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  • Mortgages & Finance

    Repayment or interest only?

    Hi New here,

    Just wanting a bit of advice, I have one rental property and another thats just about to complete both have been set up for repayment mortgages (assumed it was the norm).

    However I was speaking to someone who has a big rental property portfolio and he basically said your doing it wrong, you need interest only mortgages, maximise your income and buy more, you pay less tax and its how its done.

    Whats everyones thoughts?

    It worries me that you're not paying anything off the mortgages so what happens in 25 years time when the mortgage period is coming to an end, you have a big portfolio of properties generating good income but none of them are paid for?

    Only benefit I can see to doing it interest only is to maximise the income received to in turn save up for deposits quicker, get more properties then gradually switch the mortgages to repayment now the tenants rent covers the payments but he said no you don't switch.

    Then I have just spoke to someone else who has over 80 properties he highly recommended me not to do interest only.

    Help would be appreciated.

    Thanks

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    Hi Firstglance and welcome.

    This topic has been discussed many times here.  One such example of an archive discussion:

    Interest only vs. capital repayment BTL mortgage

    The answer will depend on your personal circumstances and attitude to risk, and especially your tax position.

    "Old school" landlords will tell you it is counter-intuitive/productive to go for a repayment mortgage, but times have changed and this is an important question to ask yourself.

    You could put one on repayment and one on interest only to cover yourself and have the best of both worlds.

    Most people aim to build a portfolio on interest only mortgages, enjoying the enhanced cash flow, then sell half the properties in 25 years time, and use the equity to pay off the mortgages on the other half, leaving them unencumbered and income producing for that individual's retirement.

    ​Hope that helps for starters?

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    That's similar to my strategy too Vanessa: "Most people aim to build a portfolio on interest only mortgages, enjoying the enhanced cash flow, then sell half the properties in 25 years time, and use the equity to pay off the mortgages on the other half, leaving them unencumbered and income producing for that individual's retirement."

    Growth will determine how many I have left unencumbered at the end, and I intent to sell 1 per year to make use of capital gains allowances until all are unencumbered. I have IO morts, but I also pay off and extra amount monthly on select properties to get them to fall below 60% LTV when the fixed period expires. This also lets you pay down the debt while giving you the flexibility of dropping the payment down to the IO amount if you ever need or want to.

    S24 means I pay most of my PAYE salary into a pension to keep tax on ACTUAL property profits to 20%, although everyones tax position will be different. Firstglance, I'd advise working out how S24 tax will effect you  before choosing a strategy.

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    Another option if you wanted the flexibility would be to take an interest only mortgage and then use the overpayment facility (generally 10% of the full mortgage balance per year - but you should check your mortgage offer) to reduce the capital on the mortgage as it suited you and your investment strategy.

    If you do complete as they are currently set up, you will not be able to amend your mortgage terms easily, or likely without paying early repayment charges, but if you have not yet exchanged you could possible ask for amendments (again depending on the lender and your mortgage offer)

    I agree with Vanessa, it's a personal choice and should always be tailored to you and your plans.

    Feel free to call or direct message if you want to talk through any personal details you may not want to share on a public site Smile

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    Jenny Reeves

    Property Tribes Financial services

    You can contact me via Direct Message, or 07581 794922 or call the team on 01206 654444 for personalised quote and advice


    wow great advice from both of you thank you, just taking it all in and writing notes I am so naive when it comes to this.


    I am toying with the idea of what Vanessa mentioned, keep the repayment one as it is and change the new one before completion to interest only and see how I get on.

    I am contemplating changing my other mortgage from repayment to interest only as I spoke to them yesterday after I got the advice to go interest only route and they said it can be done for a £50 fee and supposed to have a video call meeting with there advisor at 3pm today to possibly change it over. I am 50/50 at the moment.

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    FWIW - the potential 10% pa overpay facility could reduce an IOM faster than the typical principal decrement on the traditional 25 yr Repayment Mortgage.

    The principal decrement is a bigger portion of the servicing cost on Repayment basis when interest rates are low and vice versa - as obviously with a low interest Repayment loan most of the payments go to reduce the principal o/s - especially in later years. For completeness Repayment mortgages are in effect front end loaded with a higher bias toward interest in early years and vice versa - and of course a shorter mortgage term will have less total interest and thus higher repayment of principal each month.

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    Also worth remembering - portfolio building over say past 30 yrs has been facilitated by higher capital growth - enabling release of that extra equity building in the early tranche.

    If growth is more subdued in future the IOM route may be less suitable if the aim is to maintain full portfolio as a pension. That would especially apply if you operate in the North.

