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Typically it can often pay to purchase your residential or commercial property with finance in the form of a Buy-to-Let mortgage. Commercial and Buy-to-Let finance is not regulated by the Financial Services Authority, but it still makes sense to use a regulated broker with significant experience in this area – we recommend you contact Mortgage-Desk (www.mortgage-desk.com) on 01494 719982 or 0845 4580 8001.

The reasons to have a level of funding of your investment property are compelling and the following areas look to explain how selective use of finance can often maximise the returns made – the three areas we discuss are:-

1 - Gearing - A 47% or 188% return over 5 years - the choice is yours!

Gearing is the term used when a property is purchased using finance in the shape of a Buy-to-Let mortgage - the property is termed to have been "geared" or "leveraged". For example if you have £50,000 capital and you purchase a £50,000 property outright and the value of this house in one year increases 5% - the value a 5 years later would be £50,000 x 8% x 5 years = £73,466. The return or gain you would have made on your capital (£50,000) would be £23,466 - or expressed as a percentage 47% or 8% per year - common sense really.

However, if you had decided to obtain a Buy-to-Let mortgage on your new purchase the figures would look like this;

Purchase Price £50,000
Mortgage available - 75% of purchase price = £37,500
Deposit (your investment) = £12,500
Mortgage payments - at typical rate of 5% = £156*

*Whilst admittedly you do have a monthly liability of £156 to the mortgage company - this should be taken care of by the rent - indeed mortgage companies like to see that the property can be rented for 25-30% more than the mortgage payment to meet any voids. But the return on your capital is where the excitement starts - previously the return was 47% for a property with no finance secured on it after 5 years. The property was purchased for £50,000 and is now worth £73,466 same as above - except you only used a £12,500 deposit.

So your return is now £23,466 / £12,500 or 188%. You have nearly doubled your initial deposit - slightly better would you say?

2- Tax Efficient

A Buy-to-Let property is treated by the Inland Revenue as a "business", that means you have to pay taxes on the income received – that’s the bad news. The good news is you can offset any typical costs against income received - mortgage payment interest can be offset. Therefore by having an interest only mortgage you can reduce your tax liabilities.

For example, a property with no mortgage on it (unencumbered), means all the income is taxed at the individuals highest rate - apart from wear and tear there is little to offset.

A property that is typically mortgaged means that the outgoings initially start higher and, in the early years, little or no tax is payable. Through clever tax planning and by using tax efficient saving schemes like ISA's it is possible to create a tax free lump sum to discharge the mortgage some way down the line, possibly retirement?

3- Portfolio Planning

Through a combination of 1 & 2 - it can be demonstrated that a larger number of properties can be purchased. Based on a property price of £50,000 and deposit required of £12,500 - it is possible to purchase 4 properties with mortgages, as opposed to only one with no mortgage.

Thus, during that time a portfolio of £200,000 can be secured over a short amount of time. If property prices increased 8% per annum for 5 years - then in 2014 the portfolio could be worth £293,866 - with mortgages totalling £150,000 - equity of £143,866 has been secured. This represents a total return on capital of nearly 300%. This does not even take into account any rent received during those 5 years!