Portfolio Mortgages

The manner in which landlords in the UK are managing their investment properties is changing gradually.

Earlier, it was common for landlords to purchase investment properties through separate buy-to-let mortgages. However, an increasing number of landlords are now doing so through portfolio mortgages. 

By placing their entire portfolio of properties under a single mortgage, they can make it easier to manage their finances.

But, it is important to understand that regular portfolio mortgages are different from commercial ones. This guide aims to help you know all about commercial portfolio mortgages in detail. 

For the context of this article, we are outlining a portfolio mortgage as one where multiple properties are organised under one loan or lender. However, you can be a portfolio landlord with loans from multiple lenders.

What Are Commercial Portfolio Mortgages?

Commercial portfolio mortgages are designed especially for landlords with multiple properties, allowing them to place all their buy-to-let mortgages under a single loan. 

Thus, instead of having to deal with multiple lenders, you only need to deal with a single one and repay just one mortgage.

Lenders usually offer such a mortgage when you have no less than four properties in your portfolio. 

The properties may be owned by an individual landlord, a limited company, or an acceptable structure with multiple investors. Thus, it can be highly advantageous when there are multiple properties and mortgages to be managed. 

Also, getting such a mortgage is not mandatory for landlords with multiple properties. There is still the option of having separate buy-to-let mortgages for each property for those preferring traditional options. 

Who Is A Portfolio Landlord?

Landlords with more than three investment properties purchased through active buy-to-let mortgages are usually classified by lenders as portfolio landlords. 

In contrast, those with less than four such properties are classified usually as private landlords and may only be offered regular BTL mortgage products. 

A portfolio landlord is often different from a professional landlord as the primary source of income for the latter is through rental properties when assessing the application. To become a portfolio landlord, you need to have four investment properties, at the very least usually.  

Portfolio Mortgage Uses

A commercial portfolio mortgage can be used for financing a wide variety of investment projects, such as:

• Nurseries, funeral homes, gyms
• Healthcare facilities 
• Properties owned through a limited company
• Guest houses and pubs
• Warehouses and factories
• Retail buildings
• Offices

How Does A Portfolio Mortgage Work?

A portfolio mortgage is different from a regular buy-to-let mortgage, especially when it comes to the deposit and eligibility criteria. 

Generally, for such mortgages, lenders consider applications on a case by case basis. This means that the terms and conditions for such a mortgage have to be tailored according to your specific requirements and depend on the lender.  

Such a mortgage is secured on investment properties, and one portfolio mortgage is needed after you have purchased four properties as well as for each additional property after the fourth.

Fortunately, due to the customisable nature of such mortgages, it is possible to find lenders who can offer good deals. 

Portfolio Mortgage Criteria

Portfolio mortgages allow you to combine multiple mortgages into a single one, which makes them easier to manage. On the flip side, interest rates are higher due to the inherent risks involved. 

For lenders, it can be difficult to recover the loan and interest if the borrower is unable to repay the loan due to any other reason. 

The entire portfolio is used for calculating the rates, with the final rate being the average of all individual rates. 

As for the loan-to-value requirements, lenders generally require between 25% and 30% of the portfolio mortgage value. But you can use additional assets potentially for a higher LTV if needed. As always a lower LTV is usually preferable. 

Alternatively, it may be possible to use equity or refinance an existing portfolio for the purpose. Another common requirement is that your commercial portfolio should have a valuation of £500,000, at the very least, and £100,000,000 at most.

How To Get A Portfolio Mortgage

You can approach a lender for a portfolio mortgage after acquiring four properties in the same way as for a regular buy-to-let mortgage. 

However, it is a good idea to search for the right lender beforehand who can provide affordable rates and easy terms and conditions. A mortgage broker within this area can be very helpful for such purposes. 

After finding a suitable lender, you will need to file an application and submit the required documents, which can vary from lender to lender. 

Remember, putting down a larger deposit and having a good credit score can significantly increase the chances of getting the application accepted. 

Advantages of Portfolio Mortgages

1. Enhanced Tax Efficiency

Funds withdrawn from your portfolio are taxed collectively according to the latest tax changes where corporation tax has been increased to 25%. This advantage goes beyond the scope of this article and really should be discussed with a suitably qualified tax advisor in this area.  

Disclaimer: When it comes to taxes, this is just general advice and not to be relied upon as fact. When it comes to tax everyone’s position and circumstances are different and the rules are changing all the time. Only by seeking advice of a qualified tax professional can you be certain you are complying with all the relevant tax rules & regulations.

2. Simplified Financial Management

You only need to deal with a single lender instead of multiple ones and need to repay a single mortgage, making financial management simpler. 

3. Greater Predictability

With a commercial portfolio mortgage, it is easy to predict the future as far as repayment capability is concerned. This is because you have complete knowledge of your business plans and cash flow. 

4. Flexible Criteria

The eligibility criteria for a portfolio mortgage are generally not as stringent as those for other mortgages, and getting your application accepted tends to be easier in such cases. This will not always be the case of course

Drawbacks

1. Higher Fees And Interest Rates

The risk involved in offering a portfolio mortgage is greater than with regular mortgages, so lenders may charge higher interest rates and fees.

2. Requires Expert Advice

Commercial portfolio mortgages are among the more complicated offerings offered by lenders for commercial properties. Because of this, they usually require specialised support and expert advice. It also may be difficult to find a mortgage broker who has the required experience in this area. 

3. Business Plans And Financial Projections Needed 

A lender will want to make sure you can repay the mortgage before accepting an application. For a commercial loan like a portfolio mortgage, this requires having a proper business plan with accurate financial predictions. 

FAQs

1. What are commercial property portfolios with respect to portfolio mortgages?

A commercial property portfolio refers to a collection of investment properties and is usually used for diversification of the property portfolio. It also helps spread the risk across multiple investment properties.  

2. Which lenders offer commercial portfolio mortgages?

Some of the best-known lenders offering commercial portfolio mortgages include:

• Hodgebank
• Aldermore
• Yorkshire Building Society  

3. How do lenders determine suitability for a commercial portfolio mortgage?

Lenders require information regarding the financial projections for the business when offering a commercial portfolio mortgage. For this, they generally use a rent-to-interest (RTI) cover calculation. 

4. Are commercial portfolio mortgages interest-only or repayment mortgages?

Commercial portfolio mortgages are available as interest-only and repayment options.   

Conclusion

Portfolio mortgages can make it incredibly easy to manage multiple mortgages and are an excellent option for landlords with more than three properties. They can also be used to expand your portfolio and increase borrowing limits, which are additional advantages. 

Furthermore, your risk is reduced by placing the property portfolio under a single mortgage. This means there is no need to deal with multiple lenders and worry about different interest rates and mortgage fees.  

That said, a portfolio mortgage may not be suitable for everyone. For instance, you may not be able to afford the higher fees associated with such mortgages. 

Or you may have less than four properties and may want to manage each one individually. In such cases, a regular BTL mortgage might be more than enough.  

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.