Why landlords should be leveraging debt in today’s market

Buy-to-let landlords acquiring UK property in today’s market could boost their return on investment by using debt to fund their purchase rather than cash.

Current market conditions are prompting buy-to-let landlords to question whether they should use finance to purchase a property, but there are several advantages to using debt in today’s market, says Knight Frank Finance buy-to-let expert Huy Le.

Products like buy-to-let mortgages and bridging finance can help landlords significantly improve their return on investment when buying property in the UK.

“There’s a lot of fear about the expense involved in taking out a mortgage – and cash does have its advantages. It can make transactions quicker and smoother, in some instances. But leveraging debt can result in real rewards when implemented in the right way,” says Huy.

Huy helped a client who purchased a three-bedroom flat in London. The client bought the property under market value for £320,000, depositing £30,000 plus stamp duty and fees using a bridging loan.

The client then remortgaged the property, which was revalued at £450,000, with a buy-to-let mortgage based on a 75% loan-to-value (LTV) – meaning they borrowed £337,500.

“The client was effectively able to take all their money back out,” says Huy. “And at the same time, they’re left with 25% of £450,000 and have got a high yielding three-bed flat, which they’re renting at £2,500 per month.”

Landlords can also use this as a way to expand their portfolio, says Huy. “Over time as the equity returns grow, landlords could use the capital to place further deposits on properties and keep growing. Without leverage, such a process would be far slower, so this allows you to turbo charge your investment.”

Client circumstances will vary, however, and Huy urges clients to speak to an advisor to see whether this is the right fit for them. “A quick 10 to 15-minute conversation with an expert mortgage broker like myself will be able to give you a much better understanding of the options are available to you.”