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  • Mortgages & Finance

    Interest only mortgages ... useful?

    Hi,

    Beginners question really (I have more!) ... I've been reading about the reasons for taking out an interest only mortgage, but can't see any major benefit, so perhaps I'm missing something!

    - Are these generally the favoured option for BTL?
    - I understand that you can only offset your interest payment against tax, but what difference does that really make?
    - Do lenders want to see proof that you are saving up enough to pay off the capital at the end of the mortgage term?

    Thanks!
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    Lenders are more willing to offer interest-only mortgages on BTLs because a BTL property can be sold to pay off the loan; you (as the owner) don't need it to keep a roof over your head.

    In the meantime, since you only have to make interest payments - no capital repayments - you are left with with more cashflow that you can use as you choose - whether that be to live on, to invest in more properties, or to pay off your existing mortgages (there's usually the option to pay of a proportion of the capital each year without penalty if you so choose). As you've pointed out, it's only the interest payments that are tax-deductible so (as far as I'm aware) there's no tax benefit to making capital repayments.
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    All mine are interest only. If you intend to grow a serious portfolio you want interest only. Its tax efficient increases your cash flow and no you dont have to prove you have another savings vehicle to pay it off as that can be done by selling the property in 25 years or so.

    You leverage your asset to make money. I see precious little benefit in getting a 75% LTV mortgage only to have a 74% LTV in a years time because you have paid off some of the capital. You might as well have taken out a 74%LTV in the first place. I aim to make 20% + on each pound borrowed. So if I can borrow at 5% and make 20% it does not make commercial sense to pay down that loan as I lose out on 15% potential profit .
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    Jonathan Clarke. http://www.buytoletmk.com


    For BTL, I do agree interest only is definitely the way to go, mostly because the repayment element isn't tax deductible, so unless you have enormous cashflow from your property, it can make things tricky.

    Secondly, it keeps you in control, you can still pay down your mortgage whenever you want to, but keeps your monthly payment as low as possible.

    If paying down the debt is a part of your plan, you could simply work out what the repayment element would be, but stick the money into your savings account instead and build a cash war chest.

    So interest only every time for me.
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    (09-11-2014 10:06 AM)daniel_booth Wrote:  So interest only every time for me.


    Thought you said saving up and buying cash was the way to go?
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    (09-11-2014 10:41 AM)dw3 Wrote:  
    (09-11-2014 10:06 AM)daniel_booth Wrote:  So interest only every time for me.


    Thought you said saving up and buying cash was the way to go?

    You again!

    Yes, once again, for me personally, unencumbered is the way to do it.

    However, some people need to use mortgages, I've never denied that, just stated that there are better ways if people have capacity to do it without them.

    So if it's a choice of interest only or repayment, then interest only makes sense every time.

    I'm answering a specific question related to this specific thread, this isn't a debate about leverage.

    Stop being a twat.

    Alastair, apologies that DW3 has taken your thread off topic, hopefully your specific question about Interest Only vs Repayment has been answered.
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    (09-11-2014 10:48 AM)daniel_booth Wrote:  
    (09-11-2014 10:41 AM)dw3 Wrote:  
    (09-11-2014 10:06 AM)daniel_booth Wrote:  So interest only every time for me.


    Thought you said saving up and buying cash was the way to go?


    I'm answering a specific question related to this specific thread, this isn't a debate about leverage.

    .

    A fundamental part of the answer.
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    For a minute I thought you had seen sense!
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    Why do I need to see sense my friend?

    Because I have a different strategy to you?

    Think you might need to learn to respect alternative views to your own, like I respect Jonathan Clarkes, because he's good at what he does, just because I state it isn't how I want to do things doesn't mean Jonathan is wrong, the same as just because you don't want to do things my way, doesn't mean I'm wrong and need to see sense.
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    Let me put it this way. Whether I agree or not, Jonathan appears consistent in his advice/opinion whereas there appears to be some inconsistencies in your approach. Just an observation and not really interested in trading insults.
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    Ok, regarding insults, I have no interest in that either, but I will defend myself from someone being a smartarse.

    On the last thread we spoke on, you said "you are sane after all" and then implied anyone driving a decent car will go bust, because I've previously mentioned I drive a Range Rover.

    So you are doing the whole passive aggressive stuff, I don't mind to be honest, but I will defend myself from the snidey comments.

    Moving on from the insults, I believe the inconsistency you refer to is the fact that I don't believe in leverage, but I used it in the past, plus advising someone on mortgage options on this thread when I don't personally want anymore mortgages.

    Two simple answers:

    1/ I used leverage to originally build my portfolio, because I didn't know any better ways in my twenties, however with hindsight I would do it the other way round, build a business first and buy the portfolio with the profits.

    Of course that is inconsistent with what I actually did, but as I don't possess a time machine, I can't change that.

    2/ If Alistair had asked the question, should he leverage or not, I would refer to the debate held previously, however he didn't ask that, he asked whether to go interest only or repayment.

    When I was using leverage (in fact I still am leveraged until my remaining mortgages are paid off completely) I went interest only for the reasons I gave to Alistair above, so I'm simply answering his specific question.

    I hope that clarifies, but if there's any other inconsistencies you want answered or any more potshots you'd like to take, then absolutely feel free and we can keep going.
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