Gearing your property portfolio

Finding the balance between risk and reward

Choosing the right level of borrowing, often called ‘gearing’, is one of the most important decisions any property investor can make. I’ve been a landlord for nearly two decades and teaching/advising on this for a decade, so here are my thoughts on the critical factors involved.

1. Understanding gearing and leverage
   Gearing refers to the proportion of borrowed money used to purchase a property. If you take out a large mortgage relative to the property’s value (for example, an 80% loan-to-value), you’re highly geared (HG). Lower gearing (LG) is the inverse.

2. The HG approach: Faster growth, lower cash flow
   Pros. Accelerated Portfolio Building. With high loan-to-value mortgages, you can purchase more properties with the same amount of capital.
   Inflation hedge. With rising inflation, existing debt becomes relatively cheaper in real terms over time, as you repay it with “cheaper” pounds. Rents may also rise in an inflationary environment.
   Cons. Reduced Monthly Income. A bigger mortgage translates to higher monthly repayments, shrinking your net rental income. You could find it harder to meet ongoing expenses – like maintenance and insurance – if rents don’t keep pace with interest rates. 

3. The LG approach: Stronger cash flow, potential tax considerations
   Pros. Higher Monthly Income. Smaller (or zero) mortgages mean lower monthly repayments, boosting your net rental income. This can give you a more comfortable cushion to handle tenant voids, property upkeep, and any unexpected costs.
   Less exposure to interest rate shifts. If most of the property is funded by your own capital, interest rate fluctuations have a limited impact on your finances. This is attractive if you rely on rental income as a primary source of earnings.
   Cons. Slower Growth. Relying on your own funds limits the number of properties you can purchase in the short to medium term. This might mean missing out on opportunities in a rising market where leverage could have magnified your gains.
   Inheritance tax implications. Heirs may face a larger inheritance tax (IHT) bill if you’re over the threshold. Mortgage debt can reduce the net value subject to tax – something that can be strategically important if you plan to pass on assets.

4. Factoring in current interest rates and additional factors
   Interest rates. Understanding the cycles on the market are key.
   Stress test carefully. Work out the worst-case scenario if rates increase by two or three percentage points.
   Consider fixed-rate deals. A longer fix can offer stability, though it may be more expensive than a shorter-term mortgage.
   Inflation. This is a real wealth killer. It’s something you should monitor when assessing the actual performance of your portfolio and have a strategy in place to address. 

• Additional Factors;
  Stamp duty land tax (SDLT). Investors face a 3% surcharge on top of standard rates (increasing to 5% in April 2025).
  Mortgage arrangement fees. This hides the true cost of the mortgages – so get into the detail.
  Maintenance and management. Higher leverage can make it harder to cover repairs, refurbishments, and letting agent costs. A single larger issue could strain cash flow if you haven’t budgeted properly.
  Regulatory compliance. Energy efficiency requirements, landlord licensing, and potential changes from the Renters’ (Reform) Bill can all lead to extra costs. I own a Yorkshire-based letting agency in order to protect my portfolio and stay connected with what this means to me.

5. Planning ahead for inheritance and estate management
   If your estate exceeds the current inheritance tax threshold, you could be leaving heirs with a significant bill. While mortgages can reduce the net value of each property, you shouldn’t over-borrow solely for tax reasons. A measured approach, possibly combined with trust structures or life insurance, may be more appropriate. Get professional advice on this.

6. Creating a personal strategy
   There isn’t a single right way to gear a property portfolio; it depends on your financial goals, risk tolerance, and personal circumstances. The ideal scenario often involves a blend of strategies.
   Portfolio segmentation. You could have a handful of properties at higher loan-to-value for growth, balanced by lower or no mortgage on other assets for stable income and reduced risk.
   Schedule review time (with your trusted advisors). As interest rates and market conditions change, revisit your gearing level. You might choose to refinance, pay down debt, or borrow more to seize new opportunities. 

Final thoughts
Weigh each approach against your personal goals, risk appetite, and succession plans. With a clear view of costs, interest rates, and tax implications, you can craft a balanced portfolio strategy that stands the test of time – even in a changing property market. Don’t shy away from getting your trusted advisors (i.e. accountant, tax, financial, mortgage advisor, mentor etc.) together to get the most up-to-date and relevant advice. Good luck, and here’s to an awesome 2025!

Nick Thorpe
The Property Catalyst Club Limited
07545 837246
nickthorpe.me
Nick@PropertyCatalystClub.co.uk
The Property Catalyst Club: propertycatalystclub.co.uk