How to make money from buy-to-let mortgages

What is gearing when it is us in Buy to let?

Thanks to a concept known as gearing, buy-to-let mortgages can be used to increase the return on investment from rental properties.

Gearing, also known as leverage, is the name given to the strategy of using a loan to effectively increase the return on your investment in an asset such as property.

By looking at your return on investment – the percentage earned back on the total amount of cash you have personally invested so far – you get arguably the truest expression of investment yield. And it is this figure that gearing, if done right, can enable you to increase significantly.

Gearing can increase your true rate of return for buy to let property

Let’s assume you purchase a property worth £100,000. The property is cost-neutral, meaning that the rent covers the running costs, and you sell it five years later for £120,000.

If you paid for it outright using cash, your return on investment would be 20% (4% per year). If you purchased it with an 80% LTV mortgage, however, you would only have invested £20,000 of your own money, and your true return after repaying the loan would be 100% (20% per year) – five times the underlying appreciation alone.

Costs reduce returns – but gearing can still be beneficial

This is a very simple example and there is plenty that it doesn’t take into account.

First costs are significantly decreased when your property is unencumbered.

At 4% interest, an £80,000 interest-only mortgage would cost you £3,200 per year.

Then there are purchase costs (typically larger when you have a mortgage) and running costs to take into account.

It is not unreasonable to assume that the day-to-day running costs for a £100,000 property could add up to another £1,000 per year – so we can say that the annual costs for running this property might be around £4,200 with a mortgage, and £1,000 without.

Adding rental income into the equation

The second factor that the first example does not take into account is rental income. To service an £80,000 mortgage, most lenders would require that you charge at least £420 per month in rent – a modest amount in today’s market.

This would give you a total of £25,200 in rental income over the five years. Factor in £1,000 for purchase costs in year one and a further £1,000 for sale costs in year five, and the figures look like this:

  • Scenario one (property is unencumbered)
    Total purchase costs: £101,000
    Total running costs: £10,000
    Total sale costs: £1,000

    Sale amount: £120,000
    Rental income: £25,200
    Profit (sale and rent less total costs): 145,200 – 112,000 = £33,200
    Return on investment: 33,200 / 112,000 = 29.64% (5.93% per year)

  • Scenario two (property is subject to an 80% mortgage)
    Total purchase costs: £21,000
    Total running costs: £21,000
    Total sale costs: £1,000

    Sale amount: £120,000
    Rental income: £25,200
    Profit (sale and rent less total costs and mortgage): 145,200 – 43,000 – 80,000 = £22,200
    Return on investment: 22,200 / 43,000 = 51.63% (10.33% per year)

And here we see gearing in action: even though the end profit is lower with the mortgage, the return on investment is significantly higher.

Investing in multiple properties

Using buy-to-let mortgages to reduce the up-front cash requirements can allow you to spread your investment across more than one property and boost your returns even further.

For example, instead of using your £101,000 to buy one property outright, you could use it to pay for deposits and purchase costs for three identical properties. Assuming identical rent and appreciation, your returns would be the same, but your nominal profit would be significantly higher:

  • Scenario three (three identical properties subject to 80% mortgages)
    Total purchase costs: £63,000
    Total running costs: £63,000
    Total sale costs: £3,000

    Sale amount: £360,000
    Rental income: £75,600
    Profit (sale and rent less total costs and mortgages): 435,600 – 129,000 – 240,000 = £66,600
    Return on investment: = 66,600 / 129,000 = 51.63% (10.33% per year)

This method would also leave you with money left over from your start-up fund, which you could invest elsewhere or keep aside for emergencies.

Balancing risk and reward in buy to let

The downside of gearing in this manner is that the possible risk multiplies alongside the possible reward.

Let’s say that, instead of gaining £20,000 in value over the five-year period, the property or properties you owned actually lost £20,000. Each of the three scenarios above would have looked very different:


Loss (%)

Loss (£)

Single unencumbered property



Single property with 80% mortgage



Three properties with 80% mortgages



This is an extreme example. Short-term price fluctuations are to be expected, but prices trend upwards over the long term and if you were able to continue servicing the debt, it would be possible to hold on to your investments in the hope that the loss would eventually correct itself. This concept is known as your ‘investment horizon’.

Minimising risk

As the examples above show, under-gearing can reduce your risk by lowering your overheads. It can also reduce the reward, however, because it means that you need to invest more of your own capital.

Some investors like to minimise losses by distributing their costs and risk across multiple properties, while others prefer to minimise their gearing and take the slow and steady approach. Everyone is different, and there is no ‘best’ approach.

The type of mortgage you take out can also affect the potential risk and reward of your investment. For instance, variable rates tend to be cheaper than fixed rates during the introductory period, but could possibly rise; whilst fixed rates guarantee set repayments for a certain number of years.

Don’t be afraid of consulting professionals

If you are unsure how to best progress with your investment, the advice of professionals can be invaluable. Accountants and tax professionals can help you find the best strategy to invest with minimal risk, whilst a mortgage advisor can help you find the right product – at the right loan-to-value – for the job.

To speak to a mortgage advisor about your investment, call us on one of the numbers above or request a callback today.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.