Buying outright vs. Interest Only Mortgage - Am I overcalculating?

trelloskilos

That's brilliant! I think I've got a good grounding in how this all works.

I think Caveat Morgator summed it up with the word "Leveraging". I've never come across it before, but having read up on definitions, it seems to exactly fit in to what I am trying to describe. (Mainly, if you put in "x" & get out "x+y", by borrowing money to greatly magnify the value of "x", then "x+y" will be greater too, and you can use some of "y" to to pay off the lending source resulting in a profit for all involved.....at a risk)

Don't worry, HappyMJ. While my initial post was general & hypothetical, I will be applying it to the real-world situation I have. From your (and everyone else's) advice, I understand that the major risk in my case is whether I can get a tenant in quickly or not, as well as factoring in ongoing fees (surveys, services etc.) into my real-world scenario, but overall, I am a little more confident in how everything fits in.

And at least I know that the maths is all sound, and I'm not being a doofus with regard to the outcomes!

Once again, many thanks to all!! :-)

casper_g

Take note of the point abankerbutnotafatcat makes above re. being able to set off the mortgage interest as an expense for tax purposes. This may make the mortgage option all the more atttractive. Personally, I'm not sure that the tax system should encourage people to borrow money like this, but I'm no expert and there are probably all kinds of issues I don't fully comprehend!

Mrs_Z

When you do your real life scenario, don't forget to add the costs - cost of setting a 1 year fixed tenancy (about £1,000k if using a Letting Agent), you may have to do another in 6 months, if the first tenant decides to leave early, general maintenance & repairs, decorating between tenancies, EPC, servicing of boiler (if gas) + gas safety certificate. It all eats to your gross profit. And what happens if the interest rate rises? The rent receivable does not necessarily follow which means this further reduces your profit....

JQ.

Also don't forget you are basing your calculations on current interest rates, which are at an all time low. What happens when you're paying 8% or 9%

ReadingTim

Any lender will want to know how you're going to pay off the initial purchase price, as well as the interest charged upon it. Your figures don't seem to take acccount of that, other than a vague hope that you'll be able to sell at the same price or higher than the one your purchased at.

For lenders in the post-financial crash world, this is unlikely to be sufficient, so they'll never lend to you.

Loopgames

I won't add anything more to what you've already been given except to say that if you probably won't find 'identical' properties although I understand your theory as this is a plan that I want to achieve at some point.

One scenerio you could consider is to fully purchase a property outright and test the water. Then remortgage it after 6 months when you have understood the costs like initial outlay needed for getting property tenant-ready as well as other fees associated with the purchase. This scenerio maybe advantageos if you want to buy quickly.

Of course you may not want to put all your cash at once and want to start with a buy-to-let mortgage. First and see how it goes.

I would write a business plan with your objectives. You have to allow for contingencies in the plan and just put down all your assumptions to see what is realistic. Adjust as your experience grows as you become a fully fledged property tycoon .

jimjames

I would check the rental values, it does seem quite high for the property value. We are in Kent so still close to London but getting a property with rent of £750 would be at least £150,000/ Surely closer to London would have higher rent but also correspondingly higher prices too.

If you can borrow money more cheaply that the return you are making then it definitely is the way to go. I was looking at similar although we wouldnt be able to get a property at £100k to rent for £750 here. One thing to consider is the rates you'll get in comparison to the deposit, it may be worth putting more in to get a better mortgage rate.

sonastin

trelloskilos wrote: »

If I'm able to sell off the property at the same amount as I bought it, I could clear up the mortgage quite easily....couldn't I?

In the current market, that is a pretty big IF. You need to factor in a contingency for paying off some of the mortgage if you find yourself in a position where you need to sell in negative equity. Putting down a 30% deposit is a good starting point, as is a long term view on the deal but its something else to bear in mind.