Whether you are starting to build, or looking to grow, your portfolio it is essential to understand your objectives from the outset. For example, are you Property Portfolio Tipslooking to grow your portfolio, increase monthly cashflow, pay off capital, release equity or improve tax efficiency. Discuss your long-term goals with your broker at the outset so they can advise on the best options and products to suit your specific needs.
Switching to interest only repayments, rather than capital and interest, is a quick and easy way to increase net rental income. You will only pay the interest that you have incurred on the loan, rather than the interest + a portion of the loan. You can potentially increase your net monthly cash flow by 50% using interest only payments. Please see the example below from a recent case we worked on:
Property value – £500k
Loan amount – £374,999
Monthly repayment (interest Only) – £1,440.03
Annual payment – £17,280.36
Term – 10 years
Property Value – £500k
Loan Amount – £374,999
Monthly repayment (full capital and interest) – £3,970.46
Annual payment – £47,645.52
Term – 10 years
Total monthly cashflow increase using interest only products rather full capital & interest repayment – £30,374.16 per annum
If you opt for an interest only loan, you will benefit from a higher loan to value deal. A lender will undertake a ‘stress test’ when reviewing your application. A stress test compares rental income against mortgage payments to check you can afford the loan.
The stress test on an interest only product is less stringent in comparison to a capital repayment product. Opting for interest only works well if you are trying to build your cash reserves, to either add additional properties to your portfolio, or fund other projects.
Always keep a close eye on your mortgage agreements so you can assess when to start the refinance process. If left too late, you will have no choice but to pay a reversionary interest rate, which is usually an additional 1-2% per annum. We recommend allowing a minimum three-month window for the refinancing process as things can crop up during the valuation and legal process that take time to resolve.
Be sure to speak to a qualified, independent tax advisor to ensure you are making the most out of potential tax benefits. A tax advisor will review your portfolio’s efficiency and will provide the right foundations for future growth.
It is imperative to review your ownership options before purchasing properties and building your portfolio. One of the most commonly asked questions is, “should I buy in personal name or Ltd company?”
You should discuss the pros and cons of ownership structure with your tax advisor before making a decision. You should also discuss this with your mortgage broker as your property ownership structure dictates how a lender tests the affordability of your loan (i.e. maximum loan amount based on rental income). You may be able to secure a higher LTV or a lower rate depending upon your choice of ownership.
When choosing you mortgage product there is usually a fixed rate product or a variable rate product. A fixed rate product is when the quoted interest rate is locked in for the term of the product (this is usually 2-5 years). The benefits of using a fixed rate product is that it makes it easier to create financial forecasts and reviews of your portfolio as monthly expenditure always stays the same (up to the end of the fixed rate term). On a fixed rate product, you will not have the risk of your monthly payments increasing in case of a sudden drop in the market.
A variable rate product is when you have a set interest rate on completion, which is then added to the fluctuating rates of the Bank of England Base Rate or your lender’s LIBOR.
Usually the variable rate products look attractive at first as they always seem to be lower than fixed rates. You must always read the fine print below your quoted product which states that it is + Base Rate or LIBOR. A variable rate product usually does not have ERCs (early redemption charges) meaning that you can exit the loan whenever you want with no additional charge. However, you must always discuss this with your broker as some lenders have different ERC policies.