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Property Portfolio Tips

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Aims, Strategy and Goals 

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 looking 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.  

Increase net rental income with interest only products  

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 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. An example of a recent case we worked on is below:

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 
Cashflow increased by £30,374.16 per annum with the interest only product.

Higher Loan to Value  

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. 

Keep an eye on your current lending agreements 

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.   

Tax efficiency

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. 

Property ownership – Ltd Company or Personal Name

It is crucial 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 also be able to secure a higher LTV or a lower rate depending on your ownership structure. 

Fixed or Variable Interest Rates?

A fixed rate mortgage locks the interest rate for the term of the product (this is usually 2-5 years). Fixed rate products make financial forecasting and portfolio reviews easier to manage as monthly expenditure remains 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 change in the market.  

A variable rate product sets the interest rate on completion. This is then added to the fluctuating rate of the Bank of England Base Rate or your lender’s LIBOR. Variable rate products allow for fluctuation on the rate of interest you pay. This means some months you may pay more than expected and other months you may pay less. A variable rate product usually does not have ERCs (early redemption charges) meaning you can exit the loan whenever you want with no additional charge. However, you must always discuss this with your broker as ERC policies differ by lender.

Portfolio Review

Still considering your portfolio finance options? Speak to our commercial team who can arrange a one to one, free of charge portfolio review to discuss your options. Contact the team.

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