BTL mortgage- who's right here?

Gillybean

Hope you guys can settle an argument for me.

Our BTL mortgage has reached the end of it's tie in period, so we've been looking around for a better deal. Last time we got an interest only mortgage and I think we should do the same this time round too. We're not exactly flush for cash, we pay the mortgage ourselves and save the rental income.

But DH is adamant that we change to a repayment, because in his words, 'with an interest only you're not paying anything off the mortgage' Ok, but I don't understand his desperation to get it paid off. It'll still be many many years before it is paid off, and if we're not planning on selling the house, and just keep it ticking over and generating income, where's the problem? In my opinion any spare cash we have should be chucked at the mortgage for the main house we live in, which also has the larger mortgage.

So, who's right? I know there's arguments for both sides, but anything to boost my argument would be great

Unless of course I'm completely wrong, in which case please tell me!

Gillybean

zag2me

The only problem comes if interest rates increase a lot, if you haven't paid off any of the capital you will be exposed to big losses, if there interest rate goes up.

On a repayment mortgage the risk would reduce over the years.

You can pretty much guarantee interest rates will fluctuate over a 25 year term.

Robert_Sterling

If you do decide to pay money off it should be paid off whichever mortgage is charging the highest rate of interest.

However thee is another issue.

If you do not make repayments of capital do you then spend more on everyday living. Paying more off and spending less would improve your level of security.

Being risk averse I would move to a repayment mortgage.
This does not imply that you should do so too.

Your call !

Gillybean

Hmm, interesting.

I completely understand where DH is coming from, specially if as zag2me says we have a huge interest rate hike.

We'll have to take a look at our finances because I can't see where the extra money for a repayment mortgage would come from right now.

The other thing is if a lender would even give us a repayment mortgage, as the repayments would exceed the rental income and I don't think it would matter to the lender that we're not depending on the rental income to pay the mortgage.

AndyWallace

You could consider a linked savings account with your residential mortgage and pay any rental income into the linked savings account, certainly the profits from rent anyway. That way, the money has the same affect as making capital repayments on your home, so even if you still have interest only on your Buy to Let, your overall borrowing is being reduced on your home.

Andy.

toonfish

the other consideration is that you can offset the interest payment on the buy to let property against the rental income for tax purposes. Once the buy to let loan is repaid/reduced your income tax liability will rise.

Personally I would rather clear my residential loan first, probviding the pay rates are roughly comparable.

dunstonh

rather than pay the mortgage off and therefore increase your tax bill by doing so, you could consider putting money aside each month into an investment ISA.

Whilst an investment ISA linked to the mortgage involves investment risk, you have already taken on a high risk transaction with the mortgage buy to let so a regular contribution into an ISA is nothing by comparison.

This will allow a lump sum to build up tax free which can then later be used to pay the debt. In the meantime the tax bill remains lower as the amount of interest charged on the mortgage is not reduced.

UK007BullDog

What would happen if property prices go down just at the time the lender expects to be repaid the whole amount?

You sell the property and you are still short thousands of pounds, maybe even 50% short. What would you do then?

If you cannot afford a repayment mortgage just go for one which lets you overpay. Just overpay the amount you can afford every month, instead of going for the full grown repayment mortgage. A little bit of overpayment is better than not at all. As interest only mortgages are more expensive in the long run anyway as the amount you owe the lender never reduces.

Also once you retire, we do not know the rules lenders will have then, but they will only lend to you until 70 or 75 Yrs of age (maybe even 80 or 85). What if you live much longer and want to use the income of the rental to support your lifestyle? But because of your age the lender now wants their money back. So in the long term its better to repay all or at least part of the loan. It would be a good little supplement to any state pension you might get.

To bank just on the rental income or the property value going up is risky in my books as we all do not know what the future will hold. It seems your partner is in it for the long haul so his plans are good and he is planning ahead for the future.

jamesd

You get tax relief on the interest on the BTL mortgage (it's deducted from rental income). So, the first thing to consider is paying off your own residential mortgage, since you don't get tax relief on that.

If you do want to pay off the BTL mortgage, investments in stocks and shares ISAs should get a better investment return than the cost of the interest you save if you use the money for repayment.

If you want to mix high risk BTL with low risk/return overpayments, just overpay on an interest only mortgage. Then you have the flexibility to reduce the payments whenever you like without having to get the agreement of the mortgage lender.