Investing in a property isn't restricted to cash-only buyers, and it has become more and more popular to purchase this type of property with a mortgage. But how does investing with a mortgage impact the returns you can expect to achieve from your investment? Our Sales Manager (and CeMap qualified mortgage advisor) Mark has broken it down into simple terms...
Why should I take out a mortgage to purchase an investment property?
Let's work through an example and the figures will be self-explanatory.
Suppose you wish to invest £100,000 into an investment property with an annual return of 8%.
Without a mortgage you will simply purchase the property for £100,000 and gain an annual income of £8,000.
With a mortgage, let's suppose you actually purchase two similar properties, with a 60% mortgage at an interest rate of 4%. You still have £20,000 of your investment fund remaining.
In this scenario you will have double the income at £16,000;
less interest payments on the mortgage of £4,800;
leaving your available income at £11,200.
With a mortgage, you will have twice the purchase costs and maintenance fees but also double the capital appreciation. So, it makes sense to purchase investment properties with a mortgage if the interest rate is below the return levels.
Let's now assume that five-to-ten-years down the line, you wish to sell your investment for potential capital gains. With current trends, let's assume that the properties purchased double in value over a 20 year period.
With no mortgage in place, your £100,000 investment will be worth £200,000.
With a mortgage, both properties will be worth £400,000, minus the approximate £120,000 interest you have paid in interest in this time. This will leave you with an overall net gain of £280,000.
*All figures shown are calculated as an estimate on current interest rates as of March 2019, and are to be used as a guideline.