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Buy to Let Portfolio Mortgage (Part 1)
Paul Holland is here to explain how a Buy to Let portfolio mortgage works. Episode one of two, recorded in October 2024.
What is the definition of a portfolio landlord in the UK?
In the UK, a portfolio landlord is someone who owns four or more mortgaged Buy to Let properties. It doesn’t matter how many Buy to Let properties you own in total, it’s only the ones that you have a mortgage on that count.
If you have a mortgage on four properties, you’ll fall into the portfolio category for any further applications. It’s regardless of your residential property, and only based on investment properties.
How does a mortgage for a portfolio landlord differ from a regular Buy to Let mortgage?
Lenders are going to treat these applications differently from smaller scale landlords with one or two properties, because there’s additional risk there. There’s also additional financial management within multiple property portfolios.
If you own one or two and you’re buying a third, lenders may start to look at the whole portfolio and the overall health of your property business. Because of that, these applications usually face harsher criteria.
It could mean a restricted loan to value, which means a higher deposit. The mortgage might come with higher fees or higher interest rates due to the additional risk and extra work that comes with these applications.
On top of that, the underwriting process is likely to be more arduous and the lender will want more documentation. If they’re looking at 10 properties rather than one, naturally, it’s going to be more long-winded and more expensive.
It sounds negative, but actually, it’s all for good reason. If you’ve got that many properties, it’s a professional business. They need to make sure there’s a good backing behind that. They’re not just going to look at one property in isolation, they’re going to look at the bigger picture.
What are the eligibility requirements for a portfolio landlord mortgage? What documentation is typically required?
Eligibility will vary from one lender to the next. That’s similar across the board for mortgages, but you can expect to see certain criteria crop up with these applications.
A minimum personal income is usually required, most commonly at £25,000. Some lenders require slightly more while others won’t request that at all.
They’re going to want to see some landlord experience – generally, that’s 12 months. But if you’ve already got four Buy to Lets, it’s pretty likely you’ll have 12 months worth of experience. Each lender is going to have their own credit scoring rules. As always, the better your credit, the better the rate you’re likely to be able to secure.
Every lender is going to apply a stress test to determine the maximum loan size for that property. Remember that it’s not a case of just going to any lender and getting the same outcome – everyone’s going to stress it in different ways.
Obviously, all mortgage applications involve documentation. The usual things apply, such as your income proof, your ID and bank statements. And, because these applications go into more detail, lenders need additional documentation.
You may need a business plan or a cash flow forecast, and a portfolio schedule. That asks for details of your background properties: their value, the rental income, the loan size, and an asset and liability breakdown.
Lenders looking in more detail at the overall picture as an investor. If you’re employed, you can provide pay slips, but because you’ve got a property business that’s generating rental income, there’s a good chance that even if you are employed, they will also ask for SA302s or tax returns to show the rental income that’s being declared from that property portfolio.
How many properties can be included in a portfolio landlord mortgage?
The minute you’ve got four mortgaged Buy to Lets, you’ve met the minimum requirement. You’ll automatically fall into that classification. If you’re a landlord and you want to grow a portfolio of 100 properties, you could do that – they could all have mortgages. There aren’t really any maximums in that sense.
However, each individual lender could potentially apply a maximum to each individual client. If you had eight properties on a Buy to Let basis all with the same lender, when you look to buy property nine or 10, they might feel that their exposure to you personally is becoming quite risky. They might enforce a maximum of 10 properties per person.
But you had 10 properties with one lender and you came to me to get your next one, I would just place it with a different lender and you’d be fine.
We deal with people with 40 properties and more. At this point, they’ve got people working for them, because there’s so much involved with running everything. You could also employ a letting agent to manage those properties for you, because it can become quite time consuming.
Do you need to put down a deposit for a portfolio mortgage? How much deposit do I need for a Buy to Let portfolio mortgage?
Yes, you will. The minimum is commonly 25% for most Buy to Lets in general. But because they look at the bigger picture and stress test the whole portfolio, the borrowing is driven by the rental income.
So it’s difficult to say what the minimum amount would be without seeing a portfolio and what rental that’s driving. You could get a portfolio landlord mortgage with a 25% deposit, but there could also be instances where it might need to be much more.
In some particular circumstances you could need as much as 50% because of those things in the background. It’s a case-by-case basis.
How do lenders assess the affordability of a mortgage for a portfolio landlord?
This is really technical, actually. I was probably doing mortgage broking for about three years before I actually understood the calculation myself.
But on a really basic level, it’s about the potential rental you get from a property. Let’s say a three-bed terrace is going to generate £1,500 a month in rental income. That’s the figure that’s going to drive how much you can borrow.
If you want to get technical, lenders will use something called an ICR, which is Interest Cover Ratio. The easiest way to explain it is probably with an example. Let’s say you get a Buy to Let mortgage at a rate of 5%. The lender might apply a stress test at 6%, because obviously rates fluctuate.
