Interest only or repayment, letting a house

littlened

We let out our old property, it was valued at £65k when we got permission from the mortgage company to let it, and we have roughly £42k outstanding on the mortgage at the minute.

We let the property out for £375 per month and are currently paying interest only on the mortage, and have been for the last 6 month. We have 12 year left on the mortgage.

At the end of the year we'll be out of our fixed period with the mortgage company, and wondered what the best thing to do was?

Long term we want to keep the property being let, and possible add more properties.

In general, what's best in this scenario? Interest only or repayment? We'd prefer repayment, because at the end of the period we'd own the house, but if we did a repayment mortgage we'd probably need to increase the mortgage period to 20/25 year, which in essence means we'd be paying alot more interest. We'd love to keep the existing term of 12 year, but our mortgage payment on repayment would be more than the rental income, and I believe mortgage companies don't allow that.

Thanks in advance

Doozergirl

It's a no brainer isn't it? At the end of 25 years do you want to own the house or not? If you don't have the money to pay off the mortgage you will either have to remortgage it or sell the property. After 25 years I'd quite like to call all the rent mine, not have to continue paying a mortgage (defeats the point surely) or necessarily be in need of the cash sum, I'd prefer the income.

A long term landlord needs to pay the mortgage off. In fact, anyone with a mortgage needs to pay it off.

furndire

Isn't benefit to paying interest only is that you can offset all the payment against tax. Can you pay lumps off if you want?

mynameisdave

If you want to consider extra properties I would assume it preferable to keep the extra cash you get and put it towards a deposit, rather than using it for capital repayments.

silvercar

Tax advisors always say to go interest only to minimise the tax liability.

This also keeps more money in your pocket for unexpected maintenance and to cover voids.

poppysarah

What would you feel more comfortable with? Paying off the mortgage and having the asset owned outright or a 25 year mortgage or IO?

littlened

poppysarah wrote: »

What would you feel more comfortable with? Paying off the mortgage and having the asset owned outright or a 25 year mortgage or IO?

I think I'd be more comfortable knowing the property was ours.

I wonder if we're best off with an interest only mortgage, but at the end of the year paying a lump sum which would have been equal to what would have been paid had it been a repayment mortgage.

poppysarah

Get it all worked out on paper how much it'll cost, how much tax you'd have to pay etc on all the different senarios.

blinko

with interest only mortgage you get the capital appreciation of the property

with repayment you get the capital appreciation and after 25 years you own the property drawback is repayments are higher

InMyDreams

littlened wrote: »

We'd prefer repayment, because at the end of the period we'd own the house, but if we did a repayment mortgage we'd probably need to increase the mortgage period to 20/25 year, which in essence means we'd be paying alot more interest.

I don't follow this. What exactly is the problem with increasing the mortgage term to 20/25 years? Why would it mean you are paying more interest?

Your current term is 12 years, yes? What was your plan once this term is up? How were you intending to repay the £42K currently outstanding? (I get the impression from your post that you aren't intending on selling the property to pay off the outstanding mortgage, so I assume you have some other plan in place.)

If you switch to a repayment (increasing the term if necessary) you don't have to wait until the end of the term to clear the balance. You could still do it after the original 12 years (assuming that was your plan) and you will, overall, have paid a lot *less* interest, not more because your outstanding balance will be much less by then. It will also cost you a lot less than £42K to clear it at that point as you will have already paid a chunk of it off.

If after the 12 years you were planning to try to remortgage again on another interest only mortgage, then how is increasing the term now and going repayment going to mean you end up paying a lot more interest?

As for paying lump sums at the end of each year, where are you going to keep those lumps during the year? The interest on those savings will be taxed. You could be better off sticking it into the mortgage as soon as you have it (cash flow aside) especially if the interest rate on your mortgage is much higher than what you can get in a savings account.

As for the tax implications that's a separate issue. As poppysarah says, you need to work out whether the tax saving of keeping it interest only will outweigh the interest saving of going repayment.

fedupbankstaff

Most lenders let you pay off 10% of the o/s balance each year without penalty, so I would either stay on interest only and put extra money into a savings acc(lots of monthly savers paying 5% & above out there) and then make a lump sum payment each year or take change some of your mortgage to repayment and keep some on interest only plenty of free mortgage calculators on the web to play with the figures to get the split to what you want to pay monthly. Remember though, interest rates are low at present and if you take repayment and the rates go up you may end up paying more than the rental income, in this case staying on interest only and paying off lump sums would be more sensible.