Last reviewed on 24th October 2023 by Martin Alexander (Mortgage Advisor)
Portfolio mortgages can simplify finances for landlords. With changes in tax and stamp duty laws, landlords are looking for ways to increase their investment income. Further changes have reduced the amount of tax relief landlords can claim. For instance, it’s no longer possible to offset interest as an expense like in previous years.
Corporation tax also increased to 25% in April 2023. As a result, more landlords are placing their portfolios under limited companies or moving to a single portfolio mortgage.
A portfolio mortgage could be something to consider for landlords with multiple properties. Placing a portfolio under one mortgage can be beneficial. Lenders require landlords to have at least four buy to let properties or a minimum value of the portfolio (around £500,000 minimum) to qualify.
What is a portfolio mortgage?
A portfolio mortgage allows landlords to place all their buy to let mortgages under one mortgage. Rather than having separate lenders for each property, the entire portfolio is undertaken by one lender. This allows landlords to have a single monthly payment under one mortgage account.
If a landlord has ten properties on separate mortgages, there would be ten monthly payments to multiple lenders. A portfolio mortgage lets landlords focus on a single monthly mortgage payment to one lender. One monthly mortgage payment is easier to manage than numerous monthly payments.
Lenders introduced portfolio mortgages for landlords to manage their buy to let finances with greater clarity. Rather than having multiple mortgage statements, landlords have one monthly account and one payment, simple.
Eligability and criteria
You’ll need to meet the following criteria to be eligible for a portfolio mortgage:
- You must have at least four buy to let properties
- Limited companies and individual landlords can apply
- Some lenders have minimum portfolio value requirements of £500,000
- Rental income must be between 120%-140% of the loan repayments
- Suitable for apartment blocks and larger portfolios
- You’ll need a business plan and property schedule if you’re borrowing against your portfolio
Portfolio mortgage rates
Portfolio mortgage rates are calculated on existing rates across your portfolio. If you have ten properties, 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.
Applications from limited companies will have higher rates than buy to let mortgages. Lenders take on more risk when lending to a limited company. If a limited company goes bust, lenders may struggle to retrieve any debts. However, as more landlords now use limited companies for buy to let, fees are becoming more competitive.
Advantages of having a portfolio mortgage
All mortgage types will have positives and negatives. That said, portfolio mortgages offer a range of benefits and minimal drawbacks.
Make your portfolio tax-efficient
A portfolio mortgage can allow you to become more tax-efficient. Funds withdrawn from a portfolio are now taxed entirely rather than taxed solely on net income.
If a landlord retains funds in the portfolio, funds can be used to renovate or purchase additional properties. By doing this, landlords will pay the lower corporation tax rate as outgoings will be classed as expenses.
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 there’ll only be one monthly payment.
Use your equity to grow your portfolio
It’s easier to use the equity in your portfolio to buy more property. For instance, if your portfolio is worth £1 million and the outstanding mortgage balance is £600,000, you’d have £400,000 in equity. Landlords can borrow against the equity, usually on the loan to value across the entire portfolio.
Based on the above example, if your portfolio had a 20-25% LTV ratio, a lender may offer a credit facility of up to £150,000 – £200,000. The additional funds could be used to buy more property and generate further income. As the portfolio increases, the credit facility should also increase (if done correctly!).
Using the equity in a portfolio to fund additional property purchases can often result in buying a property with little or no deposit! This is very hard to do across several single buy to let mortgages, not to mention time-consuming!
Boost your borrowing power
Underperforming properties in a portfolio can sometimes be a warning light for lenders, especially when requesting further finance. For instance, properties in the portfolio may generate less profit than others. Lenders often view underperforming properties as liabilities. If your entire portfolio is under one mortgage, well-performing properties can compensate for poor rentals.
Lenders assess income and expenditure as a whole rather than on a case-by-case basis. As a result, portfolio landlords can spread the income over their entire portfolio and, in many cases, increase the maximum amount they can borrow. This is a rare time when keeping all your eggs in one basket is a good idea!
Disadvantages of having a portfolio mortgage
There aren’t any significant disadvantages, but it depends on how your finances are structured. Using a mortgage to buy a property is always a risk if mortgage payments aren’t met. Buy to let property is no different, as any investment typically involves risk. Growing a portfolio increases further risk as more properties are involved.
In the very rare case that every single boiler needed replacing in each property, 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.
All your portfolio payments will need to be paid 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.
Migrating properties into a limited company can be expensive. Managing a limited company has increased administrative duties for which there’ll be a cost. You’ll more than likely need a professional accountant for instance.
You won’t need to apply with a limited company. Although there are tax benefits to having a portfolio in a limited company, selling a property from a limited company is still subject to corporation tax and capital gains tax.
Portfolio mortgage specialists
If you require a portfolio mortgage, seek advice from a specialist broker. A portfolio mortgage is a ‘niche’ mortgage and requires specialist advice. With access to hundreds of lenders, our experienced specialists can tailor information to your needs.
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 decisions before speaking to a specialist.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.