Buy to Let Portfolio Mortgage
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What is a Buy to Let portfolio mortgage?
You have a portfolio if you own four or more mortgaged properties. The definition comes from the Prudential Regulation Authority who regulate this market – the FCA doesn’t act in the Buy to Let space.
When they set this definition in 2017, banks went down different paths. Certain banks offer Buy to Let portfolio mortgages now, and certain banks don’t, for reasons we will expand on later.
An important distinction is that this relates to mortgaged properties only. You might own 10 properties but only three are mortgaged – in which case you’re not a portfolio landlord. However, banks still might treat you as one. This area is all quite contradictory!
A second important difference is that this is a single mortgage on multiple properties. If you’re fortunate enough to own two or three properties you’d normally have two or three mortgages. A portfolio mortgage is one mortgage against all the properties. It’s what’s called a floating charge.
Say you have £1 million worth of property, with £0.5 million worth of debt across five different properties. There’s no specific debt on any specific property. The bank takes a helicopter view and looks at the portfolio as a whole.
How many properties before a landlord needs a portfolio mortgage?
The PRA definition is four mortgaged properties, but certain banks have their own personal definitions of portfolios. So it might be that the lender has a maximum of three, five or 10 properties. Commercial lenders are fantastic in this space – there’s no limitation whatsoever. As long as you fit certain rules around affordability, there’s no limit.
What’s critically important from my perspective is to make sure we don’t breach the limit with each bank. I have multiple clients with numerous Buy to Lets – we might have two properties with one lender, four with another and to keep the mortgage costs down we have to move them around different banks.
There is a tipping point where it makes sense to go into a portfolio mortgage. And as a side point, there’s often a tipping point for moving properties into a limited company. I’m not an accountant and I can’t give tax advice so I strongly urge you to speak to an accountant early on. If you have a limited company there are different lenders, different sets of products and different rules.
We like to work with accountants to decide what’s best for you from a tax perspective to get the most efficient lending solution. You might be paying 0.5% more on a mortgage but saving on tax. You’ve got to look at it in the round. Look up online about how much more tax efficient limited companies are, and consider your forward plans too. For example, I have two daughters – I might want to create a portfolio in a limited company and pass that to them later.
How many mortgages can I get with a limited company?
Technically, it’s unlimited, but every lender has different limitations within that. Most high street lenders tap out at about four because of the PRA regulation – not all of them, but many. Specialist providers may go to around 10 properties. Once you reach 10+ that’s the reserve of more commercial lenders. Again, it’s not a hard and fast rule but that does tend to be broadly how it works.
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How do I go about building a Buy to Let portfolio?
You need a lot of cash! Property is very cash heavy. Most banks will typically want a deposit of 25% or more when you buy a new property. I just moved out of London and live in Surrey now – 25% of the average house price is a lot of pennies.
Most people build a portfolio over time. Typically, if you own a property for a number of years it will go up in value. Let’s say you bought a £100,000 property ten years ago with a £50,000 mortgage and you didn’t touch it for whatever reason. Historically, 10 years down the line, the general rule of thumb was that property prices will have doubled – that property might well be worth £200,000 now. We can’t guarantee that will be the case in the future though. Banks let you borrow up to 75% of a property value, so you can have a new mortgage of £150,000, which releases an extra £100,000. You could split that into two and put down a 25% deposit on two £200,000 properties.
You can gear up to 75% to put down a 25% deposit on the next property – and the more properties you have, the more you can gear up. I’ve seen people do that very effectively over time.
You can build up a sizable portfolio by leveraging assets. I use that word very clearly – it’s gearing an asset to buy more of them. Leverage is not taking money out of a property to go on holiday or buy a car.
What information do Buy to Let portfolio mortgage lenders ask for?
If you have more than four mortgaged properties, what banks typically need is a property schedule and business plan. They will want a list of all the rental income you’re receiving and they might need the tenancy agreements of the properties. It’s fairly heavy on paperwork which does feel a bit intensive – but we’re here to help. We’ve got a lot of pro formas, we know what we’re doing and we can put all that stuff together.
One thing to touch on around portfolios is if you have a limited company, a lot of banks now require personal guarantees. Clients can be a bit averse to these but it’s a route to getting the most competitive terms. It tends to be limited to the mortgage, so it’s not as restrictive as it sounds.
Banks also need to know about the ‘ultimate beneficial owner’. The bank is lending to a company – but obviously you own the company, so they’re going to want to know about you: your profile, your job etc., so be ready for that. It’s not particularly intrusive and it’s standard practice these days.
How is affordability calculated for a portfolio mortgage?
When the PRA came up with the portfolio definition they also came up with a standard calculation. It used to be very simple: if the mortgage payment was £1,000, as long as the rent was £1,250, banks would offer the loan.
This is how it works now: if you were to borrow £100,000 banks assume a higher interest rate of say 5.5% on average because interest rates will rise in time. If you’re borrowing £100,000 at 5.5% on an interest-only basis, that is a monthly payment of £458. Then there’s a second calculation called the Interest Cover Ratio (ICR). That’s normally about 145% of the interest figure. So you multiply 458 by 145% and that’s £664 per month. So as a rule, for every £664 a month you get in rent, you could borrow £100,000.
