Landlord option - interest only or repayment

Guerilla_2

Hi,

I am buying a new house with my partner and have decided to try and keep my current house. I want to rent it out, but have been given different advice as to how the mortgage should be set up. Some people are saying I should have an interest only mortgage on both properties as the value of the first (if sold) in 25-30 years would pay off both. Other people have said I should take out repayment on both or at least one. What are your thoughts?

Current house is c£145k with £25k outstanding on the mortgage. Would may be able to let it at £525pcm. Have only a small amount of additional savings £2k.

hope you can assist,

Matt

Cardinal-Red

In my view, interest only is a long term gamble that when the time comes, you can pay off the capital outstanding.

In this instance, you'll be hoping that in 25 years, your property would have appreciated in value enough to pay off the outstanding capital on both properties. Do you think that's likely?

Also bear in mind that should you have to sell your property (properties) to pay off the capital, then you'll have no property left - unlike a repayment mortgage which ends with 0 balance at the end of (presumably) 25 years....

Doozergirl

Anybody that thinks you should only have an IO mortgage has absolutely no foresight at all! I would not take on a BTL without a separate investment vehicle to pay off the mortgage at the end of the term. You want those houses bought and paid for and all the money yours.

£525 on a house worth £145,000k doesn't really stack up on the numbers. You've got no additional savings once you take buying costs into account so you are basically taking out a much larger mortgage on your next house to compensate. Consider the difference each month in the repayment mortgage payments on two properties, to just one new one. You'll probably find that the rent is not covering that difference. No one should be topping up. You have no guarantee that prices will continue to rise or that interest rates won't continue to rise.

If you must have a BTL, I'd be looking for a much better pay off and a property specifically good for tenants, not my old house. In fact, I wouldn't even bat an eyelid before selling a potential BTL that paid me only 4.3% before the associated fees.

Rick62

Most BTL landlords take interest only, partly because thats all they can afford, ut also the interest on the BTL can be offset against the income for income tax purposes.

So personally I would initially keep the mortgage on the BTL interest only but pay the mortgage on your own home as quickly as you can.

Gorgeous_George

I think £120K invested in other, less-hassle, investments may prove a winner.

Other than that, if BTL is your choice, interest only is the way to go. If nothing else, it majes tax returns easier.

Residential mortgage - I prefer repayment and a flexible mortgage.



GG

hearts

Interest only on both ;-)

Contrary to the opinions of some above. There is no way on earth that your property will not have increased considerably in 25 years. I agree with what you were told the one will pay for the other.

Guerilla_2

Thanks for your comments below. I have spoken to a letting agency and they tell I should be able to get £575pcm rental income. This is on par with adverts I have seen for the same property (its a 2 bed coach house). As I only owe £25, I am considering taking it to £100k on interest only. This would give £75k to put down on a home. I want to then look at how much a repayment mortgage would be, and borrow the amount required for a suitable home. This was at least my own home is being paid off (with option to overpay), and hopefully as time goes by, rental income will increase allowing me to overpay my home faster, or switch the let property to repayment.

For information, one financial advisor has told me It is likely a property would triple in value over 25 years.

any thoughts?

Matt

clutton_2

historically houses doubled in value every 7 years. But this century's price increases of huge proportions in 2002-3-4 will have skewed recent figures.

Rick62

I think your plan of increasing your BTL mortgage (on an interest only basis) to give you a deposit for your residential purchase (with a repayment mortgage) is absolutely right.

I would however be wary of current prices, as there could be a market correction and interest rates are high. £100k vs rent of £575 is an absolute maximum, if you could make do with a bit less this would leave you with more options should prices fall or interest rates increase.

If you buy good quality properties then longf term it should be a sound investment, however we are right at the top of historical cycles (in fact over the top) so medium term prices might stagnate or fall and long term none can say how much it will increase by.

abaxas

clutton wrote:

historically houses doubled in value every 7 years. But this century's price increases of huge proportions in 2002-3-4 will have skewed recent figures.

What a load of tripe.

What you actually mean is 'in recent memory house values have doubled ever 7 years'.

As a man I have a bit that trebles in size in a few seconds, however I dont beleive that it will continue at the rate.

prudryden

abaxas wrote:

What a load of tripe.

What you actually mean is 'in recent memory house values have doubled ever 7 years'.

As a man I have a bit that trebles in size in a few seconds, however I dont beleive that it will continue at the rate.

Not very civil of you!!!