Buy to let has morphed from what was a cottage industry into a mainstream part of the housing market. Rentals are funded by the public sector as opposed to the public sector as was traditionally the case. For many investors their portfolio of property is a pension - a pension that they can control themselves. Many investors look at the return as the rent as a percentage of the value of the property. If buying cash only that may be correct. For the majority of investors buying with a mortgage the true return is the profit that they make as a percentage of their capital invested. This is called gearing a portfolio. Gearing is borrowing that allows an investor to buy more assets using mortgages in order to improve the profitability of a rental business. Gearing at 50% can turn a gross 6% yield on a property with no mortgage, into 9% with two mortgages at 3%.

Lending to special purpose vehicles – companies set up for building residential property portfolios – is also on the increase. Ring fencing the portfolio has benefits as corporation tax is paid instead of income tax, the investor draws profits down as dividends which are also taxed differently, and the mortgage interest paid benefits from being 100% tax deductible. For the small investor paying basic rate tax there is little benefit in setting up this more expensive to run property holding vehicle.

Mortgages can be interest only where annual profit is the primary purpose. The loan is never paid down and the repayment vehicle for the mortgage company is ultimately the sale of the mortgaged property. For others wanting an increased income later profits can be reinvested in the purchase of more property, or mortgages can be repaid via capital & interest meaning that the loan is paid down as it would be on the mortgage for a home. Both have their place and it comes down to the motivation and intention of the client as to which is the more advantageous.