Level of Mortgage on a Buy to Let

getmore4less

Raggs wrote: »

Biggest mortgage possible, assuming your return rate on the value of the house, is higher than your mortgage rate.

10% return on 200k house = 20k a year
5% mortgage on 150k = 7.5k a year

12.5k clean profit, on 50k of your personal investment. 25% interest rate basically.

10% return on 200k house = 20k a year
5% mortgage on 100k mortgage = 5k a year

15k profit on 100k investment = 15% interest rate.

Better interest rate on the smallest investment. As long as return is higher than mortgage, as small an investment as possible is best.

Finding £200k worth of property returning 10% net will be the issue with that plan.

Also in the first case you have a further £50k to invest elsewhere you have to take that into account for total returns on £100k to be equivilent to case 2.

Say 2% net in a safe place thats £1k so the total return on £100k is £13.5k or 13.5% which is less than the return on the £100k investment.

Ok you can buy 2 places and have all your eggs in the property market.

Caroline_a

Thanks everyone, lots to think about now!

Elliot.Rigsby

It depends on several factors:
Whether its a long term investment?
Potential income v available interest rate (borrowing and saving)

Caroline_a

i'm looking long term (15 years). As I have a reasonably well paid job at the moment, plus a house that has no mortgage to live in, the idea is that it works a bit like a pension plan.

BitterAndTwisted

Have you investigated what the rent-levels currently are in the place you are considering buying? Sometimes the uplift in rent between say a three-bed and a four-bed property may not be great enough to justify the additional cost to purchase.

As in all things relating to investment it's always best to diversify. I wouldn't put all of your future pension-plans into just the one basket. I understand that it's sensible to split the investment sum into three different baskets: one third into high-interest/high risk, one third into moderate-interest/moderate risk and the remaining third into low-interest/low risk.

getmore4less

Caroline_a wrote: »

i'm looking long term (15 years). As I have a reasonably well paid job at the moment, plus a house that has no mortgage to live in, the idea is that it works a bit like a pension plan.

One way to look at this when dealing with property is to consider that rent tends to pace with wages over the long term.

So to think in terms of retirement income you can do this in terms of rent.

For a retirement income you need regular income so one place is not enough you need more to mitigate the risks I would say 3 minimum.

So if you think in todays money that £1500pm would be ok to live off then 3 places that net £500 each(after expences but before mortgage) would do the job.

So to retire in 15 years you need to borrow at a level that can be paid off in 15 years. with £1500pm and provide the rest of the capital yourself.


The long term risks with rental is you pick an area that becomes unpopular or the main source of renters dries up.

anselld

There is no point in incurring extra expense just to avoid tax! Lower mortgage must be better. In fact if you can afford to buy mortgage free do it (assuming it is the right property with the right returns)!

Fair enough if you don't want to tie up capital which you could use elsewhere then get a mortgage but that is a completely different argument and has nothing to do with tax.

How about if I said - you can save tax by taking a pay cut?

Raggs_2

anselld wrote: »

There is no point in incurring extra expense just to avoid tax! Lower mortgage must be better. In fact if you can afford to buy mortgage free do it (assuming it is the right property with the right returns)!

Fair enough if you don't want to tie up capital which you could use elsewhere then get a mortgage but that is a completely different argument and has nothing to do with tax.

How about if I said - you can save tax by taking a pay cut?

You have to view it as an investment though. Which, the maths states (as I showed, though I realise the numbers are generous, it's to show the theory only), is best off with as little invested in the property as possible. And an overall return on the house value greater than that of the interest on the mortgage. But if you're failing to get that, then your money would probably be making more money in the bank.

Tax truly has nothing to do with it, the tax thing is purely an added bonus. With a smaller investment you also do better with price fluctuations (as long as you are working long term) due to increases = greater returns, and decreases ending up eating the banks money as opposed to yours (depending on how much it dropped).

anselld

Imagine today I have a fully owned BTL, no mortgage, just income.

You are suggesting I would be "better off" to go out and get a big mortgage so I can pay less tax and have less capital invested, more money in the bank.

Well that is simply incorrect unless I can invest that capital for a greater return than the mortgage (net of tax).

As per your example
10% return on 200k house = 20k a year
5% mortgage on 150k = 7.5k a year
12.5k clean profit

10% return on 200k house = 20k a year
5% mortgage on 100k mortgage = 5k a year
15k profit

10% return on 200k house = 20k a year
nil mortgage
20k profit

I will take the £20k thanks unless I have a better use for the capital !

JQ.

So according to your calcs the investor receives a 10% yield by having no mortgage - £20k return on £200k invested

or thay can have a 25% yield by taking a mortgage - £12,500 return on £50k invested


. . . . . I know which one I'd prefer (and it's not your £20k)