Is using leveraging as part of a
property investment strategy
right for you?
By Karen Bennett, Sales and Marketing
Director, Commercial Mortgages, Shawbrook
ued
ntin nce
Co ide
onf estors
c
inv ted
for pec
ex
After the Bank of England suggested they
would hold off putting up interest rates until
after the next election, and in light of the
CML’s regular figures suggesting the buy-tolet market will remain buoyant, investors are
entering 2015 with continued confidence.
With a strong market outlook, techniques
such as leveraging - the practice of an investor
expanding a portfolio using borrowed funds become more attractive. As this tool continues
to rise in popularity, more investors are asking
the question: “is leveraging right for me?”
The advantages of leveraging
In a nutshell, leveraging can improve the return on capital and makes your
money work harder as the borrower earns more from the equity. David Tonks,
the founder of the Essex-based brokerage Advocate Finance, believes
leveraging is an important strategy to grow a portfolio, allowing investors to
borrow to maximise their income rather than using cash resources. “I always
tell my clients that leveraging is important and that borrowing to increase a
portfolio is a good tactic as long as you maximise the rental income on an
individual basis per property. If you do this, you can continue to leverage up
and increase the profitability of your portfolio”. However, he cautions that
although leveraging is a sensible option for those who are focused on
generating sustained property rental income, it should only be used by
experienced, competent landlords.
At Shawbrook for example, a client can have a mortgage on one property and
a second charge loan on another property, enabling them to capital raise to
buy a further property, refurbish it and sell on, or buy it to refurbish and hold.
David believes leveraging is an excellent proposition “when undertaken by
people who have been advised correctly, but that it has to be built within the
overall business plan. It makes sense, for example, if the rental income is
greater than the borrowing costs, allowing for voids, repair costs and interest
rates increasing and still leaving a profit for the investor”.