David Barr
April 12th 2021
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BUY TO LET MORTGAGE VS CASH BUYERS
Are you looking to invest in your first property and become a landlord? It can be quite overwhelming, the amount of information that is out there can be quite hard to get started. One of the common queries or bits of advice we get asked for people looking to get into it is how exactly they should finance the property.
You might think if you have the cash to buy it outright, that could be the best option, but hold your horses as there are pros and cons to both sides of the coin.
When you want to become a property investor you have two main options, using a Buy To Let mortgage which is similar to a residential mortgage, and as may seem obvious, buying with cash. Both options have their own advantages and disadvantages, and they’re both popular options for want to be property investors.
A Buy-To-Let mortgage is somewhat like a residential mortgage, but it’s a slightly different product aimed at property owners who want to rent their property out. They’re typically more expensive than standard mortgages as they require a higher deposit, typically 25%+. They normally are interest-only meaning lower monthly payments so you can take a larger amount of the profit from the rental.
Cash, well that is pretty self-explanatory, it’s when you buy the property outright with your own personal savings. A lot of people choose to take equity out of their own property to finance a property investment, which if you have a lot of equity can be a favourable way to create an additional stream of revenue.
HOW DOES BUYING WITH A BUY TO LET MORTGAGE WORK?
Well, not just anyone can get a Buy-To-Let mortgage, it’s mainly aimed at people who are looking to invest in property and can afford to take the risks of doing so. Most lenders will require that you own another home, outright or with a mortgage, you’ve got a good credit rating, earn at least £25k a year and you’re under a certain age limit which sits between 70-75 depending on the lender.
As previously touched on, they have a lot of similarities to a residential mortgage, despite needing a higher deposit, usually have higher interest rates, normally being interest only and not being regulated by the FCA.
Actually buying the property is very similar to buying with a residential mortgage – you just need to be able to prove that you can financially cope for times when there may be no rent coming in. You get a Buy To Let mortgage by applying too large banks or independent specialist lenders.
Even if someone has the cash to buy a property outright, they might choose a Buy To Let mortgage, but why? Here are a few of the positives of choosing this option:
- With cash, you might be able to buy a property outright, but you might have the money to get multiple buy to let mortgages and buy several properties at the same time. This will maximise your potential rental profit.
- If you have several properties, you will benefit more from property value increases across them than you would on a single property.
- Your portfolio is more spread, so there’s less risk. Say you have a single property and a tenant refuses to pay, you’ve lost out on that income, but if you have four properties and one tenant refuses to pay, it doesn’t sting as much!
- Another obvious benefit is that you simply don’t need as much money when compared to buying outright.
There are certain disadvantages that come with a Buy To Let mortgage as well, which wouldn’t be the case if you bought with cash.
- The time between tenants stings a bit more – if you pay in cash, then you only have to cover the cost of the utilities and council tax, if you are buying through a mortgage, however, you will have to cover the months that you don’t have tenants in full.
- Property could drop in value – This is another thing you need to consider, as buy to let mortgages are often interest-only even if the price you are selling the property for drops, you’ll have to cover the difference.
- Tenants sometimes just withhold rent, for whatever reason, and it can be a hard and time-consuming process to evict them and in which time you still have to cover the costs.
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Buying with cash is pretty similar to a typical property purchase, but of course, you don’t have to jump through the hoops of getting mortgage approval which means the sale is a lot less likely to fall through as issues are common with mortgage providers.
The whole process is a little more straight forward and less stressful, and it’s also appealing to people who are selling as it typically means that you can buy quicker than someone with a mortgage, but we’ll dig more into that in the pros and cons section!
There are several advantages to being a cash buyer when it comes to trying to get the best deal on a property.
- When you pay with cash, you can move quicker than those buying with a mortgage. This is appealing to sellers, so much so that some sellers will take a reduced offer in return for a quicker sale.
- Fewer delays and fewer hurdles – there is a significantly reduced chance of something going wrong with the purchase as most issues stem from the mortgage provider.
- You don’t have to make repayments, everything you earn from the property is profit – barring taxes and bills.
- You can’t lose your property if you run into cash flow issues – you own it, and within reason you can do whatever you want with it, if you’re struggling, just sell it!
Initially, you might not think it, but there can be disadvantages to paying with cash when buying a property for investment.
- If you buy one property outright for cash, your returns might be far lower than if for example, you were to split that money to buy four properties with buy to let mortgages.
- Often things might go overlooked – a good thing about using a mortgage company is that they will often survey and value the property to ensure they are making a good investment, when you buy with cash it skips this step.
- You might be tying up a large amount of your money, losing liquidity. Be careful not to overexert yourself, as it’s not easy to easily free this money back up.
IN CONCLUSION
If you can afford it, then the cash option is usually the best option to purchase as you can often get a far better deal. It also means that there’s less management involved as you’re not buying multiple properties and managing multiple mortgages, so for someone new to property investing it’s the best way for you to dip your toe in the water and not get bogged under.
If however you’re a more experienced property investor and feel like you can take on multiple investments, Buy To Let mortgages can be the best way to get more money on a monthly basis with your cash.
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