£25k off the mortgage or Buy to Let?

RocketPig

I owe about £96k on a £100k 35 year mortgage (33 years to go at 3.8%), fortunately now I can overpay my mortgage and not have to pay a penalty.

What is most likely to return the greater yield, a £25k overpayment now saving me £44k in interest alone, or a buy to let property?

I’ve always wanted a second house as a very long investment, and here in Liverpool the rental costs are disproportionate to the house value. E.g. a £130k terrace house will rent out for £800 in a decent area.

For the sake of simplicity lets ignore the threat of bad tenants and extras like landlord insurance; I can work out the finer details later – but what would you do and why?

Annisele

What I would do would depend on my other assets.

If I didn't really have any other assets, I'd *definitely* use the money to reduce my own mortgage. A buy to let would mean borrowing more money to invest it all in one asset class (residential property), and from a diversification perspective I find that quite scary.

If I did have other assets, I'm not sure. I'd want to work out the after-tax return I'd be likely to get on the BTL, taking into account things like the risk of bad tenants.

If you assume two months worth of void periods a year and no expenses (both horrendously unrealistic assumptions), your £130k terrace would give you rental income of £8k a year - a yield of about 6.2%. If you're a basic rate taxpayer, then you effectively get about 4.9% before taking the mortgage into account. Given all the risks, I don't think that sounds all that attractive - but then in general I'm fairly risk averse and I'm not a fan of borrowing to invest.

Thrugelmir

RocketPig wrote: »

For the sake of simplicity lets ignore the threat of bad tenants and extras like landlord insurance; I can work out the finer details later – but what would you do and why?

Only speculate with what you can afford to lose.

By owning a second property at the current time. You are exposed to high degree to both interest rates and house prices. Interest rates only have one way to go and house prices are at best stagnating.

So , personally, I would take the safe option of a guaranteed return by saving interest on the current mortgage. You can always buy a second property at a later date. When the property market and the economy is in better health.

kidmugsy

Are you feeling lucky?

dimbo61

you do not give your income, equity in your current home, age, savings, job + job security!!!
being a landlord is not an easy way to get rich and please take Homes under the Hammer with a huge pinch of salt!
old repeats and same with Location, location,location.
Old terrace houses in liverpool are just that OLD they need a lot of money spending to bring up to a good standard

holly_hobby

To be fair OLD doesn't necessarily and automatically mean its dilapidated or below a good standard of decoration or maintenance ... be that in Liverpool or anywhere else, but appreciate the point being made !

OP if you elect to do this, and my own preference would be to have a good think about this due to risk exposure of an uncertain market, and the ill-liquidity of property investment (ie you may not be able to access your capital when reqd, and may have to dispose of the property to do so, which brings its own set of loss factors for a quick sale if necessary).

If you elect to go for it, then my own advice would be to look at South in the City, at properties that are immediately habital (ie functioning utilities as a basic !) - if you are considering student let ( due to the high student population there), beware that the majority of BTL lenders don't like this .... also as discussed, you ned to look at your true yield here, thats after all expenses have been applied to the rental income, such as mge payments (only the interest element is a permitted tax dedution), management and maintance costs, emergency and contingency fund, landlords ins, deposit protection - many of which are permitted tax deductions, BUT still need to be paid from the rental income recd - and thats before you get into your responsibilities as a landlord (which if you are working, you may want to employ the svcs of a letting management company to administer for you).

Hope this helps

Holly