Where I live that doesn’t get you very far because rental yields are not that high. But the further you get away from London the better the rental yields are. With a limited company it’s a lot more generous – the interest rate is often calculated at 4.5% and the ICR is only 125% because corporation tax is 19% currently. Meanwhile if you’re a higher rate taxpayer, tax could be 40% so banks are more generous to limited companies. You can get that same £100,000 on just £468 rental income a month.
With commercial lenders this assessment won’t be based on an individual property, it will be from the whole portfolio. Sometimes use private banks. If you’re a high net worth individual and you happen to have some property exposure, banks will use your personal income even if those general calculations don’t work.
Private banks are excellent in this area – they can bypass this. Another piece of regulation sets the ‘high net worth’ definition, which is where you have over £3,000,000 worth of net assets or £300,000 in income a year. It means that none of the general rules apply. It’s down to the bank to decide how they deal with you.
How many payslips do I need for a Buy to Let mortgage?
It depends. Some banks need nothing at all, some will want to see the last three and if you’re self-employed they might want to do a different form of assessment. I wouldn’t worry too much about what documents are needed.
We talk to our clients really early on to ascertain their situation, what they can provide and what they can’t. If your situation is complicated or you have something else going on, we’re not going to force you down a path. There are different ways of doing things. We’ll find a route that suits you best.
What other advice do you have on Buy to Let Portfolio mortgages?
This is quite a complicated world. There’s lots of different ways of doing things and there are also different sets of lenders – high street lenders, commercial lenders, private banks. And it’s not just the sort of bank you deal with – we need to look at how lending is assessed.
For that reason a lot of banks don’t deal with the public – they work with brokers like us. We know our way around this stuff. We know how to package cases, so they love dealing with us. They’ll also give us access to exclusive products.
In the private banking world, you don’t just contact the bank. You need to know the person in the bank. We can do all that for you and we tend to get you a better outcome – i.e. cheaper funding. More than anything, though, we save you a lot of time. If you’re running a big portfolio, your time is far better spent in your day job, not running around banks researching things and getting documents together.
Let us do the hard work for you. Your most precious resource is your time, so let us preserve that for you and let us do the donkey work on your behalf.
Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.
There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical amount is £495.
FAQs
What is a buy to let portfolio mortgage and how does it work?
A portfolio mortgage is a single mortgage secured against multiple buy to let properties as one combined loan, rather than separate mortgages on each property. It works through what's called a floating charge: the lender takes a view of the whole portfolio (total value, total debt, total rental income) rather than tying specific debt to specific properties. It's typically used by landlords with four or more mortgaged properties and is more of a commercial product, suited to serious investors rather than amateur landlords.
How many properties do I need before I'm classed as a portfolio landlord?
Four or more mortgaged properties, under the Prudential Regulation Authority's 2017 definition. The count is based on mortgaged properties only, so if you own 10 properties but only three are mortgaged, you're technically not a portfolio landlord, though some banks may still treat you as one in their criteria. Most high street lenders cap at around four properties because of the PRA rules, specialist lenders extend to around 10, and commercial lenders go beyond that with no fixed limit.
Is it more tax efficient to hold a buy to let portfolio in a limited company?
In many cases yes, particularly for higher-rate taxpayers, because limited companies pay corporation tax (currently 19% to 25%) rather than personal income tax of up to 45%, and mortgage interest is fully deductible in a company structure. Lender stress test calculations are also more generous on limited company applications, often at a 4.5% assumed rate and 125% Interest Cover Ratio, versus 5.5% and 145% for personal name. It isn't right for everyone and needs proper tax advice from an accountant before the application starts, because moving existing personal-name properties into a company can trigger stamp duty and capital gains tax.
What documents do I need for a buy to let portfolio mortgage application?
Lenders typically ask for a property schedule (listing every property, its value, mortgage balance and rental income), a business plan, and the tenancy agreements for each property. If the portfolio is held in a limited company, the lender will also want information on the ultimate beneficial owner (the individual who owns and controls the company), which is standard practice rather than intrusive. The paperwork is heavier than a single buy to let application, though a broker will usually have pro forma templates that streamline most of it.
Will I have to give a personal guarantee on a limited company portfolio mortgage?
Yes, in most cases. Lenders typically require a personal guarantee from the company directors on limited company portfolio mortgages, because they're lending to the company but want recourse to the individual owners. The guarantee is normally limited to the mortgage itself, so it's not as broad as it sounds, and accepting it is usually the route to the most competitive terms. Take independent legal advice before signing, as a personal guarantee is a meaningful commitment.
Does Heron Financial arrange portfolio mortgages for landlords with multiple properties?
Yes, portfolio mortgages are a core part of Heron Financial's buy to let work, including personal-name portfolios, limited company / SPV structures, and high net worth cases placed with private banks. The team coordinates with accountants on the personal-vs-company decision, packages property schedules and business plans for portfolio applications, and accesses lenders that don't deal with the public directly (including private banks where you typically need a named contact rather than a public application route)