Background to Portfolio Mortgages
There are now 2.5 million landlords in the UK and successful investors have been able to establish a Buy to Let portfolio of a number of properties. But changes by the Prudential Regulation Authority have introduced new checks for Buy to Let portfolio mortgages. So, what are the new rules, and will they prevent you from being able to get Buy to Let mortgages across multiple properties? Despite these changes there are lots of options out there for landlords and in this article, we look at how, with the right advice, it is still possible to get buy to let mortgages for multiple properties.
Most lenders that offer buy to let mortgages are regulated by the Bank of England’s Prudential Regulation Authority (PRA). In September 2016, the PRA issued a number of rules to introduce new underwriting standards for these lenders, including stricter affordability tests and extra checks on portfolio landlord mortgages.
It used to be the case, that lenders would calculate a buy to let mortgage based purely on rental income and deposit, but the new regulations mean that lenders need to apply more complex affordability assessments that also consider what level of tax you pay. This is because of the increased tax burden that is being phased in for Buy to Let landlords in the coming years – take a look at the section on tax later in this article for more information.
On a Buy To Let, the rental income needs to cover at least 125% of a mortgage that is charged at 5.5% for basic rate taxpayers and for higher rate taxpayers, who will need to find the money to pay a larger tax bill this increases to 145% or even 160%.
The PRA considers that borrowers with four or more mortgaged Buy to Let properties should be treated as ‘portfolio landlords’. This means that you can get a second mortgage for Buy to Let, or even a third and not be considered to be a portfolio landlord. But if you own four or more Buy to Let properties with a mortgage, then you will be subject to the new portfolio mortgage underwriting checks. These are sometimes known as portfolio mortgage stress testing.
As part of these checks, lenders will need to make sure that you are in a stable financial position. Different lenders have interpreted the rules in different ways, but they will all look at your entire Buy to Let portfolio, and are likely to consider:
- Your experience as a landlord
- Details of your mortgages on all of your Buy to Let properties
- Your assets and liabilities, including tax liability
- Historic and future expected cash flow from your portfolio
- Your income both from property and other sources.
As different lenders have interpreted the rules in different ways, criteria can vary from lender to lender. So, for example, if you have five properties generating enough rent to cover the mortgage payments, but one property that isn’t, your new mortgage application may not be approved by one lender but could be approved by another.
If you are looking for a mortgage for portfolio landlords, it is therefore important to seek the advice of a professional. We work with expert advisors who can look at your portfolio of Buy to Let mortgages and identify the best option for your circumstances
How many Buy to Let mortgages can you have?
The new rules put stricter criteria around getting multiple Buy to Let mortgages but, if the question is, “How many buy to let mortgages can I have in the UK?” ; as long as you meet the criteria, there is no limit to the maximum number of Buy to Let mortgages that you can have. Different lenders may have their own rules about the maximum number of loans they can advance to an individual, but there are many portfolio mortgage lenders in the market that want to help you to grow your investment.
If you are looking to grow your Buy to Let investment portfolio, it is important to get your paperwork in order and keep an up-to-date spreadsheet of your property portfolio, so that you have all the information at hand when you speak to an advisor.
Portfolio mortgages can simplify finances for landlords, as that’s what they’re primarily designed for. With recent news regarding tax and stamp duty laws, landlords are forever looking at methods to increase their investment income. Further changes in 2020 will lower the amount of tax relief a landlord can claim. Rather than using the interest on the loan to offset as an expense, landlords will no longer be able to do this at the same rate.
By 2020, changes in corporation tax will also decrease for annual profits up to £300,000. As a result, more landlords are considering placing their portfolios under limited companies and moving to a single portfolio mortgage.
For landlords with multiple properties, or landlords aiming to grow their portfolios, a portfolio mortgage could be something to consider. Placing an entire portfolio under one mortgage can be beneficial, especially with a large number of properties.
Lenders will usually approve portfolio mortgages to landlords with at least four buy to let properties or a minimum value of the portfolio (around £500,000 minimum). Portfolio mortgages can also be obtained for apartment blocks and larger portfolios. Accountants would usually recommend a landlord to have at least 6-7 properties for a portfolio mortgage to be viable.
What is a portfolio mortgage?
A portfolio mortgage allows landlords to place all of their buy to let mortgages under one mortgage. A portfolio mortgage is treated as a single account. Rather than having separate lenders for each property, the entire portfolio is undertaken by one lender, hence one monthly payment. The portfolio is registered as a limited company and finances and expenditures are treated exactly the same as any other business model.
A property portfolio is a term used for when a landlord has at least four properties. Technically, a portfolio could consist of two properties, but from a lenders perspective, they would usually class four properties to be the bare minimum for a portfolio.
