Pay off mortgage or BTL

Ben27

Hi,

I have about £20k that I have saved over the last couple of years and owe £240k on a mortgage currently paying at 5% fixed.

I have been mulling over whether to make overpayments to my mortgage (allowed 5% each calender year so would be able to do now and in Jan) or purchase a Buy to Let flat with the money.

Any thoughts or ideas on which would be the better plan of action?

Thanks a lot!

Ben.

Thrugelmir

At the current time I would overpay the existing mortgage. You would do well to earn an after tax net return of 5% in the current market.

CLAPTON

difficult to compare overpaying 20k on a residential mortgage or buying a BTL flat

you have forgotten to tell us what you expect the return on letting might be, what deposit a BTL would require, whether you want the hassle of being a landlord etc etc

Ben27

Sorry thrugelmir and clapton!

We are looking at getting into the property market at some point as a means of financing retirement (in 25 yrs approx) so being a landlord is something we are prepared for.

My wife currently looks after the children and doesn't do any (paid!) work so if we got a btl we'd put it in her name for tax purposes.

The purchase price would be approx £85k-90k (so may have to put in slightly more than the £20k to get requisite LTV of 75%) and the rental returns about £6k/year so about 7%.

I guess the less risky thing in current climes would be to overpay but this doesn't help the long term aim of getting a btl portfolio of 5-8 properties? Clearly I am new to BTL and want to try to make the first move as good as possible to avoid the house of cards scenario!

Cheers guys,

Ben.

Thrugelmir

Ben27 wrote: »

and the rental returns about £6k/year so about 7%.

That's a gross return. What's the net yield after interest and costs? Not only in % terms but £ terms. Then you can compare if BTL is worthwhile at the current time.

Ben27

I am advised that Interest Only would be best plan of action since then can get tax relief by putting it in my wife's name. However, I see this is a long term investment and not doing it for short term gain.

Anyway, for this reason I'll give you both returns (sorry!):

Repayment - approx £1620/year returns after paying mortgage = 1.9% approx (although clearly there will be additional maintenance costs)

Interest Only - approx £3072/yr after mortgage paid = 3.6%, although clealy would need to reinvest this either in reducing the mortgage or investing in another property or overpaying residential mortgage.

Presumably I have just clouded the issue even further! Apologies!

Thrugelmir

There's far more involved in a BTL than just collecting the rent and paying the mortgage.

Personally I would use the savings to reduce your mortgage while you spend some time understanding what's involved and formulating a business plan as to how you could achieve your target of 6 plus properties.

The house of cards you referred to early. Can be avoided by having sounder financial foundations. Leveraging up with debt is the downfall of many a business. Property has always been capital intensive. Cheap and easy credit created the boom.

Ben27

Thanks Thrugelmir, I think that is the way I'm heading at the moment. Just wanted to be make sure I covered all options.

Fwiw, my intention is not to leverage up with too much debt. I have a reasonably solid un-taxable income outside of work of around 20k a year, with which it is my intention to put down at least 25% deposit on a new place as and when I can afford it, and keeping plenty in reserve....thus protecting myself from negative equity and ensuring I can maintain payments - hopefully protecting the fact it is meant as a long term investment! That's the idea anyway!

Mrs_Z

I agree with Thugermir - specially in a climate like this where house prices are on the downwards trend. Have you researched BTL mortgages? They tend to have very high arrangement fees.

Just a few pointers to consider - this is not my list but someone who's an expericed landlord, and I've found it very useful:

Do the maths very thoroughly, including all costs. Check out the details below for thoughts on the true costs to include. Don't be at all surprised if the figures show it is going to be a terrible loss maker. Very little property is profitable at the moment, and some of it is a seriously easy way to go bankrupt!

Be prepared to walk away from the whole idea if the numbers don't add up. And they probably won't.......

Investment Property Income & Expenditure analysis

Acquisition costs include:
Purchase price, Stamp Duty Land tax, Mortgage arrangement & Broker fees, Legal fees inc. disbursements (searches etc), Survey cost, Initial safety inspections / remedial work, Refurbishment cost, Furnishing including carpets cost etc. and
· Initial void (loss of rent) prior to first let

Total Acquisition costs =

Gross rent (annual) =

Running costs include:

· Provision for voids

· Provision for bad debts

· Managing Agent fees (or notional cost if self-managing)

· Maintenance & repair allowance

· Insurance (buildings, plus any rent protection or similar)

· Gas service, gas & electric safety checks

· Ground rent

· Service charges

· Gardening or other services provided

· Provision for refurbishment at relet

· Provision for replacement of furniture

· Accountancy

· Travel / admin costs


Total running costs =

Finance Costs include:

· Mortgage interest

· Other loan interest & charges

· Lost interest on cash invested

Ben27

Thanks Mrs Z, that's excellent.

Yeah I've done a bit of research on BTL mortgages and they are high atm, as you say.

Think you two have convinced me the overpay is the best option atm - maybe revisit the possibilities in a couple of years when the financial waters are potentially less muddied.

Cheers!