Should I pay for buy to let with cash or a mortgage?

Question

I am thinking of purchasing buy-to-let properties, would it be best to pay with cash or a combination of cash and a mortgage? As properties have soared in price, is now a good time to buy or should I wait until the market levels out?

JM/Middlesex

Answer

Using a mortgage to buy a property to let is, for many, a necessity. However, even when there is the option to pay entirely with cash, some may still prefer to use a mortgage.  

That might be to help them spread their investment across more properties to maximise the return, rather than ploughing everything into one property. If one property has a void in tenancy, there could still be rental income coming from the other properties. The downside is that there is a mortgage payment that must be met, whether the property is let or not.

The other reason that some landlords will take a mortgage against a buy-to-let property is that they can set the mortgage interest against the rental income for tax purposes.  

Mortgage lenders will typically want at least a 25% deposit and will assess the borrowing level based on the rental income covering the mortgage interest by a certain margin, typically 125%.

Much will depend on what you hope to achieve from the investment and how comfortable you would feel in keeping up with mortgage payments when there is a break in the tenancy. Remember that mortgage rates could also rise, which would eat into your returns.

As to whether it makes sense to buy now, you clearly need to work out your budget, being sure to factor in other costs such as management fees, maintenance and voids
in tenancy.

It’s not possible to second-guess whether prices will keep rising, level off or even fall back, so it makes sense to focus on getting the right property that will have ongoing appeal and strong tenant demand.  Buy to let should be approached as a medium- to long-term investment, given the costs to buy and sell property.

David Hollingworth

David Hollingworth

is a mortgage expert at London & Country Mortgages in Bath.