BTL - interest only or repayment mortgage?

ellesbellesxxx

Hi there,
We have been letting out my husband's house for almost 2 years. We have now decided to keep it on for a few more years as an investment.
At the moment, we have another year on "Consent to let" where we have an excellent tracker rate of 3.5%. This covers the repayment mortgage and the insurance etc - then we have to pay a few one off fees and tax out of our own money.
However, we know that next year we will have to change mortgage product and get a buy to let mortgage.


We were wondering if it is advisable to try and get it on interest only so that we can generate an income from the property.
We would put this money aside as we know that in 20 years we would have to pay off the mortgage, however, it means there would be money more easily available for repairs/new bathroom etc. A friend was given advice from an IFA who advised doing this, saying that inflation means that if you then sell the property you should be able to cover the mortgage anyway as it should go up in value anyway.


Many thanks,
Ellesbelles

movilogo

Usually interest only is better as you can offset the interest payment as tax deduction.

jjlandlord

You don't generate 'income' from an interest-only mortgage, and in fact your taxable profit is less than with a repayment mortgage.
What you generate is cash flow because you get the cash instead of using it to repay the principal of the loan.

It is also very unlikely that you would keep the mortgage for 20 years, as there are always better deals popping up.

Certainly, keeping an interest-only mortgage over 20 years would cost you massively more than having a repayment mortgage.

If your plan is to keep the property for 20 years and not to expand your portfolio then I think that a repayment mortgage might make more sense.

You could also get an interest-only mortgage that allows repayment of the principal. That way you could have more flexibility and be able to repay the principal whenever possible.

Thrugelmir

If the property is being retained as an investment how do you propose paying off the debt owed? Will the after tax income be sufficient to do so. Over a 20 year time span property upkeep costs will mount.

ellesbellesxxx

Thanks so much for all advice!


JJlandlord: Thank you - I think you have hit the nail on the head.


Thrugelmir: This is why we are hesitant. We were thinking of putting aside the after tax income into a separate account to pay off eventually (from sums, we should be able to pay it off with this but you are right, other costs will come up in 20 years!)However, we could just pay it off!


Think we will stick with repayment but try and get a good deal next year