Buy to Let Mortgages in Sussex
What is a Buy to Let?
A buy to let is a property purchased with the intention of renting it out to tenants. You can make a hefty profit as an investor of a buy to let property, you just need to make sure you plan appropriately and weigh up the income with the costs. It also imperative to seek tax advice before embarking on a buy to let investment.
Successful buy to let investing in the current housing market is not without its challenges, like all investments, there are risks associated with investing in the buying to let market, increased taxes, greater regulation and higher cost are all realities of today’s private rented sector.
Being a landlord requires a lot of time, planning and capital. You need a thorough understanding of your capacity, aims and finances to ensure that your strategy is realistic and aligns with your budget.
Differences of a Buy to Let Mortgage
There are 4 main differences in buy to let mortgages:
- Rent Potential – the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases, your income is not ever considered.
- Interest Rate – buy to let mortgages have slightly higher interest rates.
- Larger Deposit – typically a minimum of 20% or 25% of the property’s value is required as a deposit.
- Tax implications – we recommend you seek independent tax advice. Stamp duty land tax has a 3% surplus charge for any residential investment purchase.
When buying a second property to let, you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property if it increases in value over time? The decision may affect the type of property you purchase, and the location.
Managing a Property
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental properties' interest only mortgage repayments in order to cover your costs should anything go wrong.
We are buy to let mortgage specialists in Sussex. We guide a range of clients from First Time Landlords to experienced Landlords to help them obtain the very best buy to let mortgages. Our services are authorised and regulated by the Financial Conduct Authority.
Buy to Let Portfolio
Portfolio mortgages can simplify finances for landlords, as that’s what they’re primarily designed for. With changes in tax and stamp duty laws, landlords are forever looking at methods to increase their investment income.
Further changes have reduced the amount of tax relief a landlord can claim. For instance, it’s no longer possible to offset interest as an expense like in previous years.
Corporation tax will also remain at 19% for annual profits in the 20/21 tax year. As a result, more landlords are considering placing their portfolios under limited companies and moving to a single portfolio mortgage.
For landlords with multiple properties, or those aiming to grow their portfolios, a portfolio mortgage could be something to consider. Placing an entire portfolio under one mortgage can be beneficial, especially with a large number of properties.
Lenders will usually approve portfolio mortgages to landlords with at least four buy to let properties or a minimum value of the portfolio (around £500,000 minimum).
Portfolio mortgages can also be obtained for apartment blocks and larger portfolios. Accountants recommend landlords have at least five properties for a portfolio mortgage to be viable.
What is a Portfolio Mortgage?
A property portfolio is a term used for when a landlord has at least four properties. Technically, a portfolio could consist of two properties. From a lender’s perspective, they would usually class four properties to be the bare minimum for a portfolio.
A portfolio mortgage allows landlords to place all of their buy to let mortgages under one mortgage and is treated as a single account. Rather than having separate lenders for each property, the entire portfolio is undertaken by one lender, hence one monthly payment.
The portfolio is registered as a limited company and finances and expenditures are treated exactly the same as any other business model.
If a landlord had ten properties on separate mortgages, then there would be ten monthly outgoings to multiple lenders. A portfolio mortgage allows landlords to solely focus on a single mortgage payment each month to a single lender. One monthly mortgage payment is perhaps easier to manage in comparison to multiple payments across the month.
Lenders introduced portfolio mortgages to allow landlords to manage their buy to let finances with greater clarity. Rather than having multiple mortgage statements, portfolio mortgages allow for one monthly statement and one payment, simple.
Landlords with portfolios don’t have to have a portfolio mortgage and it is entirely optional.
Portfolio Mortgage Rates
Buying new properties under a limited company will tend to have higher rates when compared to purchasing a buy to let using traditional methods. This is because lenders take on more risk as they’re lending to a company that is limited.
If a limited company goes bust, lenders may find it difficult to retrieve any debts. That being said, as more landlords are using limited companies to purchase properties, lender fees are becoming more competitive.
Portfolio mortgage rates are calculated on existing rates across your portfolio. If you have ten properties for instance, 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.
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.
Advantages of having a Portfolio Mortgage
All mortgage types will usually have positives and negatives. It’s difficult to explain whether or not a certain mortgage type will be advantageous to you without understanding your personal circumstances.
That being said, portfolio mortgages offer a range of advantages which are outlined below.
Make a Portfolio Tax Efficient
A portfolio mortgage can allow you to become more tax efficient. This is because of the tax changes discussed above. Funds withdrawn from a portfolio are now taxed as a whole, rather than paying tax solely on net income.
If a landlord retains funds in the portfolio, funds can then be used to renovate or even purchase additional properties. By doing this, landlords will pay the lower rate of corporation tax 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 they’ll only be one monthly payment.
Using Equity to Grow your Portfolio
Equity in your portfolio can be utilised to increase your portfolio further. If for instance the portfolio was valued at £1 million and the outstanding mortgage balance was £600,000, the portfolio would 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!
Boost your Borrowing Power
Under-performing properties in a portfolio can sometimes be a warning light for lenders, especially when requesting further finance. For instance, there may be properties in the portfolio that aren’t generating as much profit as others.
Lenders often view under-performing properties as liabilities. If 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. 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 perhaps a rare time when keeping all your eggs in one basket is a good idea!
Disadvantages of a Portfolio Mortgage
There aren’t any major disadvantages as such, but it depends on how your own individual finances are structured. Using a mortgage to buy a property is always a risk, in the case that mortgage payments can’t be met.
Buy to let property is no different, as any investment typically has an element of risk involved. Growing a portfolio increases further risk, as there are simply more properties 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. The entirety of your portfolio payments will need to be paid all 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.
There are also possibilities for property values and rental prices to decrease, so always be prepared for worst-case scenarios.
Lenders that offer portfolio mortgages will require you to have your portfolio under a limited company. Migrating properties into a limited company can be expensive and managing a company that is limited has increased administrative duties for which they’ll be a cost.
You’ll more than likely need a professional accountant for instance. 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.
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 whole of market access, our experienced specialists can tailor information suited to your own 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.
Transparent Mortgage Services are authorised and regulated by the Financial Conduct Authority.