Interest only or repayment, letting a house

Vincenzo

It really depends on other debts/mortgages and long term financial goals. Personally I would always keep a BTL on interest only to free up cash for other investments and/or to pay off the mortgage on my own residence quicker, since I cannot offset that interest (in the main).

littlened

InMyDreams wrote: »

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.

Our current mortgage has 12 year left to run, and is essentially a repayment mortgage, but at the minute we've had it changed to interest only for a while until we figure out what to do. If we revert back to repayment, over 12 year, then we'll pay alot less in interest than we would do if we change to mortgage period to 25 year.

So, if we go repayment over 12 year, in total we'll pay £61488, but if we go over 25 year then we'll pay £85500, a £20k difference.