Limited company interest-only mortgages: how SPV landlords use them

A limited company interest-only mortgage is a buy-to-let loan where the company pays only the interest each month and repays the capital at the end of the term, normally by selling or refinancing the property. It is the standard structure for company buy-to-let, not a concession or a risk product: the lending is sized on the rent, secured against a 20% to 25% equity cushion, and designed around the way property companies actually run their cash.

Borrowers arriving from residential mortgages often find this jarring, interest-only acquired a bad name in the owner-occupier market, and it takes a worked comparison to see why the logic inverts for a rental business. This guide is that comparison: how the structure works, why lenders and landlords both prefer it, the corporation tax angle, and where repayment still earns a place.

What is a limited company interest-only buy-to-let mortgage?

Mechanically: the company borrows, say, £165,000 against a £220,000 property at 75% loan to value. Each month it pays interest only, at 5.5% that is £756. The balance still stands at £165,000 at the end of the five-year fix and at the end of the 25-year term; the company has not repaid a pound of capital, and was never scheduled to. At term end (or far more commonly, at each refinance point along the way) the capital is dealt with by sale, by remortgage, or with accumulated cash.

Everything else about the loan is conventional limited company buy-to-let: the borrower is an SPV with a property SIC code, the directors give personal guarantees with independent legal advice, the loan is capped at 75% LTV (80% from a smaller panel at a premium), and the amount is set by the interest coverage ratio against the rent. Most lenders also offer part-and-part (a portion on repayment) and full repayment versions of the same products; they are simply chosen far less often.

Terms run long by convention, twenty to twenty-five years is typical and some lenders write thirty-five, but the term on an interest-only company loan is closer to a formality than a schedule: it sets the date by which the capital must be dealt with, not the pace at which anything is repaid. Maximum age criteria apply to the directors rather than the company, usually 80 to 85 at term end on the specialist panel, which is generous precisely because the exit is a sale or refinance rather than earned income. The product decision that actually matters month to month is the fix length, with five-year fixed rates dominating for stress-test reasons as much as rate certainty.

Why is interest-only the standard for company buy-to-let?

Because of what a rental company is for. An owner-occupier's mortgage is a debt to be extinguished; a property company's mortgage is working capital, the leverage that makes the business model function. Three reasons the structure fits:

1. Cash flow is the business. The gap between rent and costs is the company's entire operating margin. On the worked property above, interest-only leaves roughly £250 a month more in the company than repayment would, the buffer that absorbs voids, repairs and rate rises, and the surplus that becomes the next deposit. A repayment schedule converts that liquid buffer into illiquid equity the company cannot reach without refinancing, the most expensive possible savings account.

2. The equity cushion already does the safety work. The lender's protection is the 25% the company put in, plus the ICR's requirement that rent exceeds stressed interest by 25%. The capital repayment that protects an owner-occupier lender is redundant security here, which is why lenders price interest-only and repayment buy-to-let identically and why the regulator has never pushed back on the structure for company landlords.

3. Leverage is the strategy. Portfolio builders want capital spread across properties, not concentrated in one. A company directing £250 a month into one mortgage's capital is, in effect, choosing a guaranteed saving at the mortgage rate over redeploying into further stock; rational sometimes, but a choice that should be made deliberately, and reversibly, rather than baked into the product. Overpayment allowances (typically 10% a year without penalty) let an interest-only borrower amortise voluntarily whenever that is the right call.

Is interest-only tax-efficient inside a company?

This is where the company wrapper sharpens the case. Mortgage interest is a deductible business expense for a limited company, set against rental income in full before corporation tax, untouched by the Section 24 restriction that hits individuals. Capital repayments are not an expense at all, they are debt repayment, invisible to the tax computation in either structure.

