For many landlords, the straightforward strategy of borrowing at a lower interest rate and investing to achieve a higher return has long underpinned portfolio growth. However, recent shifts in lending costs, taxation, and operational expenses have complicated this equation, prompting a reassessment of borrowing’s role—especially for those with established portfolios.

The changing landscape of borrowing and returns

Historically, landlords could borrow at around 5% and expect returns closer to 10%, making the difference a reliable driver of portfolio growth. This approach was supported by stronger rental yields, lower borrowing costs, and the added confidence of capital growth. The numbers did not need to be exact; the general direction was sufficient to justify investment decisions.

Today, however, this dynamic feels less certain. Interest rates have risen, tax rules have evolved, and property management expenses have increased, all of which affect the balance between borrowing costs and returns. While these changes do not negate the long-term value of property investment, they do make the relationship between borrowing and return more complex, causing some landlords to hesitate.

How landlords typically respond

When the margin between borrowing costs and returns narrows, many landlords naturally adopt a more cautious stance. This often results in slower acquisition activity, more conservative refinancing decisions, and a focus on preserving existing assets rather than expanding portfolios. Such caution is understandable and rational, particularly for those still in the growth phase of their investment journey.

Borrowing considerations for mature portfolios

Landlords with mature, well-established portfolios tend to face different circumstances. Their borrowing levels are often modest, equity is substantial, and rental income streams are more stable. At this stage, borrowing decisions are less about seizing acquisition opportunities and more about managing the portfolio’s overall performance and strategic direction.

This shift raises important questions that are less common during the initial growth phase:

• Is borrowing viewed solely as a cost, or also as a strategic tool?
• Does existing portfolio equity offer options unavailable in earlier years?
• Is the borrowing-to-return relationship being assessed within the right context?
• Could the portfolio be optimised to work harder without necessarily increasing risk?

Understanding risk in the context of mature portfolios

It is often assumed that higher borrowing equates to higher risk, and lower borrowing means greater safety. While this may hold true for smaller, highly geared portfolios, mature portfolios can behave differently. Significant equity, stable income, and long-term ownership create a framework in which borrowing decisions are not simply about cost but about how the portfolio functions as a whole.

This perspective does not advocate taking on unnecessary risk. Instead, it emphasises the importance of understanding how the portfolio’s existing structure influences borrowing choices and overall strategy.

Revisiting borrowing strategy as portfolios mature

Experienced landlords often revisit the principle of borrowing at one rate to achieve a higher return once their portfolio reaches maturity. The fundamental idea remains valid, but the context changes. The focus shifts from building the portfolio to managing and shaping it for long-term sustainability, making the borrowing-return relationship more nuanced.

What this means for landlords

Landlords with substantial portfolios who are reassessing how borrowing fits into their future plans should consider the strategic role borrowing can play beyond just cost. Evaluating existing equity and income stability can reveal opportunities to optimise portfolio performance without necessarily increasing risk. This strategic approach requires a deeper understanding of how borrowing interacts with the portfolio’s overall structure and goals.

For those interested in exploring these questions further, a free introductory discussion is available by submitting a current property portfolio spreadsheet. This service is particularly useful for landlords with established portfolios and modest borrowing who wish to reflect on how their assets might work differently in the coming years.

Source: Based on reporting from Property118

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Landlords can explore the Academy here: https://landlordassociation.org.uk/tla-academy/

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TLA update

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