Is Interest Only the way to go?

ReportInvestor

Acc72 wrote:

At the moment you could probably buy a £200k property for £800 per month on an interest only.

But you could possibly rent the same place for say £600 per month - saving yourself £2,400 per year

Well I checked out my local property market this lunchtime and that's just not possible.

It assumes that a buy to let landlord is prepared to accept 3.6% gross income [before tax, maintenance, agency fees and lost rental income from vacancies]

tomstickland

Interest only is a gamble. Borrowing money and taking the chance that capital appreciation will make it worth it. Rather like taking out a loan so you can invest in shares.

I'd rather boringly pay off my debt. If the house is worth nothing by the time you're finished then it doesn't matter.

gallygirl

lovetobeloaded, reading between the lines I'm guessing you have a fair amount of debt and are looking to reduce your outgoings. Under the circs I wouldn't advise an interest free loan - have you curbed your spending, or would an extra say £200 a month just 'disappear'?

If you're looking to reduce ougoings I'd suggest you have a look on the DFW board, post your statement of affairs & think seriously about reducing expenditure in other areas rather than leave yourself financially at risk in this way.

or I may be talking [EMAIL="b@ll@cks"]b@ll@cks[/EMAIL] again......

ManAtHome

lovetobeloaded wrote:

If and when you move, sell the house and simply pay back the initial amount borrowed (in my case £125k, house now worth £170+), from the equity.

Hmmm - works well until this bit.

When/if you move (unless it's to a tent, cardboard box, or somewhere substantially smaller), other properties will have risen by a similar percentage so no real equity to release.

InMyDreams

Rick62 wrote:

Financial priority should be to pay off your debts, unless you still want a mortgage when you retire and to be destitute.

I would edit that to say "be in a position to" pay off your debts. You necessarily have to do it. But you do have to be disciplined not to spend the money earmarked for paying off your debts/mortgage.

Rick62 wrote:

If you could reasonable easily make, say, 10% return somewhere else then the banks would all be doing that, rather than lending to us.

They do, don't they? Except no-one says it's easy. I guess lending to us is easy(er) money (on the whole).

Rick62 wrote:

You should however pay your most expensive debts first. So if you have other more expensive loans it could make sense to have an interest only mortgage while you pay off the other debts, so long as you are disciplined enough. Then switch to repayment and pay it off. The debt does not go away on its own

The other thing to take into consideration though, is that doing this you are effectively slowly converting your unsecured debts into secured ones. If you are genuinely struggling and there's a chance things won't get better, this might be dangerous. Better to default on an unsecured debt than your mortgage.

nrsql

Rick62 wrote:

Can I just add, don't listen to nrsql, he is talking dangerous nonesense. There are a very few people who can consistantly and risk free beat the markets, like Warren Buffet. Get debts under control before you start 'investing' (other than say contributing to pensions and other safe, tax efficient vehicles).

If you want to invest a bit, because you enjoy it and want to learn more about investing, fine, but don't do it at the expense of paying your loans and mortgage.

There is a lot of discussion at the moment about free speech. This people should make up there own mind whether or not to read a post.
It's not dangerous nonsense to suggest that people shouldn't disregard an option without at least trying to understand it.
You don't have to beat the markets to get a better return than the interest on a mortgage - you just have to pick the timing.

Have a look at Martins concept of good debt and bad debt, I don't agree with it but if you never accept any debt then you would struggle in business and miss out on a lot of opportunities.

It's important to realise the risk you are taking and that you are deciding to take on that risk and control it.

If you refuse to accept debt then you would never take on a mortgage or use a credit card without loading the account first.

surfcat

ReportInvestor wrote:

Well I checked out my local property market this lunchtime and that's just not possible.

It assumes that a buy to let landlord is prepared to accept 3.6% gross income [before tax, maintenance, agency fees and lost rental income from vacancies]

No it doesn't. You are assuming the BTL landlord has bought the price very recently, at the current price. In reality they are likely to have bought in previous years, prior to the boom and when the price was lower. This is the mechanism by which you can rent a property for less than the interest only portion on its mortgage!

ReportInvestor

I merely computed the Buy-to-let sums as an afterthought because my main interest in this subject is how it impacts on other investments generally so I always do these sums as an instinctive reflex action.

My comment was based on the evidence that here just wasn't any £200K property for rent at anything like £600pm period, so this "mechanism" doesn't seem to work in my part of London.

Perhaps you could give us an example from elsewhere?

gallygirl

ReportInvestor, I was until recently running 2 BTL's at around 4% (East Northants). Have now sold 1 and will be selling other (because they both became empty, I hate the area they are in and I have other plans for money - still have another 2 running at 3.8 & 4.5%).

4% IS v low. However, if the houses had stayed at the same price I had paid for them the yield would have been 13%. Is that really better? Personally, I am happy to get 4% because of capital growth.

I accept that buying NOW and only getting 4% is a poor investment (even at time of purchase I was getting around 10%), however there are a lot of BTL owners happy with 4% for the same reasons as me.

Remember, 68% of all statistics are made up, the other 41% are unreliable;)

tomstickland

4% IS v low. However, if the houses had stayed at the same price I had paid for them the yield would have been 13%.

Well the yield for you is 13% then.

I'm defining yield as annual profit over purchase price when you bought it.