Property Portfolio Finance

Of course, as with any other investment, diversification is useful. It pays to spread the financial risk by investing in different geographical areas, different types of property and for different markets (such as student rental, private rental and even commercial property).

This will ensure that you haven’t put all of your eggs in one basket, should one part of the property market take a fall - and it means becoming a portfolio investor. Several corporate landlords exist with more than 1000 properties in their portfolios - and there are individuals who have property portfolios approaching that figure.

It means that property can be very lucrative if you have the right financial arrangements to support your business plans.

What’s more, it is possible to become a portfolio investor - with tens if not hundreds of properties - very quickly. One way to grow your property portfolio may even be to buy in bulk, particularly at auction, where groups of properties and even entire estates may often be sold at very attractive prices. Many auction properties need a good deal of work, something which is off-putting to many buyers. If you’re prepared to put in some time and effort, however, you can pick up bargains that can be quickly turned into great rental moneymakers, with the assistance of an experienced builder.

Of course, with several properties to manage, refurbish and fund it means what can start as a sideline soon becomes a full-time business- and it requires a professional approach to finance.

The professional approach

With recent changes to tax and stamp duty laws, landlords are looking at methods to increase their investment income. Changes in corporation tax will also decrease to 17% for annual profits up to £300,000. As a result, more landlords are considering placing their portfolios under limited companies, and building real property empires, by calling on a variety of lenders to finance each one. 

Buying properties for your portfolio through limited companies can provide more attractive tax rates and economies of scale. But there can be another important advantage in making the step to becoming a property portfolio owner with a limited company. It can allow you to move to a single portfolio mortgage.

What is a portfolio mortgage?

Conventional buy to let mortgages are based on individual properties, much like a homebuyer mortgage. They can be difficult to administer when the property owner has a large portfolio. For landlords with multiple properties, or those aiming to grow their portfolios, a portfolio mortgage could be a solution. A portfolio mortgage allows landlords to fund all their buy to let mortgages with one mortgage, treated as a single account.

This means that rather than having separate lenders for each property, the entire portfolio is undertaken by one lender, hence one monthly payment with one monthly mortgage payment compared to multiple mortgage payments across the month.

The portfolio is registered as a limited company and finances and expenditures are treated exactly the same as any other business, simplifying administration and reducing costs.

Technically, a portfolio could consist of two properties but, from a lender’s perspective, they would usually class four properties to be the bare minimum for a portfolio.

Lenders will usually approve portfolio mortgages to landlords with at least four buy to let properties or on a minimum portfolio (around £500,000) value. Portfolio mortgages can also be particularly suitable for apartment blocks and larger estate style portfolios. 

Portfolio mortgage rates

There are some drawbacks to a portfolio mortgage. Buying properties under a limited company will tend to have higher rates compared to purchasing a buy to let using traditional methods. This is because lenders take on more risk by lending to a limited company - if it goes bust, they may find it difficult to retrieve any debts. 

However, this may be changing as portfolios become more popular and, at Rangewell, we can help you find the most competitive rate for your portfolio mortgage. 

Portfolio mortgage rates can be calculated on existing rates across the portfolio. If you have ten properties, each property will have its own mortgage rate. A portfolio mortgage will incorporate each mortgage into one single agreement and, 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.

The Advantages of a portfolio mortgage

Portfolio mortgages can offer a range of advantages.  

Tax efficiency - A portfolio mortgage can help you be more tax efficient. The rules on buy to let have become punitive outside a limited company. Inside it, and with a portfolio mortgage, funds withdrawn from the portfolio will soon be taxed as a whole, rather than paying tax solely on net income. So, if you retain funds in the portfolio, funds can then be used to renovate or even purchase additional properties - and 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 they’ll only be one monthly payment. With individual mortgages, under-performing properties can be a problem for lenders, especially when you need further finance. If you have properties in your portfolio that aren’t generating as much profit as others, lenders may see them as liabilities.

With your 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 on 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. 

Lenders that offer portfolio mortgages will require you to have their portfolio under a limited company. Migrating properties into a limited company can be expensive and does mean some increased administrative duties - and a professional accountant will be essential. You should also remember that although there are tax benefits to having a portfolio in a limited company, selling a property from a limited company is subject to corporation tax and capital gains tax.

Refinancing a property portfolio

If you already have built up a large property portfolio, you may be ready to look at the advantages of a portfolio mortgage. The most obvious benefit of using a limited company to hold your properties is the fact that you’ll be paying corporation tax on your profits rather than income tax on everything your properties earn. This is currently charged at 19% of profit and will drop to 17% for the 2020/21 tax year. This is much lower than the higher rate (40%) and the additional rate (45%) of personal income tax. However, you may still be subject to income tax when withdrawing profits from the company. Paying corporation tax also means that the recent restrictions on mortgage interest relief and relief on finance costs don’t apply.

It is possible to make the switch to a portfolio mortgage, but this will only be possible if you own your properties under a limited company - and you may need to look at getting professional advice on the most cost-effective ways to transfer property that you currently own yourself into a limited company. To move it to a limited company, you technically have to sell it to that company. This means you have to pay the following on a property worth £300,000.

• Stamp Duty Land Tax at the higher rate. Your company will pay £14,000 - although if you act now you may be able to take advantage of the stamps duty holiday with many properties
• Capital Gains Tax at the residential property rate of 18% if your total annual income is within the basic rate band, or 28% if you are taxed at the higher rate
• Finance costs of taking out a new mortgage for the company
• Early repayment charges on your existing mortgage.

You’re also unlikely to qualify for tax breaks such as incorporation relief and entrepreneurs’ relief because HMRC sees property as an investment rather than a business. Also, when you take dividends out of your company, only the first £2,000 is tax free. Any dividends you take within your basic rate tax band are charged at 7.5%, rising to 32.5% when you hit the higher rate dividend band at £50,000.

You may need to look very carefully at how property is transferred, but then, when you have talked to your accountant and possibly your solicitor, actually doing so can be straightforward.

Of course, once you are ready to look at a portfolio mortgage, you will need expert support to get the deal you need. Portfolio mortgages can still be expensive from some providers, and even a small difference in the interest rate will make a substantial difference to your monthly repayments. Getting the most competitive loan rate can make an important contribution to your profits.  Property remortgaging or refinancing could help you reduce the repayments you make each month.

It works by letting you pay off an existing mortgage arrangement and replacing it with a new one at a lower cost. Your properties will probably have appreciated in value, and we may be able to help you secure a better deal thanks to the lower LTV - especially if you have an entire portfolio to refinance.

But there is another reason to refinance your property when you are a portfolio investor. Your property has built up equity while you have owned it and, by refinancing, you may be able to release some of that equity, providing cash to allow you to acquire additional property.

Getting the help you need

All types of property investment inevitably involve high costs, and it is important to have expert help to get the kind of funding that is right for your investment plans - whether you are expanding your portfolio or refinancing your existing property investments.

Lenders will vary greatly in what they offer and even a fraction of a percentage point can make a substantial difference to what you actually pay each month. It means that getting expert support to find the most appropriate deal is essential to save you money.

At Rangewell, we help investors of all kinds find the finance they need. We cover the entire UK lending market, which means we can help you find the most cost-effective property finance for all property investment needs - and to help you make the most of your buy to let plans.

Our knowledge can not only help you secure the funding you need - but it can also save you a great deal of cash.

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.