How Does a Portfolio Mortgage Work?
If you’re investing in property you might be wondering what a portfolio landlord or portfolio mortgage is. Typically it’s someone who owns several properties usually on a buy-to-let basis.
By definition, a portfolio landlord has multiple properties or, under lender criteria, 4 or more mortgaged buy-to-let properties. These could be owned privately, under a limited company, sole owned or jointly owned.
Whilst you will see in this article there are advantages to taking out a portfolio mortgage, you don’t necessarily have to take one out. However, Portfolio mortgages were introduced with the intention to give landlords greater clarity on managing their buy-to-let finances.
In this article, we aim to cover some of the most common questions and give you a better understanding of portfolio landlord products.
Put simply, this type of mortgage works by placing all of your property mortgages under an umbrella mortgage lender.
In line with most lender criteria, however, you must have a minimum of 4 rental properties with mortgages before you consider applying for this type of buy-to-let mortgage. Therefore, if you had 5 properties and only 3 are mortgaged you would meet lending criteria.
By moving to a portfolio mortgage it means you don’t have multiple payments or separate lenders to worry about. Instead, you have one payment for your entire portfolio. In terms of what it means for your portfolio landlord mortgage rates, these are calculated based on existing rates in the portfolio incorporating each. In general, lenders will average the rates across the portfolio into one single rate.
Portfolio Landlord Criteria
As we’ve said, to be considered for a portfolio landlord mortgage lenders generally ask for a minimum of 4 mortgaged properties within your portfolio. This is the first benchmark lenders will be looking for.
By having one umbrella lender and treating it as one account you’ll have one monthly payment. This can benefit you because it will:
- Simplify your landlord finances.
- Make it more tax efficient.
- Boost borrowing power.
There are a variety of portfolio mortgage lenders, including some high street lenders. However, they all have their own criteria that must be met.
You will need to provide the same information as a normal buy-to-let mortgage application so that lenders can carry out stress tests. However, you will be required to provide further documentation such as:
- A detailed schedule of properties
- A business plan
As regulations on buy-to-lets became stricter in September 2017, lenders will ensure that you are not over-committing yourself and have enough contingency in place to cover any eventualities.
That being said, as long as you meet criteria there is no legal limit to the number of properties you can have in your portfolio.
However, lenders will look to minimise their risk by placing their own limits on the number of mortgaged properties they will allow, and the overall maximum amounts you can borrow.
Portfolio landlord new rules
Regulations on buy-to-lets became stricter in September 2016, lenders will ensure that you are not over-committing yourself and have enough contingency in place to cover any eventualities.
The Prudential Regulation Authority (PRA) in England issued new rules for underwriting standards which is why you would undergo a stress test where lenders make checks and look at the viability of the investment.
In addition to this, changes were made in April 2017 to tax relief on interest for private landlords. This means that you are no longer able to deduct any of your mortgage expenses from your rental income. Because of this, some landlords have found it advantageous to handle their buy-to-let property portfolio through a limited company.
Because of the PRA changes lenders can no longer calculate buy-to-let mortgages purely on rental income and deposit. Affordability assessments ensure you’re in a stable financial position and that the risk to the lender is minimised.
The assessments are now more complex and consider the tax you pay, whether you are a basic rate taxpayer or higher rate taxpayer.
For this reason, it means that lenders will assess and expect your rental income to meet at least 125% as a basic rate taxpayer or 145% as a higher rate taxpayer (depending on your tax bracket it could be between 125% – 160%).
Therefore, to calculate your affordability a lender will likely take the value of the property and place a stress rate of a minimum 5% interest to calculate how much your monthly mortgage payments may be and then calculate based on the tax bracket you fall into.
Example: Property is valued at £200,000 and 5.5% interest is applied = £11,000 per annum = £916 per month payments. To cover a basic taxpayer rate you will need rental income to 125% = £1,466 per month.
Portfolio landlord vs. limited company
Due to the tax changes mentioned above and the fact that corporation tax has also decreased it can be more beneficial to run your portfolio under a limited company should you wish to do so. We’ve provided more information on this in our limited company buy-to-let mortgages article.
Are portfolio mortgages a good idea?
The biggest advantage of a portfolio loan is having one umbrella lender and treating it as one account, meaning only one monthly payment.
Choosing to place your portfolio under this type of mortgage can have other benefits such as:
- Simplifying your landlord finances as you will only be making one monthly payment.
- Making it more tax efficient especially as tax changes mean that relief on tax that a landlord can claim has been lowered.
- Boosting borrowing power with your portfolio under one mortgage you are able to spread the income over the entire portfolio, meaning well-performing properties can compensate for the under-performing ones.
- You could also use the equity in your portfolio to grow.
It will however mean more time spent over applications and a potentially slower decision-making process as lenders will want to see more documentation from you.
You will also have to pay an extra 3% Stamp Duty to buy any investment property.
However, there are no major disadvantages to a portfolio mortgage, though it will always depend on how your individual finances are structured.
Portfolio mortgage brokers
Portfolio mortgages are quite a ‘niche’ area so requires careful planning and specialist advice. Speaking to a mortgage advisor with experience in this area and with access to the whole of market lenders means you will be in the best possible position for being approved a mortgage and placed with the right lender based on your circumstances.