Interest only or repayment

magic_genie

Is your Buy to Let a repayment or interest only mortgage?
What is your reason?

I have 1 B2L on an Interest only and am about to buy another the same way.

And from what I hear experienced Landlords buy on Interest only deals.
But if I'm viewing my houses as long term investments, should I turn my mortgages into repayments?

Hope to hear your thoughts, kind regards
Alex

Nick_C_4

I don't own a BTL, but my understanding was that BTLers get interest-only mortgages because then you can write off the mortgage payments as an expense. If you have a repayment mortgage, then you can't do this. And if it's not the house you live in, selling the property later to repay the capital would not be a disaster (or maybe even what you intend to do). Hopefully someone will correct me if I'm wrong.

lisyloo

And from what I hear experienced Landlords buy on Interest only deals.

You can offset interest against rental profits to reduce your tax bill, therefore it makes sense to have the max interest only mortgage.

But if I'm viewing my houses as long term investments, should I turn my mortgages into repayments?

No, because it will increase your tax bill.
You want to make as little profit as possible and pay as little tax as possible (legally of course).
If you have spare money then invest it in something else (you can always mentally "earmark" this money to pay off the mortgage with this investment if you like). A stock and shares ISA would be an alternative.

Fairdo_2

I may be showing some ignorance in terms of tax here, but I am happy to be corrected.

I would not have thought that the Repayment method would make much difference here, as an Accountant could still help you to offset the Interest payment of a REpayment mortgage as a business expense anyway. Therefore, I am under the impression that this won't make a difference.

The only way, I feel that you could give rise to more Tax cost would be, if you pay off so much capital and sell on early enough that you may be liable to Capital Gains Tax. Again, with the expected property value growth, I can't see many people falling into that category, unless you are already at your tax free threshold.

I suppose it mainly boils down to how much you want to pay contractually, whether you want the capital reduction to be governed by the repayment method, or your own means and whether the Lender would penalise you for taking it on a Repayment basis against the rental yield.

Innys

Fairdo is boadly correct.

The interest element of the repayments is always allowable against the rental income - for tax purposes anyway.

If you pay on a repyament basis the capital element will obviously reduce your mortgage and hence increase the profit that is taxable when it comes time sell. Arguably you could use that element more profitably to fund the purchase of another B2L property and offset the repayments fully against tax.

While that is a tax efficient approach, it also means you will always end up paying more interest to the lender. I always try and minimise any interest I pay, so I wouldn't be comfortable with this approach.

I look at it this way - say you borrow and end up paying £1,000 per month on an interest only basis. Now, although £400 of this is recovered from the tax man, you still have to pay £600 to the lender in interest.

I know that, longer term, if you use a repayment basis, there will be a tax bill at the end for the capital gain - but you can settle that when you sell with the proceeds.

lisyloo

I would not have thought that the Repayment method would make much difference here, as an Accountant could still help you to offset the Interest payment of a REpayment mortgage as a business expense anyway. Therefore, I am under the impression that this won't make a difference.

On a repayment mortgage you pay less interest so you make more profit and pay more tax.
In year 1, I agree with you that the difference is small, but in year 10 or 20 the difference will be large. So I disagree that it'won't make a difference.

While that is a tax efficient approach, it also means you will always end up paying more interest to the lender. I always try and minimise any interest I pay, so I wouldn't be comfortable with this approach.

I think this is also wrong (unless you are very risk advers).
On interest only you DO pay more interest, however don't overlook the fact that you can invest the repayments elsewhere, potentially making more than the interest you are paying on a mortgage.
You can currently get a higher rate on a cash ISA than you can on a normal mortgage.
With a BTL mortgage it's harder, but still possible to make a profit.

Now, although £400 of this is recovered from the tax man, you still have to pay £600 to the lender in interest.

Don't forget that you haven't included the repayment money.
If you aren't repaying the mortgage you can invest the money elsewhere.
It hasn't simply dissapered into thin air.