If a landlord had ten properties on separate mortgages, then there would be ten monthly outgoings to multiple lenders. A portfolio mortgage would allow a landlord to solely focus on a single mortgage payment each month to a single lender. One monthly mortgage payment is perhaps easier to manage in comparison to multiple mortgage payments across the month.
Lenders introduced portfolio mortgages to allow landlords to manage their buy to let finances with greater clarity. Rather than having multiple mortgage statements, portfolio mortgages allow for one monthly statement and one payment, simple. Landlords with portfolios don’t have to have a portfolio mortgage and it is entirely optional.
Want to know more?
Contact Mint FS on 0330 1355914 for expert Portfolio advice – or complete our contact form and we will call you back.
Rates for portfolio mortgages
Buying new properties under a limited company will tend to have higher rates when compared to purchasing a buy to let using traditional methods. This is because lenders take on more risk as they’re lending to a limited company. If a limited company goes bust, lenders may find it difficult to retrieve any debts. That being said, as more landlords are using limited companies to purchase properties, lender fees are becoming more competitive.
Portfolio mortgage rates are calculated on existing rates across the portfolio. If a landlord has ten properties for instance, each property will have its own mortgage rate. A portfolio mortgage will incorporate each mortgage rate into one single rate. As a result, the rate of a portfolio mortgage will generally be the average of mortgage rates across the portfolio.
Lenders often require portfolios to be valued at £500,000 minimum. The rental income generated will also need to be around 120%-140% of the loan repayments. Other lenders may consider landlords with at least four properties.
Advantages of having portfolio mortgages
All mortgages types will usually have positives and negatives. It’s difficult to explain whether or not a certain mortgage type will be advantageous to an individual without understanding their personal circumstances. That being said, portfolio mortgages can offer a range of advantages which are outlined below.
Simplify your buy to let finances
Rather than having multiple lenders, a portfolio mortgage allows landlords to have a single lender. A single lender across a portfolio can simplify finances in many ways, as they’ll only be one monthly payment.
Using equity to grow your portfolio
Equity in the portfolio can be utilised to increase the portfolio further. If for instance the portfolio was valued at £1 million and the outstanding mortgage balance was £600,000, the portfolio would have £400,000 in equity. Landlords can borrow against the equity usually on the loan to value across the entire portfolio.
Boost your borrowing power
Under-performing properties in a portfolio can sometimes be a warning light for lenders, especially when requesting further finance. For instance, there may be properties in the portfolio which aren’t generating as much profit as others. Lenders may envisage under-performing properties as liabilities.
If the entire portfolio is under one mortgage, well-performing properties can compensate for poor rentals. This is because lenders will simply assess income and expenditure as a whole, rather than a case by case basis. This allows portfolio landlords to spread the income over their entire portfolio and in many cases can increase the maximum amount they can borrow. This is perhaps a rare time where keeping all your eggs in one basket is a good idea!
Disadvantages of having a portfolio mortgages
There aren’t any major disadvantages as such, however it depends on how your own individual finances are structured. Using a mortgage to fund a purchase of a property is always a risk, in the case that mortgage payments can’t be met. Buy to let property is no different, as investment typically has an element of risk involved. Growing a portfolio increases further risk, as there’s simply more properties involved.
In the very rare case that every single boiler needed replacing in each property for instance, this would create a large outgoing for that particular month. As portfolio mortgages operate under a single account, you wouldn’t be able to defer payments to different dates. The entirety of your portfolio payments will need to be paid all at once.
This can be a disadvantage if your finances aren’t in great shape. If you’ve got savings tucked away for a rainy day (which we advise everyone should aim to have!), then you can minimise your exposure to situations such as these. There are also possibilities for property values and rental prices to decrease, so always be prepared for worst-case scenarios.
Lenders that do offer portfolio mortgages will require landlords to have their portfolio under a limited company. Migrating properties into a limited company can be expensive. Operating a limited company does come with increased administrative duties for which they’ll be a cost. You’ll more than likely need a professional accountant for instance. Although there are tax benefits to having a portfolio in a limited company, selling a property from a limited company is subject to corporation and capital gains tax.
Specialists in Portfolio Mortgages
If you require a portfolio mortgage, seek advice from a specialist commercial broker – like Mint FS. A portfolio mortgage is a ‘niche’ commercial mortgage and will therefore require specialist advice. With whole of market access, our experts can tailor information suited to your own circumstances.
A property empire isn’t built overnight and usually takes careful planning. The same can be said for portfolio mortgages. Don’t rush into making any decision before speaking to a specialist.
Need to know more?
Contact Mint FS on 0330 1355914 for expert Portfolio advice – or complete our contact form and we will call you back.