It’s the first decision every buy-to-let landlord faces, and the one that changes the outcome most: pay for the flat outright, or put down a deposit and mortgage the rest. The answer you’ll hear in every landlord forum is “always leverage — a mortgage multiplies your return.” It’s true. What they leave out is that it multiplies in both directions, and that the number which shoots up — total return — sits alongside a cash flow that can turn negative every month.
This article puts both options side by side on the same flat. There’s no single right answer: there’s one that prioritises wealth and one that prioritises cash flow and peace of mind.
General information, not financial or tax advice. The figures are illustrative examples; your own position depends on the real price, your mortgage rate, your tax band, and whether you hold the property personally or through a company. The mortgage-interest rules are set out on gov.uk — Renting out a property. Check with an accountant before deciding.
If you don’t have your numbers yet, the rental yield calculator runs this same comparison in a minute, with and without a mortgage. This article explains what you’re looking at when it does.
The reference property
Same flat we use in How to calculate rental yield, so the numbers line up:
- Purchase price: £250,000
- Purchase costs (SDLT with the surcharge, legal, survey): ~£10,000
- Rent: £1,200/month → £14,400/year gross
- Net operating income (after voids, management, service charge, insurance and repairs): ≈ £8,460/year, pre-tax and pre-finance
From here only one thing changes between the two options: how much you put in and how much the bank does.
Option A — In cash
You put in the full £260,000 (price + costs). No mortgage payment, so all the net income is yours.
| Item | Amount |
|---|---|
| Own capital invested | £260,000 |
| Net operating income (cash) | +£8,460/yr |
| Mortgage payment | £0 |
| Cash flow | +£8,460/yr |
| Cash-on-cash return | 3.25 % |
Add a conservative 3 % appreciation (£7,500 on £260,000 = 2.88 %) and the total return is around 6.1 %. Comfortable, positive from month one, zero interest-rate risk. And unexciting: you’ve got £260,000 locked into a single flat.
Option B — With a 75 % buy-to-let mortgage
You put down the deposit plus costs. The bank does the rest. Most BTL mortgages are interest-only, so there’s no capital repayment — the loan doesn’t shrink.
- Deposit (25 % of £250,000): £62,500
- Purchase costs: £10,000
- Own capital invested: £72,500
- Mortgage: £187,500 interest-only at ~5.5 % → ≈ £10,312/year in interest (≈ £860/month)
| Item | Amount |
|---|---|
| Own capital invested | £72,500 |
| Net operating income (cash) | +£8,460/yr |
| Mortgage interest | −£10,312/yr |
| Cash flow | −£1,852/yr |
| Cash-on-cash return | −2.55 % |
In cash terms, this option loses £1,852 a year — you top it up out of pocket every month. But look at what happens with wealth:
- Appreciation 3 %: £7,500 (on the whole £250,000 value, not on your deposit) → +10.3 % on your £72,500
- No capital repayment, because it’s interest-only, so nothing from paying down the loan.
- Total return ≈ −2.55 % + 10.3 % = ~7.8 %
The same deal looks like 6.1 % in cash and 7.8 % with a mortgage — and the gap widens fast the more the flat appreciates, because you captured that growth on £250,000 of property having put in only £72,500. That’s leverage.
Why the number climbs (and why it deceives)
1. Leverage multiplies both ways. You earn appreciation on the full value of the flat having put in less than a third. Brilliant if it rises. But if the flat falls 3 % instead, that drop is also calculated on £250,000 and hits your £72,500 deposit just as hard. High return is the flip side of high risk.
2. Cash and wealth aren’t the same thing. The 7.8 % is real, but almost all of it is paper wealth, not cash — value that has gone up, which you can’t spend until you sell or remortgage. Day to day, this option takes £1,852 a year out of your pocket. If your finances can’t carry a flat that costs you every month, the 7.8 % on paper doesn’t help. It’s the cash-on-cash vs total-return distinction we spell out in How to calculate rental yield.
3. Section 24 makes leverage tax-inefficient — the UK-specific twist. This is where the British case differs sharply. Since April 2020, mortgage interest is no longer a deductible expense — you get a flat 20 % tax credit instead, and your rent is counted gross of interest when working out your income. So on £10,312 of interest a higher-rate landlord gets just £2,062 back, while that gross rent can push them further into the 40 % band. Leverage that used to come with a full tax shield now doesn’t for higher-rate taxpayers — which is exactly why so many landlords now buy through a limited company, where interest is still fully deductible. We cover this in Which rental expenses you can deduct.
4. Interest-rate risk. The −2.55 % cash-on-cash is at 5.5 %. If your rate resets to 6.5 % when you remortgage, the interest climbs past £12,000 and the negative cash flow gets worse. In cash, that risk simply doesn’t exist: there’s no payment that can rise.
5. Opportunity cost, in reverse. The strongest argument for a mortgage isn’t one flat — it’s the three flats you don’t buy by paying for one in cash. With £260,000 you buy one property outright; spread across 25 % deposits, that same £260,000 finances three. More wealth working, yes — but also three negative cash flows and three mortgages to watch when rates move.
When does each make sense?
In cash, if you value peace of mind over maximising the number: you want positive income from day one, you don’t want to depend on interest rates, and you don’t mind your capital being concentrated. Typical of someone buying to supplement a pension or park savings at a steady return.
With a mortgage, if your goal is to build a portfolio and your finances can absorb the negative cash flow while the flat appreciates. It only works if you have a buffer for the payments during voids and headroom for a rate rise — and, in the UK, if you’ve thought through Section 24 or holding through a company. Leverage rewards the landlord who can wait; it punishes the one who’s short on cash.
A common middle ground: a mortgage, but more conservative — 60 % loan-to-value instead of 75 %, so the cash flow is nearer break-even and a rate rise doesn’t sink it.
What matters
Asking “cash or mortgage?” is really asking “which do I prioritise — cash flow or wealth?”. A mortgage almost always wins on total return, because leverage calculates your gains on the full value of the flat; cash almost always wins on cash flow and peace of mind, because there’s no payment eating the rent and no rate to watch. The big 7.8 % figure is true, but it’s paper wealth you can’t spend yet, it comes with the risk of the flat falling or rates rising, and in the UK, Section 24 has quietly eroded the tax case for leverage. Choose by looking at both numbers, not just the one that shines.
Put your figures — with a mortgage and without — into the rental yield calculator and compare the two columns before you commit to anything. And if you’d like Livra to track the real monthly cash flow of each property — payment, interest, costs and rent already categorised — so you always know whether it’s costing you or paying you, take a look at Livra.