I have the option of reducing my buy to let mortgage by £120 by extending it from 20 years to 30 years. This is a capital repayment mortgage. However, the bank says I will need to put in £1600 to qualify for the preferred tracker interest rate I want.

When I met with the branch manager, they strongly advised me against changing my loan because I will pay £70,000 more in the long term.

Is it better that I switch mortgages, or should I just listen to my banker?

Hello Ruth

There are many possible answers, maybe listening to a banker would be quite a way down the list.

What is it that you are looking to achieve? Gain more cash flow, pay off the mortgage...without an understanding of your goal it is difficult to make sure you get the right get advice,

Michael

I would like to decrease my outgoings each month by reducing the mortgage payments by extending the mortgage. what do you think?

Will you make more than £70,000 in a 10 year period by saving £120 a month?

(07-10-2012 07:00 PM)Simon Topple Wrote:  Will you make more than £70,000 in a 10 year period by saving £120 a month?

I think I would because it would free up my money to invest in other things. Also, I think that in 20 years I could just sale the property anyways, which would result in me just clearing off the debt anyways. therefore, if I sale the property in 20 years, I would have paid less overall then if I keep the mortgage at 20 years amortization, and paid the higher fee due to the shorter loan period.

I'm hoping I sound like a smart business woman with this logic?

My gut feeling is to keep the mortgage on the arrangement you have and continue to pay down the debt.

£120 per month extra does not seem worth it.

If you have a spare room in your own home, have you considered renting out a room? That would bring in a few more hundred £££ a month for you to use as cashflow without compromising your BTL mortgage.

Hi Ruth

You are repaying capital and interest so the amount of profit you are making on the property is increasing each month so you have to be aware of the affect this has on your personal tax situation

By saving £120 a month you will gain £1,440 in the first year. What could you invest this in to get a better return than the rate you are being charged by your bank?

Certainly property but how much cash would you need to get the return you want?What rates and fees are the bank offering you? Have you considered a remortgage with another lender on an interest only basis but you would also have to compare set up costs.

I use a spread sheet in my day job which calculates repayments for mortgages. It's amazing how much can be saved in interest by reducing the term and also how much extra it costs by increasing it.

(07-10-2012 08:48 PM)Simon Allen Wrote:  Hi Ruth

You are repaying capital and interest so the amount of profit you are making on the property is increasing each month so you have to be aware of the affect this has on your personal tax situation

By saving £120 a month you will gain £1,440 in the first year. What could you invest this in to get a better return than the rate you are being charged by your bank?

Certainly property but how much cash would you need to get the return you want?What rates and fees are the bank offering you? Have you considered a remortgage with another lender on an interest only basis but you would also have to compare set up costs.

I use a spread sheet in my day job which calculates repayments for mortgages. It's amazing how much can be saved in interest by reducing the term and also how much extra it costs by increasing it.

Do you have a link to your spread sheet so I can use it?

If you can always have the biggest BTL mortgage you can on an IO only basis for the longest period possible.
Put any surplus funds in a high interest account.
You will then have created your own piggy-bank to be used when you wish.
The difference between the interest you will be charged; which is offsettable against tax and what you would receive net shouldn't be that much.
To have liquid capital available at an ongoing cost of say 1 % is a small price to pay for that liquidity.
Plus it is a lot easier to service an IO loan that a capital repayment.
You can devise your own capital repayment strategy without any bank dictating to you when you should.
I have a friend who has a resi IO mortgage from Santander.
His IO payment on a £100000 debt is about £100 per month.
He has the capital to pay it of but chooses to leave the capital in a high interest savings account.
Consequently he is in charge of his repayment strategy not the bank.
He may be made redundant; but it would take about 20 years for all his savings to run out.
You only need 6 months of mortgage arrears to find your property repossessed.
One needs to ensure funds are available to prevent this occurring.
You are essentially providing an insurance policy for yourself at very little cost.
If you haven't the funds to pay your mortgage you are stuffed.
You may have massive equity; the bank won't care; they want the mortgage payments made
So you make sure you have the ability to service the mortgage debt come what may.
I don't think he will be out of work that long!!
Savvy borrowers will create as much liquidity as they can when the opportunity arises.
The banks will be even more restrictive in lending in future.
Therefore we need to build up our own bank resources.via bank as they will refuse to lend in the future.
If offered try and get it while you can!

I agree with Paul.

Any measure you can take to keep control is worthwhile in my book for the reasons Paul outlines.
Keep the control with you and let the bank worry whether you can service the loan and pay it back in the future.

BUT the 120 must be used effectively and treated with care. You only have temporary custody of it. If you are weak and spend the extra cash on frivolous objects which you dont really need then you need to be wary.

If however you save the 120 plus hopefully other 120`s over the course of time from other properties using the same IO strategy you become highly geared and you will benefit from rental income and capital growth over that 10 year period.

As Simon says nice and succinctly - Will you make more than £70,000 in a 10 year period by saving £120 a month?

I would go slightly further and say look at a 20 year period also. It depends what your other assets are and what you propose to do to increase those assets in that 10 year period. That will help to determine your decision now. How do you foresee the picture in 20 years.

With some of my earlier properties they would not pass Simon`s test.
They may fail or break even in fact within that 10 year period. I`ve used and abused them to give me the cash to buy more. They will recover from my harsh treatment with them but it may take 20 years not 10 for them to forgive me!


Thats when the plan really starts to come together. They were the seeds that enabled growth. 10 years is important but what happens in 20 years is maybe more important

The extra 70K on paper you have to pay back could become a walk in the park if you play a good game
Use the combination of leverage, inflation and capital growth to whittle that figure down and lessen its impact on you

Buy houses not shoes with the 120 is what I`m saying. :-)