typically receive better rates.

The Personal Credit Histories of the Partners: While an LLP is a separate legal entity, lenders often consider the personal credit histories of the partners in the LLP, especially for smaller LLPs. Partners with good credit histories can help the LLP secure a better rate.

The Property: The type, location, and condition of the property being mortgaged can affect the rate. Properties that are in good condition and located in desirable areas will typically secure better rates.

The Loan-to-Value (LTV) Ratio: The LTV ratio is the percentage of the property’s value that is being borrowed. A lower LTV (meaning a larger down payment) will typically secure a better rate.

Market Conditions: Broader market conditions can also impact rates. In periods of economic uncertainty or higher interest rates in general, LLP mortgage rates may be higher.

What mortgage criteria does an LLP need?

When assessing your income from a Limited Liability Partnership (LLP), UK lenders typically consider a variety of factors. Here’s a general idea of how they might approach this:

LLP Profitability: The first thing lenders will look at is the profitability of the LLP. They will typically request copies of the last two to three years of accounts to assess how much profit the LLP has been generating.

Drawings: Lenders will look at your drawings from the LLP, which refers to the amount of money you personally take out of the LLP’s profits. This can include salary, dividends, or other forms of profit distribution. If your drawings have been consistent and are expected to continue, lenders will be more confident in your ability to repay a mortgage.

Personal Tax Returns: As a member of an LLP, your share of the profits is typically reflected on your personal tax returns. Lenders may request copies of your tax returns to verify the income you’ve received from the LLP.

Business Stability and Projections: Lenders will look at the stability of the LLP and any future income projections. If the LLP has a stable income and the future business outlook is positive, this can strengthen your application.

Individual Circumstances: Each lender may assess income in their own way, and some may take into account additional factors. For example, if you have a significant stake in the LLP or if you have other forms of income, these might be considered.

It’s important to note that lenders will generally want to see evidence of a consistent and sustainable income. If your income from the LLP is variable or hasn’t been consistent, you may need to provide additional information to support your mortgage application.

As always, this process can vary between lenders, and it’s advisable to consult with a mortgage broker or financial advisor who can guide you through the process based on your specific circumstances.

What is the situation if you have bad credit and wish to obtain an LLP mortgage?

If you, as a partner in a Limited Liability Partnership (LLP), have a poor personal credit history, it could make obtaining an LLP mortgage more challenging. That’s because lenders often consider the personal credit histories of the LLP’s partners alongside the LLP’s credit history and financial health when making lending decisions.

Here are a few points to consider if you’re seeking an LLP mortgage with bad credit:

Higher Interest Rates and Fees: Lenders might still be willing to offer you a mortgage, but they could charge higher interest rates and fees to offset the perceived risk associated with lending to someone with a bad credit history.

Lower Loan-to-Value (LTV) Ratio: You might find that lenders are only willing to offer a lower LTV ratio, meaning you’d need to provide a larger down payment.

Personal Guarantees: Lenders might require personal guarantees from other partners in the LLP with better credit histories. This means those partners would become personally liable for the mortgage if the LLP defaults.

Specialist Bad Credit Lenders: Some lenders specialise in “bad credit” or “adverse credit” mortgages. They may be more willing to consider your application, but keep in mind that the rates and fees might be higher.

Improve Your Credit Score: If you’re not in a rush, it might be worth taking steps to improve your credit score before applying for the mortgage. This could involve paying down debt, ensuring you make all payments on time, and correcting any errors on your credit report.

Professional Advice: Given the complexity and potential risks, it’s advisable to seek advice from a financial advisor or a mortgage broker who specialises in adverse credit situations. They can guide you through the process and help you understand your options.

How does the mortgage application process differ for an LLP compared to a traditional company?

In many ways, the mortgage application process for a Limited Liability Partnership (LLP) and a traditional company (like a limited company) is similar. Both types of entities will need to provide evidence of their financial health, business plan, and property details, and both will be subject to credit checks and property valuations.

However, there are some key differences to be aware of:

Assessment of Income: For a limited company, lenders typically look at the salary and dividends of the directors to assess personal income. For an LLP, lenders often look at the partners’ share of the profits (drawings), as documented in their personal tax returns.

Personal Liability: LLP partners have limited liability, similar to the shareholders of a limited company. However, LLP partners often have more control over the business than shareholders, and thus lenders may require personal guarantees from the partners. While this can also happen with directors of a limited company, it’s more common with LLPs.

