Should I Buy Property with Cash or a Mortgage?

If you are in a fortunate position to be able to buy a property outright for cash, you may be considering whether or not to buy the property for chase, or, with a mortgage?

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If you are buying a property to live in, it is good to know that the property is completely yours and you don’t have monthly mortgage payments, but if you are buying a property for investment, most investors want to achieve the highest returns possible; therefore, leveraging your purchase is the best means to achieving higher returns.

Higher Returns

Buying a property for cash would mean you own 100% of the property outright and don’t have a mortgage, but your returns are likely to be around 5% if you bought in the North of England and much lower in the South of England.

Buying a property with a mortgage allows you to leverage your purchase, also known as gearing.  

With low interest rates providing an increased Return on Capital Invested (ROCI) makes this appealing to many property investors.

Mortgage lenders for the buy-to-let market offer either capital and interest payments, i.e. repayment, or, interest only payments. If you choose interest only, it will lower your monthly costs and increase your returns, but it will not repay any capital.  

Leveraging Your Investment

Purchasing a buy-to-let investment property with a mortgage allows you to leverage your purchase, enabling you to increase your purchasing power and benefit from low interest rates from mortgage lenders.

For example:

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Spreading the risk

With the ability to mortgage property and leverage your purchase, many buy-to-let investors choose to spread their funds across multiple properties in different cities, or, regions.

Whilst undertaking extensive due diligence on the likely future performance of a development, city, or, region, no one can predict the future, so spreading your investment is a strategy to de-risk your property portfolio.

Cash Purchase Property

Property investment with higher returns typically comes in the form of smaller units that are designed for the student, or, accommodation for young professionals / commuters.

This type of property cannot be mortgaged in most cases, due to the size and restriction on use for student property. These types of developments tend to be office to residential conversions, which also have their challenges with raising a mortgage.

You may wish to consider diversifying your portfolio of traditional residential property with a cash purchase property.

Negotiating a deal

Negotiating the purchase of a property as a cash buyer can be very attractive to a property seller, who may favour a lower offer from a cash buyer than a higher offer from a mortgage buyer.  

Purchases have a higher likelihood of not completing with mortgage buyers as they are having to satisfy a lender, who may even change their lending criteria during a transaction, or, even withdraw their offer.

If you have the ability to buy with cash, it may be worth considering purchasing with cash and then re-mortgaging the property 6-month’s after you have completed. If you have secured a good level of discount and property prices have increased, you may be able to leave less money tied up in the property, allowing you to build up your property portfolio.

Ability to raise a mortgage

Mortgages are subject-to-status and are by no means guaranteed.  

Lenders will take into consideration many factors on the applicant including, but not limited to:  

• Your income
• Your age
• Country of residence
• Employment status
• Credit rating  
• Existing mortgages  
• Experience as a buy-to-let investor

They will also consider various aspects on the property, such as:

• Type of build – is it a new build, existing property, or, an office conversion
• Permitted use – is the property permitted for C3 residential use, or, limited to use by students, intended for use as a serviced apartment, etc.
• Size of the property – most lenders do not lend on properties below 30 square metres, but these are a typical size for a student studio apartment, or, a property designed for the young professional market  
• Location of the property – lenders restrict their level of exposure in certain areas and also in a building
• Lease – any aspects of the Lease, such as the ground rent being too high, ground rent review terms, a short-term remaining on the Lease, etc.
• Materials used for construction – some lenders have restrictions on steel framed houses and types of cladding used
• Rental coverage – many lenders require a minimum of 125% of coverage of rent on the mortgage payments, also allowing for rate increases  

The criteria that mortgage lenders apply can narrow down the available borrowing options, so mortgaging a property may simply not be an option for some.

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Tax Relief on Mortgage Payments

The UK government has recently changed the tax relief applied to interest payments on buy-to-let mortgages, which means that the income after taxation has been reduced.

From April 2020, buy-to-let investors cannot deduct any mortgage expenses from their rental income to reduce their tax bill and instead, will receive a tax credit based upon 20% of the interest payments.

Buy-to-let investors could be placed into a higher tax bracket as they will be required to declare all of the rental income that was used to pay the mortgage when completing their tax return.

Many buy-to-let investors are now turning to buying property in limited companies, which is more tax efficient as they pay corporation tax through the limited company as opposed to paying income tax.

If you are looking to buy with a mortgage, Regency Invest can refer buyers to specialist buy-to-let mortgage brokers. Book your consultation with one of our experts today.

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