How to remortgage a buy to let portfolio
Changes to tax and regulations mean that landlords' finance needs to work harder for them to ensure the profitability of their rental property holdings.
Good returns aren't only available to those who "stay small". But the new financial landscape does mean that investment property owners can't afford to let the mortgages on their portfolios coast along in neutral.
If you want to ensure future profitability or to have funds available for further growth, it pays to take a cold, hard look at your property finance now.
First of all: are you a "portfolio landlord"?
From October 2017, the catchall phrase acquired a specific regulatory meaning regarding the finance available to investment property owners.
From that date, the UK's Prudential Regulation Authority (PRA) defined a portfolio landlord as "borrowers with four or more distinct mortgaged properties, either separately or together, in aggregate."
- For example, if you own six rental properties but only three are mortgaged… you're not a portfolio landlord.
- If you own ten rental properties, six of them are owned outright… you are a portfolio landlord.
- If you own three investment properties on BTL mortgages, and you're trying to sell your own home, but it's not finding a buyer, you decide to let it out instead… you will be a portfolio landlord.
But what if some of your properties are held within a company structure?
More on that below – and other circumstances which a good mortgage broker will know could work for or against you.
How does portfolio size affect the finance available to landlords?
When the PRA redefined the size of property portfolios, they made two important changes to how mortgage finance could be assessed for them.
The changes to the Interest Coverage Ratio (ICR) applied to landlord lending were intended to ensure that they could manage their repayments if interest rates should increase significantly. And to cover rental voids and the cost of significant repairs or refurbishments.
How does the stress-testing work?
1 BTL mortgages would be based on landlords paying 2% above their actual interest rate, or a minimum of 5.5%:
- If your BTL mortgage rate is 3%, you'll be affordability-tested at 5.5%
- If your mortgage rate is 4.5%, you'll be assessed at 6.5%
2 The rental value must be 145% of that figure.
Whole-portfolio stress testing
Lenders must now consider the financial resilience of all the properties a client owns rather than assessing each borrowing application in isolation.
The effect could make it more difficult for losses sustained by individual properties to be buried amongst the rental incomes generated by other properties owned. These could include poorly-performing buy to let properties which arguably should be scrapped:
- A property that turns out to be in the wrong location attracts the rental return you need.
- A house with too-few bedrooms to fit the number of tenants which will cover its running costs.
But it could also include property holdings whose returns might be calculated differently:
A high-value property (for example, in London) might have been purchased for its capital gains potential, but it will struggle to wash its face with its monthly rental return.
The 2017 regulatory changes only applied to new BTL mortgages, not those already in place. You may still have longer fixed-term BTL mortgages unaffected by the new portfolio regulations.
So before we look at the potential workarounds for the issues you may face, we should look at the potential advantages of refinancing.
How could portfolio refinancing help me?
1 Access better interest rates
You may be sitting on BTL mortgages fixed at higher rates than those available now. We're currently (Jan 2020) sourcing two-year fixed BTLs at 1.37%
2 Change from capital to interest-only repayments
Some landlords have chosen capital repayment BTL mortgages in the past because they might prudently choose capital repayment for a residential mortgage.
But you may not have considered the implications for capital gains tax when you come to sell an investment property: repaying capital exposes you to the possibility of more capital gain to be taxed.
The ability to sell rental properties to repay the capital investment without personal upheaval means that there may be many good reasons to reap the benefits of substantially reduced monthly mortgage payments.
3 Take advantage of enhanced LTV to gain a better interest rate
Investment properties bought with an eye to capital gain and rental return might now be revalued and remortgaged at a lower loan-to-value – and a lower interest rate. Improvements in rate might be as good as 75% LTV at 3.55%, reducing to 2.5% at 60% LTV.
4 Release capital for refurbishments or further investment
If you need to access some of the value locked up in your investments, remortgaging at improved LTVs, or taking out mortgages on previously unencumbered properties, can release a powerful amount of finance that can be put to work.
How can you get the portfolio borrowing you need?
Mainstream lenders apply the ICR criteria at 5.5% and 145% inflexibly to every property within a portfolio.
But specialist lenders manage their risk exposure by applying the criteria differently. A well-connected specialist mortgage broker will be aware of these variations and will be able to select a lender that suits your particular circumstances.
Your attractiveness to different lenders could depend on variations such as:
- The total value and number of properties in your portfolio
- Rental returns
- Other income (from salary)
- Your credit record
And the variations available from different lenders which could work to your advantage include the following:
- ICR may range from 120% to 145%
- The assumed rate may range from 2% to 5.5%
- Lenders may not include properties owned by a corporate structure in the same portfolio as properties owned in your name
- Some lenders are more willing than others to lend on high-value properties or multi-unit freehold blocks
- Once the total portfolio has passed the stress test, different lenders may be able to be more flexible on the rates for individual properties for fixed terms of more than five years. The number of lenders willing to consider portfolios of more than ten properties is reduced, and fewer still are willing to lend on portfolios of more than 20 properties
- But some lenders are only focused on the number of properties mortgaged with them – they're not concerned about the overall size of your portfolio
Only a well-connected broker will know which finance houses will consider the circumstances of your application. This is undoubtedly a situation where you need expert, individual advice and an application tailored to a lender's requirements.
What property portfolio information will you need to supply?
- A portfolio summary of property values, mortgage values and payments, and rental returns
- Your business plan for your future portfolio strategy, including rental changes, refurbishments, acquisitions and divestments
- Tenancy agreements, management company agreements and bank statements for each property
- Complete tax returns
- Cash flow forecasts
Talk to us
Portfolio finance is necessarily complex, and it's only an independent broker who will examine the details of all your property holdings and look at all the options available across the market to give you impartial advice about the structure of finance that will suit your current needs and plans.
We're not tax advisers, and we'd always recommend you get specialist tax advice. But we will flag up the possible advantages or disadvantages of any proposal.
Get in touch, and we'll set up an appointment for you to talk in detail with one of our portfolio finance experts at a time that's good for you:
And if you've found this blog useful, do pass it on...