Buy-To-Let: Cash Buyer vs Mortgage

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Purchasing an investment property with cash only can be advantageous to those who have the capital to invest. However, there are pros and cons of using only cash as opposed to using a debt to fund the purchase.

Paying with cash: 

The pro’s to an all cash purchase:

  • You can snap up property faster when you pay cash. It will typically take 4-6 weeks for a mortgage to be finalised which can delay the conveyancing process.
  • As a result, cash buyers are more attractive to sellers because there are fewer delays and a greater guarantee that the deal won’t fall through. If you are going for a property with several other interested parties, being a cash buyer will make you a far more attractive option and you may even pick the property up without being the highest bid.
  • You’re not having to pay interest on a loan. Buy-to-let mortgages are normally interest only. If the property is rising in value you will still make a profit but if the property falls in value, it can leave you in a tricky spot.

The con’s to an all cash purchase:

  • The first and most obvious downside to buying a property with all cash is the need to have a large amount of capital free.
  • Taking a large amount of liquid capital and investing into a property which is an illiquid investment should be considered. If you have cash flow difficulties in the future, in order to liquidate your investment in the property you may have to sell at a below market price.
  • You can’t utilise the power of leverage when you pay with only cash and makes it harder to build a larger and more diverse portfolio. Serious property investors will always utilise leverage in order to help grow and diversify their portfolios.

Both pro’s and con’s mentioned above should be used as food for thought when deliberating your decision. Before making an offer on a property we always advise speaking to an accountant or property professional as everyone’s financial situation is different.

Buy-To-Let Mortgages

But-To-Let mortgages are a different product from residential mortgages and have different criteria and rules that must be followed. Most mortgages are interest only and no monthly capital payments are made. Higher deposits are almost always required with a minimum of 25% but you will be able to find better deals if you have a 40% deposit or more.

The amount you can borrow is based on how much rent you can realistically charge. Lenders usually require rental income to be 125% of the monthly repayments. For example, if your mortgage payments are £500 pm your property will need to have a minimum income of £625 pm.

According to the 2018 English Private Landlord Survey, 55% of landlords had a mortgage, with mortgages being found with landlords who have larger portfolios.

  • 49% of landlords with a portfolio age of < 3 years had a mortgage
  • 58% of landlords with a portfolio age of 4 to 10 years had a mortgage
  • 54% of landlords with a portfolio age > 11 years had a mortgage

The Pro’s of Buy-To-Let Mortgages

  • Using mortgages across multiple properties is a common strategy used by serious investors looking to grow a large portfolio. The strategy is known as “gearing” and can be very lucrative especially in a low interest environment.
  • By having a leveraged portfolio you will enjoy higher investment returns.
  • Unless you have a significant sum of money, mortgaging means you can purchase more properties and build a larger and more diverse portfolio which can protect against market changes and voids.

For example, if you have £100,000 of liquid capital available for investment in the property market,  you could buy 1 property worth £100,000 or you could buy 4 with a 25% deposit + mortgage. If the market grows by 10% and you have only 1 property, your gains will be £10,000. However, if you have 4 properties you will have gained £40,000.

The Con’s of Buy-To-Let Mortgages

  • After the implementation of Section 24 interest relief is no longer available and cannot be deducted from rental earnings. You can find out more about the impact of Section 24 in our BLOG.
  • It’s not easy to get approved for a buy-to-let mortgage. Lenders look at a wide range of factors including age and credit history and they already expect you to own a home with a residential mortgage or outright. In addition, lenders will look for you to be at least 25 years of age and have an annual income of more than £25k.
  • Interest rates are at an all time low which is an immediate advantage but can also leave you exposed to future interest rate increases. (find out more)
  • Borrowing money is always a risk with many external factors playing a significant role in this risk. Borrowing large sums of money should never be underestimated and if you can’t meet your repayment obligations, it can unravel very quickly.
  • Be prepared for void periods where you may have to cover the interest payments when you have no rental income for the property.
  • Beware of negative equity and the impact this can have if you need to sell the property before the market has the chance to rise again. In a falling market, demand for housing plummets and it can take months to sell a property. If you sell the property for less than the mortgage value you may still be left with a debt to the bank and no property to show for it.