Then they apply a coverage amount to ensure that you can afford rental voids and maintenance costs. A common coverage is 145% for a portfolio landlord. With some Buy to Let lenders it might be 125%, or it can go all the way to 175%.
Let’s say you wanted to borrow £100,000, if you stress that at 6%, the annual interest is £6,000 over 12 months. So the 100% coverage rate gives you £6,000. They want 145%, which annually is £8,700. If you divide that by 12, then you’re left with a figure of £725.
So if you want to borrow £100,000, you need to rent your property out for at least £725 a month.
Every lender has a different stress rate and a different coverage amount, so every lender will offer you a unique amount based on your particular circumstances and the property that you’re buying. You need to speak to a broker to work that figure out.
Does a portfolio mortgage have to be through one lender or can it be different lenders for individual properties?
Subject to criteria, you can apply to a different lender every time you look to add an additional property to your portfolio.
What happens if a portfolio landlord’s existing properties do not meet lending criteria?
Obviously, if the whole portfolio doesn’t fit their stress test, they won’t lend. But let’s say you’ve already got a property on a leasehold that a lender wouldn’t lend on – that wouldn’t matter. They’ll lend on the purchase that you’re doing – they’re not lending on what’s in the background.
All they need is for the background properties to fit the overall stress test. It doesn’t matter if their properties are outside of their criteria, due to construction type or something like that. They’re only interested in lending on the new property, as long as the business model makes sense.
What types of properties can be included in a portfolio landlord mortgage? Are there any limitations?
Generally, any property restrictions will be across the board for Buy to Let, whether that’s on a portfolio or not.
Non-standard construction could flag up as a problem in the purchasing process. Things like timber frames, concrete construction or thatched roofs – anything that isn’t really conventional will potentially be on a lender’s radar.
New build properties can come with bigger deposit requirements. Some lenders don’t like leasehold properties with a really short lease. Holiday and student lets, again, are more difficult to secure because of the higher turnover of the rental situation. That might not suit a lender’s risk appetite.
On anything other than conventional property types, bring it to the table with your broker before you spend any money – you really need to make sure that the lender we approach is going to be happy with those finer details before you commit.
It’s usually a straightforward process if you get your ducks in a row – but it can be like dragging someone down a garden path if you don’t.
Is there anything else to know before we return for part two?
This can be as difficult or as easy as you like. It really just does depend. We still get situations where we have to go away for hours to identify everything that could trip us up, because it’s a new situation. Every client is different.
Most portfolio landlords have a broker. It’s key to make sure you are dealing with someone who has experience in that space. Otherwise, you’re going to be flogging a dead horse.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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Buy to Let Portfolio Mortgage (Part 2)
We continue the conversation on Buy to Let portfolio mortgages with Paul Holland. Episode two of two, recorded in November 2024.
Are there any restrictions on the types of tenancies that can be considered for a portfolio landlord mortgage?
Yes, there are. Restrictions vary from lender to lender, which is always true in the mortgage world. As an example, with a standard assured shorthold tenancy (AST), lenders usually like those to be in a range of 6-12 months, and you might struggle if they have unusually long terms.
Things like HMOs, holiday lets, supporting living, affordable housing or corporate lets are generally going to come with different restrictions, depending on what lender you go to. While standard ASTs are widely accepted, non-traditional tenancies are likely to require a more bespoke approach or additional documentation.
Just make sure you consult with your broker. We will understand the specifics of your portfolio and match that with the correct lender.
Can a portfolio landlord mortgage be used for both residential and commercial properties?
Portfolios in general tend to focus more on residential properties, but some lenders accommodate mixed use. You might have a semi-commercial or full commercial property, and you can incorporate that as well.
Commercial loans tend to come with slightly higher interest rates as they’re a bigger risk from a lending perspective. Again, you’re likely to need a little experience in that space. Otherwise, it’s just a little more difficult to secure borrowing.
But as long as you’re working with a broker, you’re going to be able to source the most suitable lender.
Are there any specific tax implications for considerations for portfolio landlords?
I certainly can’t give tax advice, and I’m not going to be throwing around percentages because every tax situation is different.
Tax implications for portfolio landlords can become quite complex, to say the least, especially as your portfolio grows. As we know, any income or profit is going to get taxed one way or another. It’s one of those things in life you can be certain of.
Let’s start from the beginning. When you buy a property, you pay stamp duty tax. When you own the property, if it’s in your personal name you’re going to pay income tax on the profits. If you own it through a limited company, you will pay corporation tax.
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If you are letting a commercial property, that could also be subject to VAT. When you sell any Buy to Let property, you’re going to potentially pay capital gains tax on any gains you’ve made, or again, corporation tax if it’s in a limited company.
When you die, the property could become liable to inheritance tax as well. It can hardly seem worth it with that many taxes. But in all seriousness, this can still be a really profitable investment if it’s done correctly. It’s just worth understanding those taxes and making sure your business model and strategy allows you to be profitable as an investor.
