By James Whitfield · Property Finance Correspondent
The question comes up in every conversation with a serious holiday home buyer right now: do I borrow, or do I pay cash? In 2021 and 2022, when rates were near zero, leverage was almost always the right answer. In a 6% environment, the calculus is genuinely different — and more interesting than most people think.
This piece does the arithmetic plainly. We'll look at a representative purchase at €500,000 (roughly equivalent in USD, GBP, or AUD at current rates), compare the all-in cost of a mortgage position against a cash purchase, and then determine what rental yield you need to make the mortgage worth it.
The baseline scenario
Assume you're buying a holiday property worth €500,000. You have the cash available. You're choosing between:
Option A: Pay cash. €500,000 out the door, no ongoing financing cost.
Option B: Put down 30% (€150,000) and take a mortgage on €350,000 at 6% over 20 years. Invest the retained €350,000 elsewhere.
The true cost of borrowing at 6%
On a €350,000 mortgage at 6% over 20 years, your monthly payment is approximately €2,506. Over the full term, you'll pay €601,440 in total — meaning €251,440 in interest. If you only hold the property for 10 years (a reasonable planning horizon for a holiday home), you'll have paid roughly €300,720 in repayments and still owe around €260,000 on the mortgage. Your total interest bill for that 10-year period: approximately €170,000.
At 6%, borrowing €350,000 on a holiday home costs you approximately €170,000 in interest over 10 years. That's 34% of the purchase price before you account for any capital gain or rental income.
The opportunity cost of paying cash
Cash buyers avoid that €170,000 interest bill — but they give up the return they could have earned on that €350,000 sitting elsewhere. If you invest it in a diversified equity index at a net real return of 5% annually, that €350,000 grows to approximately €570,000 over 10 years — a gain of €220,000. At 6% return, the gain is roughly €277,000.
So the true comparison isn't 'zero cost versus €170,000 interest'. It's €170,000 in interest versus €220,000–€277,000 in foregone investment returns. On pure financial logic, paying cash is more expensive than borrowing if your alternative investment return exceeds your mortgage rate.
The problem is that most people cannot reliably earn 6%+ after tax on money held outside an ISA or pension wrapper. For many buyers, effective after-tax returns on accessible capital are 3–4%. At those rates, the cash purchase begins to look more competitive.
What rental yield do you need to justify the mortgage?
This is the question most buyers actually need answered. If the property generates rental income, the income reduces the net cost of carrying the mortgage. Here's the threshold calculation:
Your annual mortgage servicing cost is approximately €30,000 (12 × €2,506). To break even on the financing — meaning rental income covers your entire interest and principal payments — you need the property to generate €30,000 in net rental income annually. On a €500,000 property, that's a 6% gross yield before management fees, vacancies, and maintenance.
Realistic achievable gross yields: Algarve villa (5–7%) · Phuket condo (6–9%) · Goa villa (4–6%) · Barbados beachfront (5–8%) · Lisbon apartment (4–6%). Deduct 25–35% for expenses to arrive at net yield.
After deducting a typical property management fee (20%), platform fees (3%), maintenance allowance (1%), and vacancy (15% of weeks), your net yield will be roughly 60–65% of gross. So to net €30,000, you actually need to gross approximately €47,000 — a 9.4% gross yield. Very few markets deliver that consistently at the €500,000 price point.
The honest conclusion
For most buyers, a holiday home purchased primarily for personal use (with some rental income on the side), the cash purchase wins if you have the liquidity. You avoid complexity, reduce risk, and the ‘cost’ of not investing that capital is likely offset by the simplicity and peace of mind.
For buyers who are serious about generating rental returns and have strong alternative investment options for their capital, a 30% down, 70% mortgage structure can work — but only in markets where gross yields of 7%+ are achievable. Phuket, parts of Bali, and select Caribbean destinations clear that bar. Most European and Indian markets do not at current price levels.
The worst outcome is a leveraged purchase in a low-yield market where the owner funds mortgage shortfalls from salary year after year. Run those numbers before you sign anything.
Mortgage rates, tax treatment, and yield assumptions vary by country and change frequently. This analysis is illustrative and does not constitute financial advice. Consult a qualified adviser for your specific situation.