Awesome cash advantages of investing with a mortgage

Property investment for higher yields, better capital gains, and lower tax bills

There’s a debate raging about property investment in the UK. Should you invest with cash or use a buy-to-let mortgage to invest? For higher rate taxpayers especially, this is a question that needs to be answered. As the changes to tax relief on mortgage interest are phased in, the returns for higher rate taxpayers are going to be hit.

Whether you should invest in cash or with a mortgage is ultimately your decision. Whatever you feel most comfortable doing is probably the best answer. For me though, I prefer to use a mortgage and gain from the benefits of leveraging in property investment.

I’m going to explain why I prefer using other people’s money to invest rather than my own, looking at the three financial benefits of buying residential investment property:

  • Income
  • Capital growth
  • Tax

I’m going to explain how leveraging works for me using a hypothetical example. I’ll imagine I’ve found a property investment opportunity which:

  • Costs £100,000
  • Can be financed with a 75% buy-to-let mortgage at 5% interest
  • Pays a gross yield of 10%

For ease of illustration, we’ll assume there are no other financing costs. We’ll also factor in an investment property management charge of 10% of gross rental income.

Rental Income

The gross rental income is £10,000 on this property (10% of £100,000). After my investment property management charges, I’m left with £9,000. That’s a net yield (before tax) of 9% – way better than any bank account. If you’ve got the cash in the bank and you’re earning 1% (if you’re lucky), it looks like a no-brainer to invest in a buy-to-let and see your return rise to 9%.

However, look what happens when I invest with a mortgage:

  • I use £25,000 of my money, and £75,000 of other people’s money
  • My gross income is £10,000, but now I pay mortgage interest of £3,750. After accounting for investment property management charge, I’m left with £5,250.
  • Now, I’ve earned this income on my investment of £25,000. Suddenly, the yield I’m earning on my money has increased not to 9%, but to 21%!

I could use my £100,000 to invest in four such properties, and earn £21,000 rental income by investing in mortgages. That’s a lot different to the £9,000 I’d earn by investing with cash.

Capital growth

Let’s assume the property increases in value by 5% every year for the next 20 years. At the end of this period, it will be worth around £265,000. That’s not bad: I’ve made a total capital gain of £165,000 or 165%.

By investing with a mortgage, my capital gain is lower. I must repay the mortgage of £75,000, and I’m left with a capital gain of £90,000. But when I compare my percentage gain, I’ve made a return of 260%.

Again, if I’d invested in four identical properties with my £100,000 and four mortgages, my capital gain would be a huge £360,000 – more than twice the gain I would have made by paying cash for on property.


There are also tax advantages that I access by investing with a mortgage. As a property investor, you get to reduce your tax bill by the tax relief on your mortgage interest. Let’s imagine that I’m a basic rate taxpayer, and I buy the investment property in our example:

By paying cash, I’ll be subject to £1,800 tax (£9,000 x 20%). My net-of-tax income yield from this property investment is 7.2%

Using a mortgage, I’m liable to £1,800 tax as I would be when investing with cash. However, I can then reduce my tax bill by 20% relief on my mortgage payments of £3,750. So, instead of paying £1,800 in tax, I’ll pay £1,050. My net-of-tax income yield is 16.8%.

Summing up

When you invest using a buy-to-let mortgage, you use other people’s money to make your investment return. It means you leverage the income and capital gain potential of your property investment and could benefit with higher yields, better capital gains, and lower tax bills.

If you want to find out how mortgaging to invest could impact you, contact one of our team today on +44 (0)207 923 6100. We’ll help you define your goals and strategy, and find the best investment opportunities to make long-term income and capital gain in buy-to-let.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
April 22, 2017


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