Nature of Business: LLPs are often professional services firms (like law firms or accountancy practices), whereas limited companies can be in any line of business. The nature of the business can impact the risk assessment by the lender and potentially the terms of the mortgage.

Number of Decision Makers: In a traditional company, it may be easier to identify who has the authority to apply for a mortgage, usually the directors. But in an LLP, where decisions may be shared among partners, it might be more complex. Lenders may require approval from a certain percentage of the partners.

Ownership Structure: Changes in the ownership of an LLP, particularly a change in the named partners, may have an impact on the mortgage agreement. This is less of a concern with a limited company, where shareholders can buy and sell shares without affecting the company’s legal identity.

How many years trade does my LLP need to have before I can get a mortgage?

The trading history requirement for an LLP to get a mortgage can vary depending on the lender and their specific criteria. However, as a general rule, many lenders prefer businesses to have at least two to three years of trading history before they will consider a mortgage application.

This is because a longer trading history allows the lender to assess the financial stability and profitability of the business over a significant period of time. They will look at the LLP’s accounts for the past two to three years to understand its income, expenses, profit margins, and cash flow, which in turn helps them to evaluate the LLP’s ability to repay the loan.

However, it’s worth noting that there are some lenders who may consider applications from LLPs with less than two years of trading history. These lenders may use other factors to assess the LLP’s creditworthiness, such as the personal credit histories of the partners, the LLP’s business plan, or the LLP’s projected income.

If your LLP has less than two years of trading history and you’re considering a mortgage, it could be worthwhile to consult with a mortgage broker. They can guide you through the process, help you understand your options, and potentially identify lenders who are more likely to consider your application.

Can a newly established LLP apply for a mortgage?

While it’s technically possible for a newly established Limited Liability Partnership (LLP) to apply for a mortgage, it can be challenging. Many lenders prefer to see a track record of at least two to three years of trading history to assess an LLP’s financial stability and profitability.

The primary reason for this is that lenders want to see evidence that the LLP can generate consistent income over time, which demonstrates its ability to meet mortgage repayments. Without this track record, it’s harder for a lender to gauge the risk associated with the loan.

However, there may still be options available for newly established LLPs:

Alternative Lenders: Some lenders or alternative financial institutions may be willing to consider an application from a new LLP, particularly if the partners have a strong history in their industry or if the LLP has a robust business plan.

Personal Guarantees: Lenders might be more inclined to lend to a new LLP if the partners are willing to provide personal guarantees. This means that the partners agree to be personally liable for the loan if the LLP defaults.

Larger Deposits: If the LLP can afford to put down a larger deposit to reduce the Loan-to-Value (LTV) ratio, this could increase the likelihood of mortgage approval.

Business Plan and Projections: A strong business plan and solid financial projections can be beneficial in showing the lender how the LLP intends to generate income.

Personal Credit Histories: The personal credit histories of the partners will also be considered. Good credit histories could improve the chances of approval.

Is it possible for an LLP to get a buy to let mortgage?

Yes, it’s indeed possible for a Limited Liability Partnership (LLP) to get a buy-to-let mortgage. Buy-to-let mortgages are a type of mortgage specifically designed for properties that are to be rented out, and they can be taken out by various types of entities, including LLPs.

In the UK, a growing number of lenders offer buy-to-let mortgages to LLPs. The application process and criteria will likely be similar to that of a standard commercial mortgage, but there may be additional considerations given the nature of the buy-to-let market.

When assessing an LLP’s eligibility for a buy-to-let mortgage, lenders may look at:

LLP’s Financial Health and Trading History: The LLP’s profits, cash flow, and general financial health will be assessed, along with its trading history. Most lenders prefer an LLP with at least two to three years of trading history.

Partners’ Personal Credit Histories: The personal credit histories of the partners in the LLP will often be taken into account.

Rental Yield: Lenders will want to see that the expected rental income from the property is sufficient to cover the mortgage repayments, usually by a certain percentage.

Loan-to-Value (LTV) Ratio: The LTV ratio will play a part in the mortgage terms. A lower LTV (meaning a larger down payment) can result in better terms.

Property Details: The type, location, and condition of the property to be rented out will be considered.

What income is declared for a LLP mortgage?

When applying for a mortgage as a Limited Liability Partnership (LLP), lenders typically focus on the income derived from the LLP by its partners. This income is usually assessed through the share of profits, or ‘drawings’, that the partners take from the LLP, as opposed to a regular salary like an employee might receive.

