Is buy-to-let still worth it?

Getting a mortgage in order to make an investment, such as a buy to let property, is known as “leveraging” (or sometimes “gearing”). Even if you are confident that you can afford a property with your current savings, it would be worth considering using leverage as an option.

For example, let’s say that you had enough saved up to buy a property worth £100,000. If the property increased in value by 10% every year, then five years later you could sell it for £150,000, giving you a total profit of £50,000 (these examples exclude fees, charges, tax, and rental income for the sake of simplicity).

However, if there was another property in the same area worth £300,000, then you might decide to take out a buy to let mortgage in order to afford this property instead. Assuming you invest £100,000 of your own money and take out a £200,000 mortgage, and this property rises in value at the same rate as the cheaper one, then after five years you could sell it for £450,000. This gives you a total profit of £350,000 from your initial investment, or £150,000 after paying off your mortgage. In this way, leveraging allows you to access investment opportunities that would normally be outside of your savings.

Alternatively, you could stick with the £100,000 property and take out a buy to let mortgage for £50,000. The benefits of leverage here would be twofold: firstly, it would allow you to invest your remaining £50,000 in other properties or ventures at the same time. Secondly, the overall return on your initial investment would be higher when expressed as a percentage: if you put in £50,000 and make £100,000, then this amounts to a 100% return, which is technically a more successful investment than putting in £100,000 and making £50,000 (a 50% return), even though after paying back the mortgage your profit will basically be the same amount. A higher percentage return is seen as more successful in the context of an investment portfolio.

Being able to invest in more expensive properties or multiple properties at the same time also generally means that your rental yield from these properties will be higher, which is another way that leveraging can result in greater earnings than you would normally achieve with your own savings.

The downside to leveraging is that the same principles apply in reverse: just as the potential reward is higher, so is the potential risk. If the property goes down in value, you may not have enough to pay off your mortgage just from selling it, and might have to dip into rental income or your own savings in order to cover the rest. Your percentage return will suffer as well; if you bought a £300,000 property outright and its value falls by 20% to £240,000, then you will only have lost 20% of your investment. If you only put down a 50% deposit of £150,000, however, then the same £60,000 loss is equivalent to 40% of your investment.