Treated as a kind of ‘mortgage account’ by the lender, a portfolio mortgage can incorporate mortgages for a variety of properties, possibly with varying interest rates across the grouping. The rental income from all the properties and the loan-to-value rates are averaged out across the portfolio, so that the total surplus equity can be used in the borrower’s favour when looking to add more dwellings to the group.
One example would be a landlord whose portfolio has a total value of £2.5M, with an outstanding amount on the collective loan of £1.5M. If we assume that the maximum loan-to-value ratio is 75% (in this case a value of £1.875M), this would give you a surplus of £375,000 with which to extend your portfolio further.
And if this landlord buys a property for £200,000, they would still have an available credit of £325,000. This is because once the new property is added, the new total portfolio value will be £2.7M, with an outstanding loan amount of £1.7M. Again, with a maximum loan-to-value ratio of 75%, this leaves £325,000.
In this way, you can see that the more properties a landlord owns, the greater the risk is spread across them. Not only does it become easier to use the total credit facility afforded by this kind of portfolio management, but it allows for income from all inhabited properties to make up the difference during periods where income from one or two properties may drop due to standing vacant.