Investors who have the capital to buy property without debt financing (mortgages) must make the decision as to whether their capital is best invested in the property investment or whether it could be invested elsewhere (for example in a bank) and the property acquired with debt finance. This will of course depend on factors such as the mortgage interest rate (the cost of capital), the rate of return on investing the capital elsewhere, the net operating income from the investment property (rental income less all costs), and, of course, the expected future value of the property.

The mortgage interest rate is crucial. If the rate is low enough so that income from the property exceeds it, it is preferable in many cases to borrow to invest in property thereby leveraging the purchase. There are also potential tax advantages to using debt finance. The investor’s capital could then be invested elsewhere thus increasing overall returns.

Of course, many investors do not have the capital to finance the complete value of their intended investment property, but this should not be seen as a barrier to investing. Where debt finance is to be used, mortgage loans generally have the lowest interest rates. A domestic mortgage may be preferable if the investor already has a domestic mortgage as there will generally be less arrangement fees than applying for a new mortgage elsewhere. In some cases investors can increase their domestic mortgages and reduce their overall interest rate in the process, but mortgage interest rates in the country in which the investment is being made (local mortgages) may be significantly lower so as to more than offset the cost of arrangement fees.

Local Mortgages may be preferable due to other factors such as the potential to offset mortgage repayments against gross rental yields, thus reducing tax exposure. Local mortgages will reduce the net value of the property, which has other tax implications, for personal wealth and inheritance for example. Tax laws differ from country to country, and it is crucial that investors know the facts and incorporate them into their investment analyses. Validus are happy to discuss these and other matters on the telephone or in person at our offices in Canary Wharf, and to put you in touch with our partner tax, legal and currency specialists.

For further information about investing with Validus, call us on
020 7517 0580, email ask@validus-invest.com or register here.

view disclaimerPlease note: As with all investment property purchases, you are advised to take proper financial and legal advice at all stages. Investment values can decrease as well as increase. The content of this website is for informational purposes only, and readers are advised to speak to qualified legal experts and financial planners before taking any action. The information, tables, projections, and estimations provided by Validus are for indication only and do not represent factual information unless otherwise stated. The information is supplied without any guarantees whatsoever.