It’s often confusing to new investors or even seasoned investors with regards to choosing cash or taking the mortgage route for their buy-to-let investments. It all depends on an individual’s financial strength, as there are pros and cons to either method.
How useful is a buy-to-let mortgage?
A buy-to-let mortgage is useful in several ways. For instance, taking out a mortgage allows an investor to increase their budget, thus leading to a high-value investment. This means the return on investment will be higher over time as the value of the property increases. By only investing a minor portion of the total purchase capital, the investor will enjoy the profit from the entire increase in value of the property over time.
Another significant advantage of mortgages over cash is that you can spread out your capital into multiple investment properties. This prevents the capital from being stuck in only one property, which diversifies the portfolio, resulting in proper risk management and high rental income through multiple properties.
Drawbacks of mortgage
The downward trend in house prices coincides with an increase in seller discounts. Between November and December, property discounts reached a 5-year high, averaging 5.5%, or £18,000 off the original asking price. This buyer-friendly environment has spurred a 6% increase in demand. Investors are advised to act promptly to capitalise on these discounts, as heightened competition among buyers continues to drive demand.
Improvements in Interest Rates
As we highlight the useful features of opting for a mortgage, the drawbacks also need to see the daylight.
The most significant drawback of mortgages is monthly mortgage payments. The higher the mortgage, the higher the monthly repayments would be. Even during times of vacancy, mortgage payments cannot be paused. Another setback of choosing a mortgage is the interest rate.
While choosing a mortgage, the interest rate should be kept in mind to assess the returns. A higher mortgage means a lower rental return, which can cause dissatisfaction and hesitation towards future investments.
Is buying in cash better than a mortgage?
Not everybody is comfortable with mortgages, and that’s quite understandable. Cash purchases come with no strings attached. There is no risk associated with a cash purchase as opposed to a mortgage. Moreover, there is no interest or official fee to process a cash purchase, which is always the case with mortgages. The risk of foreclosure caused by failed mortgage payments and increased monthly rental income give the option of cash purchases an edge over mortgages.
Cash purchases do come with a big disadvantage. With the entire capital tied up to one property, an investor will need more time to build up a diverse portfolio, leaving them susceptible to market risks. This also affects the potential rental income negatively.
So… cash or mortgage?
To wrap up, both cash and mortgages come with their own set of pros and cons. Mortgages allow to increase the number of investments at a given time by spreading the entire capital across multiple properties. This, in turn, increases the rental yield. On the other hand, cash provides a sense of security with no monthly payments and no risk of defaulting or foreclosure. Also, there are no extra fees incurred in a cash purchase. Ultimately, it’s up to the individual and their comfort zone.
Galaxy of Homes facilitates both cash and mortgage deals depending on the client’s needs. We thoroughly explain every nitty gritty detail of both the options and also advice what’s best for you based on your background and goals.
Subscribe to our Newsletter