Here’s a breakdown of the income components that are typically considered:

Profit Share: The primary form of income for partners in an LLP is their share of the LLP’s profits. This will be declared in the LLP’s accounts and the partners’ personal tax returns.

Other Income: If a partner receives other forms of income from the LLP (for example, interest on capital or certain types of bonuses), these might also be considered.

Personal Income: In addition to the income from the LLP, a lender may also consider any other personal income that a partner has, such as income from investments, rental income, or income from other employment.

In order to verify this income, lenders will typically ask for a variety of documents, including:

 

• • The LLP’s accounts for the past two to three years, to demonstrate the LLP’s profitability and the partners’ share of those profits.

• • The partners’ personal tax returns, to verify the income they’ve declared from the LLP.

• • Bank statements, to demonstrate the receipt of this income.

Lenders may also consider the stability of this income. If the LLP’s profits or a partner’s share of those profits have fluctuated significantly, this could impact the lender’s assessment of their ability to repay the loan.

What else can influence my eligibility to obtain an LLP mortgage?

In addition to the financial health of the Limited Liability Partnership (LLP) and the income of its partners, there are several other factors that can influence your eligibility to obtain an LLP mortgage:

Credit History: The credit histories of the LLP and the individual partners are often considered by lenders. A history of timely payments and responsible credit use can improve your chances of approval, while a history of defaults, late payments, or other negative marks can make it more challenging.

Nature of the Business: The type of business that the LLP is involved in can play a role. Certain industries may be seen as more risky than others by lenders.

Business Plan and Future Projections: A clear, realistic business plan and future income projections can help reassure lenders about the LLP’s ability to repay the loan.

Property Details: The value, location, condition, and type of the property being mortgaged can also impact eligibility. For instance, commercial properties or mixed-use properties may have different eligibility requirements than residential properties.

Loan-to-Value (LTV) Ratio: This ratio, which is the amount of the loan compared to the value of the property, can affect the terms of the loan and the likelihood of approval. A lower LTV ratio (meaning a larger down payment) can make a loan less risky for the lender.

Personal Guarantees: Some lenders may require personal guarantees from the partners, meaning that the partners agree to be personally liable for the loan if the LLP defaults.

Economic Conditions: Broader market conditions and economic trends can also play a role in your eligibility. For example, in a downturn, lenders may be more cautious and tighten their lending criteria.

Can an LLP with company debt apply for a mortgage?

Yes, a Limited Liability Partnership (LLP) with existing company debt can still apply for a mortgage. However, the presence of company debt could affect the LLP’s eligibility and the terms of the mortgage.

When evaluating an LLP’s mortgage application, lenders will take into account the overall financial health of the LLP. This includes looking at its assets, liabilities (including any existing debt), income, and profitability. Here’s how company debt could factor into this:

Debt-to-Income Ratio: This ratio measures the LLP’s total monthly debt payments against its gross monthly income. If this ratio is high, it could be a red flag for lenders as it suggests the LLP might have difficulty managing additional debt.

Cash Flow: If existing debt payments are taking up a significant proportion of the LLP’s cash flow, this could raise concerns about its ability to handle additional monthly mortgage payments.

History of Late Payments or Defaults: If the LLP has a history of late payments or defaults on its existing debt, this could negatively affect its credit history and potentially make it more difficult to get a mortgage.

Equity: Debt can also affect the LLP’s equity (the difference between its assets and liabilities). If the LLP has high levels of debt and low levels of equity, this could make it appear riskier to lenders.

However, it’s important to note that having company debt doesn’t automatically disqualify an LLP from getting a mortgage. Many businesses carry debt as a normal part of their operations. What matters more is how well the LLP is managing its debt and whether it’s demonstrating the ability to meet all of its payment obligations.

How to find an LLP mortgage specialist and what to consider during your search:

Professional Accreditations: Look for specialists who are certified or accredited by recognized financial institutions or organizations, such as the Financial Conduct Authority (FCA) in the UK.

Experience and Expertise: Look for a specialist with a track record in handling LLP mortgages specifically. Ask about their past work and successes with similar clients.

Client Reviews: Research reviews and testimonials from previous clients. This can provide insight into the specialist’s level of service and client satisfaction.

Transparent Fees: The specialist should be clear and upfront about their fees. You want to avoid any hidden costs.

Initial Consultation: Many specialists offer a free initial consultation. This can be a great opportunity to ask questions and gauge whether they would be a good fit for your LLP’s needs.
You can search online for an LLP mortgage specialist or ask for recommendations from your network. Remember to speak with multiple professionals to compare services and fees before making a decision.