For investors in UK buy to let properties, the sort of mortgage that they take out can have considerable implications on how much tax they will pay, both over the life of the investment and only a monthly basis.
This can significantly impact total returns from buy to let investing.
Unfortunately there is no single choice of mortgage that is right for every property investment strategy so prospective landlords should investigate their options with great care.
The first choice to make is between an interest only mortgage and one that includes repayment of the principal amount owed.
Traditionally most buy to let mortgages have been interest only ones.
This is because the interest paid can be deducted from the rent received for income tax purposes.
Thus many landlords have wished to minimize tax by not reducing the loan amount.
The main tax that would then be payable is capital gains but this is levied at a lower rate than income tax.
The advantage becomes particularly pronounced for people with high incomes as they pay tax at a much higher marginal rate.
The disadvantage of this sort of mortgage is that during times of stressed financial markets, landlords may find their loan to value ratio becomes easily stretched.
This may make it difficult if not impossible to remortgage with another provider and also means they may end up paying a punitive risk-adjusted rate.
Holders of mortgages where some capital is repaid along with the interest each month are reducing the size of the outstanding loan with every payment.
This reduces the risks of them falling into negative equity.
The second major choice is between a variable rate mortgage or a fixed rate.
In the past most landlords' mortgages were variable rate because the fees were slightly lower and the rate slightly more competitive.
However an increasing number of residential property investors are now taking out fixed mortgages.
These reduce the risk of being caught out by a sudden and severe increase in interest rates.
The disadvantages include higher fees and less flexibility.
Generally mortgage providers will also charge an early redemption fee on these sorts of products.
That reduces the flexibility of the landlord to sell or remortgage to take advantage of changes in market conditions.
Since interest rates in the United Kingdom are currently at record lows the arguments in favor of taking a fixed rate seem to be overwhelming.
There is little to gain from a variable mortgage and potentially much to lose.
Generally beginner buy to let investors spend most of their time researching the property market and then get a mortgage almost as an afterthought.
Considered research in this area could, however, led to very different investment outcomes.