A common belief among landlords is that maintaining low gearing – a low level of mortgage debt relative to property value – inherently represents a low-risk investment strategy. However, recent discussions within the property sector are challenging this long-held assumption, suggesting that while it reduces direct debt exposure, it might introduce other, less obvious risks and inefficiencies for UK property investors.
For many years, the conventional wisdom has been that a landlord with a substantial equity stake in their properties is better insulated against market downturns, interest rate hikes, and rental voids. This perspective often leads investors to pay down mortgages aggressively or purchase properties with significant cash deposits. While this approach undeniably minimises monthly interest payments and the immediate threat of repossession, it may not always be the most optimal strategy for wealth creation or capital protection in the long term.
One of the primary counterarguments highlights the concept of 'opportunity cost'. Funds tied up in low-geared properties could potentially be deployed elsewhere to generate higher returns, or to acquire additional properties, thereby diversifying a portfolio and potentially accelerating capital growth. With property prices across the UK experiencing varied movements – for instance, Rightmove reported average asking prices rising by 0.8% in May 2024 to £375,131 nationally, but with regional disparities – landlords with high equity might be missing out on leveraging these shifts effectively.
Furthermore, the tax implications of low gearing can be significant. Mortgage interest relief, though restricted for individual landlords since 2020, still offers some benefits, particularly for limited companies. Landlords with minimal debt might find their taxable rental income is higher, leading to a larger tax bill compared to those with higher gearing who can offset more interest. This can reduce net profitability and the overall return on investment.
Another factor to consider is liquidity. A portfolio with very high equity is inherently less liquid. In a situation where a landlord needs access to capital for emergencies, reinvestment, or other opportunities, extracting funds from a low-geared property often requires a remortgage or sale, both of which can be time-consuming and incur costs. This lack of immediate access to capital can be a hidden risk, limiting a landlord's financial agility.