Moving from a portfolio of 1-3 residential properties to a portfolio of 4-10 or more properties requires more than just additional purchases. Operating as a professional landlord requires careful thought and planning to ensure you have considered regulatory requirements, stricter financing criteria, tax-efficiency and the economic/interest rate environment. The impact on a landlord’s ability to secure the right mortgage will be critical to economic success.
Who is a portfolio landlord?
A portfolio landlord is a borrower with four or more distinct mortgaged buy-to-let (BTL) rental properties. This includes:
- properties owned through a limited company/partnership
- and all BTL mortgaged properties owned solely or jointly by the applicant(s).
Additional mortgage criteria for portfolio landlords
When considering a mortgage application for a portfolio landlord, lenders are required to carry out additional affordability checks. During the underwriting process the borrower will be required to provide the following:
- full details of all existing properties owned (fully or partly) including rental income, current loan to value, mortgage term, monthly payments;
- cash flow forecasts and business plan;
- submitted tax returns (personal or corporate)
The lender will use the information to assess the landlord’s ability to afford the mortgage applied for by stress testing the existing portfolio alongside the new purchase and new mortgage.
What financing challenges do portfolio landlords face?
Many lenders will have some form of additional restrictions that apply to portfolio landlords:
- Limit the overall loan to value across the whole buy to let portfolio;
- Maximum amount of borrowing extended to a landlord
- Apply a higher Interest Coverage Ratio (ICR)
What is ICR?
As part of the mortgage approval process lenders need to understand the borrower’s affordability. For BTL mortgages, affordability is typically assessed by looking at the ICR. Most lenders apply a formulaic approach which takes into consideration gross rental income, borrowers’ income tax bracket, monthly mortgage payments (including a potential increase in interest rates) and property maintenance costs.
Each lender will have their own ICR requirements/policies depending on:
- Type of landlord – e.g. portfolio/professional or ‘accidental’
- Landlord’s financial circumstances, other sources of income and marginal tax rate
- Property type – HMO, holiday let, student etc
- Product characteristics e.g. different stress tests for 2-year and 5-year fixed rates
How the Kinnison Team can help
Transitioning to Professional Landlord status can be a complicated process. The team can:
- Review your existing property portfolio and advise you on your funding options;
- Undertake research of the mortgage market and discuss your circumstances with appropriate lenders;
- Prepare and collate all the documentation required for the mortgage application;
- Help to predict and answer questions which the bank underwriter may have;
- Work with your conveyancing lawyer to complete on your purchase/refinance.
ICAEW Property Investor Webinar
If you would like to hear more about the transition process, the regulatory and structuring considerations of becoming a professional landlord please register to join the ICAEW Property Investor webinar on 25th March.
Get in touch
If you are currently looking for a buy-to-let mortgage or to refinance an existing mortgage and would like to discuss your personal position, please contact the Kinnison team:
Email: [email protected]
Call: 0203 871 2824