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    OP, please join up with a landlords association as well! For £75 or less it makes a lot of sense to gain knowledge quickly.

    There is a discount via this PT forum for the RLA, and as an alternative there is the NLA as well.

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    The correct route either Repayment Mortgage v Interest Only Mortgage, is a decision for you to make. Its not a one size fits all.

    It's also not that simple either, as some Interest Only mortgages also come with an "Overpayment Allowance" giving you the the option and flexibility to reduce the outstanding capital.

    Traditionally the Portfolio Landlord route was Interest Only. Those not looking to create an empire may favor repayment to give themselves security and aim to have the mortgage paid off by retirement.

    Though with the removal of Mortgage Interest Relief ("Clause 24" or "Tenant Tax") it is highly advantageous to pay down your mortgages.

    So paying down the capital is one strategy, the other that favours interest only. Is to use those funds instead into a savings account to put down as deposit for another property or even fund renovation/extension of existing properties. ( See: Leveraging ).

    Some of those leveraging would argue, they are making there money work harder. Having multiple properties at a point generating income which would allow you then to pay down the finance once income has accumulated.

    Neither is permanent, you can change the repayment strategy on refinance. Either switching to interest only if your business plan is to generate funds to expand portfolio. Alternatively switching to repayment if your portfolio is of a size you are happy with.

    The funds of course used to pay-down the mortgage is not lost, often a landlord able to refinance to release that equity. In addition the funds from Interest Only have been used or are there to be used, that could be to pay down the mortgage on refinance (or given an overpayment allowance).
    If it is a matter of following trends, most landlords take interest only mortgages. Though its a personal choice in how it fits in with your business plan & ambitions.

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    _________________________________________________________________________


    The above post is not financial advice, its often me rambling - passing time on a coffee break.
    If you are looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance.


    _________________________________________________________________________


    Hi there.

    The argument regarding interest only versus repayment for BTL depends on your long term plans and goals really. Your contact is correct if your initial goal is to maximise rental income as interest only is the minimum possible payment. However, if you are looking long term to have the properties free of debt for retirement (for example) AND you do not require much by way of income now then repayment makes a lot of sense. 

    But…if you go interest only but re-invest the excess income every so often to buy more BTL properties then you can potentially grow your portfolio faster. The balances of the mortgages will not fall (as not repayment - obviously) but when you get to retirement with a load of properties that have a bit of equity in them you can always sell a few of them to release the equity that you can then use to clear the mortgages on the remaining properties to leave them debt-free (unencumbered) in retirement. So you can achieve the same result but by different means. 

    There are perhaps more risks with the future value of property when you come to sell them but I can’t help with that unfortunately.  I think the decision comes down to whether or not you need the excess rental income now and what your long term plans are for the properties.  I would also strongly recommend talking to a property tax specialist as you might want to use a limited company – there are pro’s and con’s for this too.

    I hope that helps you decide what is best for you,

    Cat

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    Call the PT Broker Hotline on 0333 363 6507 or email us at ptbrokers@johncharcol.co.uk


    It depends on your goals/financial position, and more importantly if you do not need the cashflow for personal income or to achieve the portfolio size you require.

    So, assuming you are a married couple age 40 and the goal is to retire at 60 with the income from 4 properties.

    I see it on here regularly where people recommend to have Interest only mortgages, in this example 8, and when you reach target retirement age then sell half to pay half off leaving 4 mortgage free. On the face of it this seems a reasonable strategy. However, lets look at the repayment mortgage strategy to achieve this (assuming all items I mentioned in paragraph one).

    Buy a property for £100k at 75%LTV. Over 20 years with a compound capital growth at 3.5% per year will mean it doubles in value to £200k.

    If you have 8 of these properties, and sell 4 of them (doing 1 a year to take advantage of the couples CGT allowances). So, £100k capital gain per property - 24K couples allowance will leave you with £76k so you will be able to pay one of those you are going to keep. Note that there will also be selling costs etc.

    A property with a repayment mortgage at £75k over 20 years (assuming 5% interest rate) will be £495 per month against an interest only one at £312.50. However, the overall interest paid on the repayment over the term is £43,792 against the IO mortgage at £75,000. Saving in interest costs of £31,208 per property. Over the 8 properties that is a savings of just shy of £250k. At 75k each that's the equivalent of 3 of the properties, plus 25k change.

    So, going for repayments instead of interest only (ignoring/not needed cashflow and affordable etc), you could end up with 7 of the properties without mortgages at the the same interest cost. And, after a few years use the cashflow to pay of property 8 and you have all 8 instead of 4.

    All the above depends on those items I mentioned in para 1. But, it's still something worth thinking about.

    Hope this helps.

    fab


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