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Buy to let investment – is cash or a mortgage best?

8 July 2014

Buy-to-let InvestmentBuy to let landlords often ask accountants about the best way to invest – in cash or with a mortgage?

The typical answer is there is no best way, as different investors have different personal financial and business circumstances.
Most landlords would buy with a mortgage to spread investment risk across more than one property.

For instance, an investor with £250,000 in cash would split the amount over two or more homes and take out mortgages for the rest of the purchase prices.

This gives several benefits:

• Risk is reduced as the investment is split over more than one property
• Yields and profits probably increase as two or three properties will generate more income and growth in value than a single property
• Tax relief on mortgage interest paid reduces the tax due on rental profits
• If the property is part of a portfolio, rental profits from let homes can offset the mortgage costs of any time another property is standing empty awaiting a tenant

Some landlords buy in cash and then remortgage up to the value of their original investment to repay their own home loan. This way, their property business pays the interest on the loan and gains tax relief that is not available on the investor’s own home.

Many buy to let lenders offer mortgages of up to 75% of the value of a rental property – leaving the investor to fund the remaining 25% as a deposit.

Affordability is not based on the investor’s personal income, but on a rental assessment.

Generally this means 125% of the monthly rent should cover the repayment. For a mortgage of £100,000, the monthly mortgage interest payment at 5% is £416 a month. Rent cover at 125% is £520 a month – so the tenant should pay at least that amount.

If the rent cover is less, the lender will reduce the loan so the rent is set at 125% of the monthly payment.