When buying UK property, we’re often told that if you have the cash to buy outright, you should do so. There are definite benefits to purchasing property in cash, however, for landlords and property investors alike, you could be missing out on a lucrative opportunity by not leveraging your capital efficiently.
In this blog, we’ll explore how you can use buy-to-let mortgages to improve the long-term benefits to you of investing in property.
Let’s take a look at the numbers through some worked examples:
Scenario: Buying a buy-to-let investment property in cash vs buying two investment properties leveraging mortgages
In this scenario, we’ve compared buying a property worth £144,000 in cash with using mortgages to buy two properties (both also worth £144,00) to explore some of the potential advantages.
|
Buying 1 Property in Cash |
Buying 2 Properties Using Mortgages |
|
|
Number of Properties |
1 |
2 |
|
Individual Purchase Price |
£144,000 |
£144,000 |
|
Stamp Duty Land Tax (SDLT) |
£4,320 |
£8,640 |
|
Other Costs |
£3,500 |
£7,000 |
|
Loan to Value (LTV) |
0% |
60% |
|
Deposit Required |
£144,000 |
£115,200 |
|
Total Investment |
£151,820 |
£130,840 |
|
Yield |
8.4% |
8.4% |
|
Mortgage Interest Rate |
6.79% |
|
|
Gross Rent |
£12,000 |
£24,000 |
|
Interest Payments |
£0 |
£11,733 |
|
Property Costs (Ground rent, etc.) |
£1,180 |
£2,359 |
|
Cash Flow |
£10,820 |
£9,907 |
|
Investment Yield |
7.13% |
7.57% |
When taking out mortgages for two properties using a 60% LTV, you invest around £20,000 less of your personal capital and also benefit from having an additional property. Although your initial cash flow is lower than when you buy a single property outright due to the interest payments that come with mortgages, owning the two properties still boasts a higher investment yield.
One of the major advantages of having multiple properties under your ownership is the capital gain which is accumulated over the years. If we take a conservative estimate of a 4% capital growth per annum, we can see the property value growth over the years.
|
Buying 1 Property in Cash |
Buying 2 Properties Using Mortgages |
|
|
Capital Gain |
4% |
4% |
|
Profit in 5 Years |
£23,378 |
£46,756 |
|
Profit in 10 Years |
£61,335 |
£122,670 |
|
Profit in 25 Years |
£232,060 |
£464,121 |
By investing in more properties by using mortgages, you see the accumulation of significant capital gains. Looking at the table below you can see that you make your money back far quicker with multiple properties. Over 25 years, the return is significant and you can clearly see how investors are able to leverage debt for high buy-to-let returns.
|
Profit (as a multiple of the investment - 1x indicates a double in your investment) |
Buying 1 Property in Cash |
Buying 2 Properties Using Mortgages |
|
5 Years |
0.6x |
0.8x |
|
10 Years |
1.3x |
1.9x |
|
25 Years |
4.8x |
7.1x |
So… is using buy-to-let mortgages for your leveraging strategy worth it?
When investing in property, mortgages allow you to leverage your capital in a more meaningful, efficient way. You are able to benefit from greater capital growth from properties which you didn’t finance entirely yourself - this also affords you the opportunity to place your capital into multiple properties, spreading your risk and your opportunity.
Interested in exploring further the benefits of buy-to-let mortgages? Book in a call with us and see what mortgaging options are best for you.