The traditional residential landlords investment model has been to use mortgages (leverage) to buy properties, and so benefit from the ability to buy more property, and make more rental profit and capital gains, as a result. Mortgage interest tax relief restriction (known as ‘Section 24’), means that tax now plays a major role in the overall picture for landlords – but the fundamentals of using mortgages to magnify returns hasn’t changed.
This article looks at where the ‘sweet spot’ is for many landlords, in terms of balancing leverage and financial return, and what the benefit and limitations are in moving to a fully-unencumbered position.
Recap – why do landlords have mortgages?
Back to basics – landlords use mortgages to buy rental property to benefit from ‘leverage’ i.e. the ability to buy more property than their own cash alone allows, and so make more rental profit and capital gains than would be possible with cash alone.
Fundamentally, as the owner of a mortgaged property, all of the capital gain is the owner’s (the lender just wants their interest but benefits from no upside capital growth), and the rental profit as a Return On Investment (ROI) on the cash invested is much higher compared to what it would be if the property was purchased with just cash.