Are there any government schemes or support available specifically for Buy to Let investors with a property portfolio?
There’s nothing in comparison to the schemes for First Time Buyers on residential properties, but there are a few things to mention. Some support mechanisms are going to be available for portfolio landlords to take advantage of, such as the ECO, the Energy Company Obligation.
That’s going to provide funding for energy saving improvements like installing heating systems, especially for properties with low-income tenants. If your portfolio is built around those tenants, it might be worth looking into the ECO.
There are also property improvement loans, where some councils offer low interest loans or grants to landlords to make improvements on an energy efficiency or safety basis. Again, that’s going to be more available in areas where there are housing shortages. Take note of that if it ticks the box for your portfolio.
I didn’t initially think of tax relief as an incentive or government support. But realistically, any ability to offset costs and save tax comes from the government. If you were to buy a property in a limited company or a special purpose vehicle, you can offset the interest payments for your mortgage.
That ultimately means your tax bill for those profits is much lower than if you bought in your personal name – because that way you can only offset 20% of that interest. Your profits are therefore larger, which means more tax.
We’ll be doing more around the benefits of limited company letting in future podcasts.
Is it possible to switch lenders or remortgage a portfolio landlord mortgage?
Absolutely, yes, subject to all the criteria and affordability. It’s usually a bit more difficult than a non-portfolio case, for multiple reasons. Bear in mind that lenders will assess your entire portfolio.
Despite you only asking for a mortgage on a specific property, they’re going to look at everything in the background. They’re going to need property values, loan sizes and rental income on all the background properties. They stress that as a business model, rather than an individual isolated case, looking at the entire portfolio.
Because of that, they’re likely to need a lot of documentation and evidence. All that being said, there can be lots of positives to remortgaging a portfolio loan, especially if you’re looking to obtain a better rate. You might also want to raise some capital for renovations or even to pay for a deposit on a future Buy to Let purchase. It’s definitely worth looking at.
What role does rental income play in obtaining a portfolio landlord mortgage?
We touched on this in Part One, where we went into the calculations. To reiterate, rental income is the foundation for securing any mortgage, and especially with portfolio mortgages.
The lenders are going to use the rent as a gauge for affordability, looking at the portfolio viability, and to determine how much they will lend based on the rental figures. They’re going to apply a stress test to arrive at a maximum loan. Typically around 125% to 145% of the interest payments need to be covered by the rent – and they stress that at around 6%.
Again, those brackets are all going to differ from lender to lender, but that’s broadly how they run affordability calculations. The idea is to make sure you’re protected from market fluctuations.
While all lenders are different, it’s the same idea: the bigger the gap between the interest payments and the rent, the better. As that gap gets smaller, it becomes more and more difficult to secure a decent mortgage.
How do interest rates on portfolio landlord mortgages compare to other types of mortgages?
In a nutshell, they are more expensive. You can get rates that are quite close to a standard Buy to Let, but generally, it’s more. Again, that’s to cover the risk of market fluctuation. It’s riskier for the lender, because you’re more exposed by having multiple properties.
If there was a slump, that’s obviously going to hit your business model much harder than if you just had one property. Because of that, they have slightly more expensive rates.
That being said, if you set it up properly, it could still be more profitable than a mortgage with a lower rate because you can offset interest, etc. It’s just knowing the ins and outs and how you should set up your business model.
Can a portfolio landlord mortgage be obtained for properties owned jointly with others?
If someone on the mortgage application has four or more mortgaged Buy to Let properties, you will need a portfolio mortgage. You will be deemed a portfolio landlord, so you only have access to those mortgages. That’s the criteria.
If anyone on the application has four or more mortgaged Buy to Let properties, they automatically fall into that definition, and therefore you will only have access to portfolio mortgages.
What are the consequences of defaulting on a Buy to Let portfolio mortgage?
It’s repossession, ultimately. If you don’t keep up with your mortgage repayments, you run the risk of your property being repossessed. I’m sure everybody’s seen that disclosure on any financial advice or marketing. That’s obviously the worst case scenario.
Also, if you miss a payment or you default, it’s going to affect your credit status. With a secured loan against an asset, the damage to your credit is much worse than unsecured debt, utility bills or phone contracts or anything like that.
Try to avoid missing any mortgage payments across the board, because it’s just going to hurt you when trying to obtain credit in the future.
You’ve demonstrated how a mortgage broker can help, but do you have any final thoughts?
What I’d like people to take away from this is that it’s really important to have the right team of people around you. Make sure you’ve got the right advice from a tax specialist. Find a broker that’s good at what they do, and specialises in portfolio cases, because they’re just so much more in-depth.
There’s much more to take into account when you’re becoming a professional landlord. You’ve got a business with multiple properties. If you run it correctly, it could be a path to early retirement. If you run it poorly, however, it could be a path to really late retirement.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST Buy to Let MORTGAGES.
Why Us?
- Friendly, expert mortgage advisers
- We work with dozens of lenders
- Access to competitive rates