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I know some Landlords do not favour Capital & Repayment Mortgages or paying down debt in general
But I do and I will show you why :
Property Value £100K
£60K mortgage over 25 years
Capital Growth of 1.5% per year over 10 years
The result is as follows after 10 years
Mortgage will around £42K
Property Value around £116KSo your LTV will be around 36%
I fully understand that for Landlords who are expanding and using equity from existing property this will not work
But If you can afford Capital and repayment and you can fund your deposits without borrowing I believe this strategy makes a lot of sense
Just think today If you had an LTV on your business of under 40% how the effects of S24 would have be easier to deal with today
Money makes money as the old saying goes - but not via high leverage in 2019 in my opinion .
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
Long term I would prefer to have very low LTV or no mortgage at all on properties and I think for anyone that should be the long term goal because it shields you from market conditions but I guess it depends if you believe areas you invest will grow in capital value or not. If you do then you want as many as possible, especially whilst the cost of borrowing is so low and can be secured for so long (5 year fix is very common now). Some seem to think now is a poor time to buy but I believe the opposite and I think where we are buying will see strong growth, above average growth, in the coming 5-10 years. I also think interest rates will remain relatively low for the next 5-10 years at least and so for now my plan is to borrow as much as I can, put it where I think it will grow and generate the most cash flow to buy more then in 5-10 years reassess and perhaps look to secure lower LTVs on our existing properties to secure our position and maybe grow slower from there on if we decide to grow further at all.
This strategy I think is for Landlords who either have good Cash flow or have a lot of cash in the bank and wish to expand
For Landlords who dont have the above I dont think they have any other option other than to Remortgage and extract funds which of course has higher risk
Before S24 I used property for deposits and it worked well
Today I am in a different tax position and I have strong yields so I choose now to use this strategy because it fits my plans and it fits my risk profile
I agree, we're fortunate in that me and my wife have 2x good full time paying jobs plus we have quite a lot of capital. I'm hoping we can both work for ourselves in around 2 years but we'll see what happens.
I think repayment is a good idea, but I only switch after holding the property for a significant time (7-10) years as the rent has then increased to make the strategy viable.
S24 I believe makes it harder to do as the tax is paid in the rent so if you also have a large monthly repayment too you are putting more of your own money into the property.
Example on one of mine, rent 525, IO payment 110, repayment 472. So with repayment my cashflow goes to almost 0, and I still have the same tax to pay via s24, in fact over time my tax bill will go up. If i put the same cashflow into say an isa @ 5% and my mortgage rate remains at 2% i will be in a position to pay off the mortgage earlier i think!
Rather than repayment mortgage wouldnt it be better to make strategic overpayments at various times as you isa pot grows?
Slowly working towards financial freedom
I do think that outing cash into and ISA is a good strategy its building up a good tax free fund which can be called on to pay down debts
The strategy I have outlined here is my Company Strategy
and I believe it works well in a company
I have been using it now over three years and I can see the strength building in the company
I dont think there is right or wrong its a matter of which fits a Landlords business plan
I dont think we are going to see huge rises in capital growth for some time to come
But If I use this strategy I dont have to depend on Capital Growth to achieve a low leveraged business
It would be nice if it happens but I am not depending on it either in my company or my personal BTL
But I am a great supporter of using ISA and Pensions today in my own name and my company name
I still think the North West will grow at a good/solid rate for the next 5 years. Businesses are relocating there, infrastructure is improving, foreign investment is starting to move in. More importantly for what it is I think it is still undervalued in many areas. Still with all that said, hope for capital growth - don't bank on it.
In the long term a strategy is needed to pay down debt - be that by selling assets or making repayments.
Unless you're undisciplined and need a bank to put a gun to your head and make you do it --- err I mean hold your hand
Then I'd choose IO with ability to repay as and when I feel like it - not repayment.
Never know when a series of boiler may go pop - or a big bill for MEES works comes along - and I think the latter is likely to be significant in the future...
DISCLAIMER just my personal opinion - for legal advice consult a qualified professional grown-up.
I'm also in the "IO with overpayments" camp.
As per DL's scenario paying down £1,800 pa over 10 years, if you put the £150pm into a high interest account at 3% that would equate to about £21K to pay down the mortgage, or at 5% would equate to £23K, better than £18K going the repayment route. And in the meantime, as Owen said, you can still have access to this money if needed.
In the hope that we will have capital growth, our plan is to remortgage to the same value over the years, thus slowly reducing our LTV.
I am using precise on a purchase at present and if I buy via the Company they will not allow over payments
so I have opted for capital and repayment
I have got used to useing CR so I will crack on with my plans
but I know what your saying