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  • Mortgages & Finance

    Full repayment or Interest Only Mortgage ?

    Hi

    I am in the process of arranging the finance of my 1st BTL. Just wanted to know what are people's views with regards to having a mortgage on an interest only or repayment basis. There are pros and cons to both.

    My aim is to hopefully save enough from the rental of the property to build a deposit for another property. My investment strategy is to buy low maintenance 3 bedroom (or more) houses in residential areas that will hopefully appeal to families. Hopefully be able to build a portfolio of 5 - 10 of these houses.

    Would love to hear what more experienced land lords and property investors do when it comes to selecting the right way to finance their investments. Any advice or insight would be really appreciated.

    Thank you

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    pros- cheaper than repayment,.debt depreciates in value over the long term because of inflation. ( not what has happened over last few years with low inflation levels. For first time people have been paying a real rate of interest.) with any extra money you could pay off lump sums- most allow 10% per year.but need to check any mortgage details. this could result in lower payments as capital sum borrowed would be less. can always move to repayment at later date if it suited you depending upon borrowing criteria at that time.

    cons-unless you put money away or sell the house at terms end you might not have the means to repay the mortgage. Can't always bank on property prices going up at the end of the term.if need to change mortgage, or remortgage for what ever reason could find it difficult pp if in negative equity at that time.

    Why not do part repayment and part interest only.

    Over the last few years interest only has been cheap as rates have been historically low and house prices have gone up. This period is now over and don't expect the same going forward. Many are going to get hit very badly as we get back to normal conditions. I

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    Thanks Douglas.

    Yes - this is true. I think your advice of looking at part repayment and part interest is a good one. I will explore this further with my mortgage advisor. I did full repayment for my first property and the difference that 5 years has made to the capital that needs to be repaid is a substantial one. Certainly one of my concerns is remortgaging at the end of a fixed term and being in negative equity. What is your view on 5 and 10 year fixed mortgage rates? 

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    I think a 10yr mortgage with 5yr fix is not a bad idea. gives you piece of mind for next few years and option after 5yrs. I have not had a mortgage for many years but just did this on my own investment property to increase my liquidity for any future opportunities. LTV is still only 15% so i have cash to play with and plenty of equity as had the property for 35 yrs.

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    What's the capital growth like in the area you're thinking of investing in, and what LTV will you have? With a LTV of 65% in an area with steady GC of say 5% pa, I'd say IO - there are lots of good deals about now. Then you can do the classic 'let inflation erode away the debt' strategy. This enables you to save and use higher rental profits towards next deposit. You're then using leverage to help you expand.

    Sometime in the future, you can use the equity you've gained through CG to remortgage and release some equity towards a deposit. I would advise staying below 65% LTV for the foreseeable future though.

    That's my opinion!


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    Rachel 

    "Change is a prerequisite to longterm survival".

    The establishment is rigged so that the rich stay very rich, and the poor get poorer.

    Hi Rachel 

    Very valid points.

    Capital growth has been varied. These are the overall figures according to the House Prices Report :

    2013: -8%
    2014: 30%
    2015: -7% 
    2016: 1%
    2017: 10%  

    65% LTV is a very a sensible idea. If I opt for capital repayment then I would be looking at remortgaging in 5 years time. Hopefully by then some of the capital will have been chipped away and there will be some equity in the property. 

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    One comment to make, that many buying now have failed to understand. Property cycles go in 17.2 yrs. Since 20006/7 recent bottom, we are approaching the end of the going up phase with tops probably being reached now. The next phase is recession or downturn in property prices. This will continue for another few years (until around 2023/24) when they will start going up again as each cycle starts at a higher level than the previous one. No problem for long term holders but during the later period as confidence fades, prices fall and those over leveraged become forced sellers with many going bust. Its difficult to say when this happens but we are not too far away now.

    So make sure you have funds available to ride out the storm over the next few years otherwise you become another bankrupt statistic.

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    Sorry to correct but that’s not the 18 year cycle I and many others are working off.

    We are at a wobble then period of increased price growth then drops off at date mentioned.

    You've peaked too soon!

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    Its not an exact science just one of many theories on the property cycle.

    But the fact remains properties are now over priced and due for a correction. -this time a very sharp one.I have held my remaining let property for over 35 years and that's fine but I never had to worry about funding it so any rate increases etc did not affect me.

    I remember when mortgages rates were 15%. and I had borrowed 50K for my main house and repayments were £1500 per month. But inflation was 20% and my salary was increasing at over 15% per year so I survived but many did not at that time.

    Hopefully many will not see that again but history does repeat itself .

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    Another good post Douglas. I am conscious that there will be a down turn of properties prices in the near future. History does repeat itself. Some prices are already falling in London and usually what happens in London will catch up with the rest of the country. Setting some savings aside instead of going all guns out on property shopping is a very sensible approach. Thank you

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    2006/7 was the peak not the bottom. Prices then dropped and around here only recovered to 2007 levels 2 years ago and growth has been  accelerating since then. By the 17 year cycle the the peak is not due until 2023. That is using my local housing market of course.

    The crash before was around 1990 - 17 years earlier - just after I bought my first home with interest rates over 10%. I payed £64,500 with a £40k mortgage and sold it for £39,500 3 years later.  My pay had gone up 25% but the company had then imposed a pay freeze which left me being paid less than others doing the same work.


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