Business buy-to-let mortgages provide an excellent opportunity for businesses to invest in commercial property, whether to be let to a third party or to be used as premises to trade from.
However, securing a business buy-to-let mortgage can be quite different from a standard residential mortgage.
In this blog, we’ll explore what a personal guarantee agreement attached to a business buy-to-let mortgage is, and the pros and cons of signing one.
Why personal guarantees are used for business buy-to-let mortgages
When acquiring a business but-to-let mortgage, especially for commercial or multi-unit properties, lenders often require more reassurance than they would for a residential property.
For this reason, they may want an added layer of security through a personal guarantee. A personal guarantee, in the context of a business buy-to-let mortgage, is a legal commitment made by the business owner or directors to take personal responsibility for the mortgage repayments if the business is unable to.
By signing a personal guarantee, the business owner puts their personal assets, such as their savings or their property, on the line as collateral to back up the mortgage.
While this increases the risk for the business owner, it increases the likelihood of getting approved for the mortgage.
The pros and cons of signing a personal guarantee for a business but-to-let mortgage
Personal guarantees are a serious financial commitment, which is why you should weigh the pros and cons before you decide on signing one to secure your mortgage.
Pros
- Higher likelihood of approval
As mentioned earlier, agreeing to a personal guarantee can raise the chances of your mortgage application being accepted. It demonstrates your commitment to the investment and provides a safety net for the lender.
- Better terms
By offering a personal guarantee, you may be able to negotiate better interest rates and terms on the mortgage. Lenders are likely to offer favourable conditions when they have more confidence in the borrower’s ability to make repayments.
- Access to property
Gaining access to commercial property through a business but-to-let mortgage may be the key to your business’ growth and success, allowing you to profit off a third-party letting arrangement, or expand your operation in a larger building.
Cons
- Personal risk
The most significant drawback of a personal guarantee is the substantial personal risk it carries. If the business faces any financial difficulties that mean it will default on the mortgage, the guarantor’s personal assets can be seized to cover the outstanding debt.
- Limited protection
Signing a personal guarantee effectively bypasses any protection that business ownership usually provides in the event of insolvency or other financial issues. This means that your personal assets are exposed to any business-related risks.
- Financial stress
If the business experiences any financial challenges, a business owner or director could find themselves in a precarious financial situation. Meeting both business and personal financial obligations simultaneously can be overwhelming.
Protecting your investment with personal guarantee insurance
Given the potential risks associated with signing a personal guarantee, it’s essential to explore ways to protect yourself.
Personal Guarantee Insurance (PGI) is a solution designed to mitigate the financial impact of a business default on a buy-to-let mortgage.
This insurance can cover a portion of the value of the personal assets used in the guarantee in the event that the business can’t meet its obligations.
PGI provides peace of mind to business owners by offering financial protection against the worst-case scenario.
By using PGI, business owners can secure their personal assets and minimise the potential damage to their financial stability.
Personal guarantee insurance from Purbeck
Signing a personal guarantee on a business buy-to-let mortgage is a significant decision that warrants careful consideration.
While it can increase your chances of mortgage approval, it also exposes you to substantial personal risk.
At Purbeck, we believe that you should be able to invest in your business without compromising your financial security.
That’s why we offer PGI solutions to help safeguard your personal assets and provide you with the confidence to pursue your investments.
To find out more, get in touch with our team today, we’re on hand to help.
