What changes when you buy with cash?
A cash purchase means the property is bought without borrowing. There are no mortgage payments, interest costs, or loan terms to consider.
In buy-to-let calculations, this typically means:
- No monthly mortgage payment
- Lower ongoing costs
- Higher monthly profit, all else being equal
- A larger amount of cash invested upfront
Because all of the purchase price is paid in cash, the total cash invested is usually much higher than in a mortgaged purchase.
What changes when you use a mortgage?
A mortgage introduces borrowing into the calculation. Part of the purchase price is funded by a loan, with the remainder covered by a deposit.
In buy-to-let calculations, this typically means:
- Monthly mortgage payments reduce cash flow
- Interest costs reduce annual profit
- Less cash is required upfront
- Returns are measured relative to a smaller cash investment
The presence of a mortgage does not change the property's rental income, but it does change how profit and returns are calculated.
Yield is unaffected by financing
Rental yield is calculated using rental income and purchase price. It does not include financing or most costs.
Because of this:
- Yield is the same whether a property is bought with cash or a mortgage
- Yield is useful for comparing properties, not financing structures
This is why yield alone does not explain profitability or efficiency of invested cash.
ROI behaves very differently
Return on investment (ROI) compares annual profit to the total cash invested. This is where financing structure has the greatest impact.
Cash purchase ROI:
- Annual profit may be higher (no mortgage payments)
- Total cash invested is much larger
- ROI is often lower as a percentage
Mortgage purchase ROI:
- Annual profit may be lower due to interest costs
- Total cash invested is lower
- ROI may be higher because profit is measured against less cash
Neither outcome is inherently better — they reflect different trade-offs.
The role of leverage
Using a mortgage introduces leverage. Leverage allows rental income from a full property value to be generated using a smaller amount of invested cash.
Leverage can:
- Increase ROI when costs and interest rates are favourable
- Increase sensitivity to interest rate changes
- Reduce cash flow stability in some scenarios
This is one reason why ROI is more sensitive to assumptions than yield.
When cash purchases may still be relevant
Cash purchases are sometimes used:
- To avoid borrowing costs
- To simplify cash flow
- Where borrowing is unavailable or undesirable
- As a baseline comparison against leveraged scenarios
In calculations, cash purchases can be represented by setting loan-to-value (LTV) to 0%.
Comparing cash and mortgage scenarios
When comparing cash and mortgaged purchases:
- Use the same rental and cost assumptions
- Compare both ROI and cash flow
- Be clear about how much cash is invested in each scenario
Comparisons are most useful when assumptions are held constant and only financing structure changes.
How the calculator handles this
The calculator allows both approaches:
- Cash purchases can be modelled by setting LTV to 0%
- Mortgage purchases allow LTV, rate, and mortgage type to be adjusted
This makes it possible to compare cash flow differences, ROI differences, and sensitivity to interest rates and costs.
Summary
Cash and mortgage purchases lead to different buy-to-let outcomes, even when the underlying property is the same. Yield remains unchanged, but profit and ROI behave very differently depending on how the purchase is financed.
Understanding this distinction helps interpret calculator results more accurately and avoids misleading comparisons between scenarios.