Repayment BTL - what's the downside?

HenBroon

I am buying a flat in London off-plan, paid the 10% deposit some time ago and am told it will complete in a couple of months. I am British with a long (good) credit history in the UK and a previous mortgage, though don't currently own a property. However I now live and work outside the UK, with no immediate plans to return and have found it harder than I expected to get a mortgage.

I'm putting down 30% deposit overall. My broker has got me an agreement in principle for a repayment mortgage but is pushing me to hold out for an interest-only. I won't go into the details but to do this involves moving money out of other investments in order to have enough in an account to meet a particular international bank's BTL mortgage eligibility criteria, and it's all a bit fiddly.

The repayments will be a bit less than the projected rental income on the property but after agent's fees etc I will probably have to top up the mortgage payment out of my salary. I am OK with this and the lender is fine with it as I am fortunate to have a good salary.

To be honest I really can't be bothered bending over backwards to trying to qualify for the interest-only and, as I see it, having the repayment is just like investing money in my property every month. I just want to get the mortgage in place so I can be confident that I will have the funds when completion comes around. I have a feeling that the broker has a vested interest in getting me to do IO as the financial adviser side of his company can then sell me a separate investment vehicle. I figure I can always switch to IO in the future if lenders' criteria change.

Am I missing something - given that I am happy to tie the money up in the property, is there a reason why IO is a much better choice for a buy to let investment?

kingstreet

This sounds like a complicated case, with "international banks" and "moving money in and out."

In general, you put down the same deposit on an interest-only BTL as you do on a repayment BTL, so the decision is based wholly on whether you want to repay the mortgage on a gradual basis, or by selling or one-off lump sum payments at your discretion.

Only the interest element of the mortgage payment can be offset against the rental income for tax purposes, so any capital payments are effectively being made out of your taxed income. As time passes, more of the rental income belongs to you as the interest element falls in a repayment mortgage payment.

This ends up increasing the tax you'll pay.

TBH in the early years, it matters very little and it's more about the philosophic consideration of how you want to pay the mortgage off, if at all.

EMac_2

Ex-pat Buy 2 Let is difficult and very few lenders will entertain, fortunately you have a big deposit available. The only obvious advantage of IO is the lower contractual monthly payments but if you are happy on repayment and paying a bit extra then go that way. Ask the broker for their 'reasons why' you should hold out for IO.

HenBroon

Thanks Kingstreet. Not that complicated really - HSBC (my main bank as I live in Hong Kong) offer interest-only but will only lend BTL to Premier customers - to be a Premier customer I need to hold a minimum amount of funds in my account with them. To qualify I'll need to top up my current account by moving some money I have invested elsewhere. It's also not entirely clear what would happen if I lost the Premier status after drawing down the mortgage. Seems like a right hassle to me.

Thrugelmir

Is the projected rental income 130% of the mortgage interest charges after the deduction of agents fees?

HenBroon

Yes, easily. The repayment mortgage is already agreed in principle.

Thrugelmir

HenBroon wrote: »

The repayment mortgage is already agreed in principle.

"In principle" is subject to. Have you made a formal application yet along with the property surveyed and rental income assessed?

HenBroon

Thanks, I do understand the terms of the in- principle offer. The survey has not yet been done but I have no reason to believe it will not confirm the rental projection (and there's a bit of slack in there anyway).

If there is any problem then that is a whole different issue: I appreciate that you're trying to help but my question was about repayment vs interest-only and I am fully up to speed on the other aspects of BTL mortgages.

Cornucopia

It's only really the tax (and the accounting behind it) that is more complex with Repayment compared to IO.