To Borrow or Not to Borrow: What’s the best strategy to invest in Buy-To-Let ?

Posted on February 7th, 2020.

When it comes to investing in property, is it better to take a mortgage or to buy a home using your own cash? In this week’s article, we explore the old adage of cash is king.

Those investing in property for extra income or to fund their retirement have seen diminishing returns under the new tax rules phased in by HMRC since 2017.

Buying a property outright seems the way to go as mortgage interest can no longer be off set against the tax liability.

Speaking with my colleagues in financial services, we found that landlords can still generate higher returns by borrowing and spreading funds over two or more properties. This also considers professional fees, insurance and maintenance costs. This aroused my curiosity, so I’ve put together an example for comparison based on a total investment of £100,000. This is buying outright v’s buying 2 properties with mortgage loans.

Purchase a single property outright

To buy a property for £100,000 it will generate around £500 per month in rent. Accounting for fees, insurance, maintenance and Stamp Duty , the net income is £380 per month. Over a typical 5-year period that is equal to £22,800.

Once stamp duty, management fees, insurance costs and general upkeep are considered, the landlord should expect to bring in £380 per month, equivalent to £22,800 over a five-year investment period.

Purchase 2 properties with mortgages

In this scenario, spreading the funds could buy two £100,000 homes. One with a mortgage of £60,000 that would cover the cost of Stamp Duty , legal and broker fees. The other property bought with a £50,000 mortgage.

On a typical 5-year fixed rate loan of 2.5% plus other costs, the outgoings are £477 per month.  From the £1000 per month rental income that would leave a gross return of £523 per month. Accounting for mortgage tax relief  of 20%, the owner would have a return of £570 a month or £34,200 over the 5-year period. 

See the graph below for comparison of the cumulative incomes over a typical 5-year period.

To borrow or not to borrow ?

The mortgaged example would create an extra £11,400 in rental income compared to buying a single property outright. Buying two properties gives a buffer for any void period on the other.

This scenario works well as we have historically low mortgage rates. Any interest rate rises would diminish the Landlords profit margin.  The landlord also must weigh up the costs of maintaining two properties.

By taking advantage of low interest rates, it can help Landlords to maximise the income potential across their portfolio. There are also higher fixed costs in terms of Insurance and maintenance with 2 properties. Fluctuations in house prices will mean the Landlord will be highly exposed to any falls in values, but equally benefit when prices rise.

If you are a Landlord and would like to know more about maximising the income potential of your investments, and fancy a chat about the market then give me a call on  020 8366 9777 or drop me a line [email protected]