So compare the two product shapes through the company's tax lens on the £165,000 loan at 5.5%:

• Interest-only: the entire £9,075 annual payment is deductible. At the 19% small profits rate the deduction is worth £1,724 a year in corporation tax saved.
• Repayment: of roughly £12,160 paid in year one, only the £9,000-odd of interest is deductible; the £3,100 of capital comes out of post-tax profit. The company must earn about £3,830 pre-tax to fund it.

The repayment mortgage therefore costs more per month and a higher proportion of it is paid from taxed money. Over a long hold the picture has a counterweight, the interest-only balance never falls, so total interest paid is higher, and a shrinking repayment balance means shrinking deductions but also shrinking cost. The honest summary: interest-only maximises deductibility and flexibility; repayment trades both for guaranteed deleveraging. For companies retaining profit to reinvest, the first usually dominates; the broader tax mechanics are in our guide to limited company buy-to-let tax, and the structure-level comparison with personal ownership is in the limited company vs personal calculator.

How do interest-only and repayment compare on the numbers?

The full side-by-side on the worked case, £220,000 property, £165,000 loan, 5.5%, £1,150 per month rent, £240 per month running costs:

Read the second line twice: on these realistic numbers the repayment version is cash-flow negative every month, the company subsidises the property, while the interest-only version self-funds with margin. The repayment borrower does own £18,000 more equity after five years, but bought it with £15,400 of negative cash flow plus the lost corporation tax deductions, and with no flexibility along the way. This is the calculation, run on your own figures, that settles the choice for most companies, and the stress test calculator will also show whether the rent supports the loan in the first place.

What does the company do about repaying the capital?

The question every interest-only borrower should be able to answer crisply, because the lender will ask it and the business plan depends on it. The accepted exits:

• Sale. The property is sold, the loan redeemed, the equity (plus any growth) stays in the company. The default exit for a finite-horizon investment.
• Refinance. The realistic description of what actually happens: company buy-to-let loans are remortgaged at each fix expiry, and "term end" recedes indefinitely as long as the rent supports the ICR and the LTV holds. The risk to plan around is refinanceability, an ageing director profile, a property type falling out of favour, or rents lagging a rising stress rate can all narrow the panel at the worst moment.
• Accumulated cash. A company retaining its surplus can simply hold the redemption money itself by the later years of a long hold; some lenders accept this as the stated vehicle, most just want to see it as plausible.
• Voluntary amortisation. Using the overpayment allowance to trim the balance in good years, interest-only's flexibility working as intended, reducing the eventual exit rather than betting everything on it.

Lenders underwriting company cases treat the equity itself as the repayment strategy at sensible LTVs; what they are really testing is whether the directors have thought about it. A company that plans its exits property by property, and stress-tests the refinance assumption rather than assuming it, passes that test and sleeps better. The mechanics of how lenders size and re-test the loan at each refinance are covered in our guide to ICR stress tests for limited companies.

When does repayment still make sense for a company?

Interest-only is the default, not a dogma. We place repayment or part-and-part company loans where the plan genuinely calls for them:

• The forever hold. A company intending to keep a property unencumbered into the directors' retirement, prioritising eventual debt-free income over portfolio growth.
• High-yield stock with surplus to burn. Where rent covers a repayment schedule with room to spare and the directors have no reinvestment appetite, amortising at the mortgage rate is a respectable risk-free return.
• De-risking before an exit. Driving LTV down ahead of a planned sale of the company or a succession event.
• Director temperament. Some borrowers simply will not carry level debt comfortably, and a structure you abandon under stress is the wrong structure regardless of arithmetic.

Even in these cases, a part-and-part or an interest-only loan with disciplined overpayments often achieves the same end with the flexibility retained, if the surplus dries up, an overpayment stops; a contractual repayment instalment does not.

The product choice is one decision inside the larger structure, company versus personal, SPV setup, deposit route, lender placement, and it is cheap to get right at the start. Send us the property numbers and the plan, and we will model interest-only against repayment across the panel on a fee-free 15-minute call, with the stress test and the corporation tax effect on one page.