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Repayment versus Interest only


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:angry: Am contemplating purchasing a property for investment purposes and renting this out. Am being advised that interest only is the way to go but I am not sure as the final property will never be mine admittedly the capital gain after tax will be. With current pension situation, is it not better to go on repayment so that you can recoup the whole rent when the property is finally yours??



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There's different ways of looking at it The interest can be offset against tax - so the longer you are paying interest - the better

If you pay off the mortgage then your tax bill will shoot up, unless you re-invest in another property.

Personally, I prefer to see my loan reducing year-on-year, and more especially with low inflation which means you are saddled with debt a lot longer.

I don't think you will see much in the way of capital gains in the next few years - there has to be a correction, and reducing debt could turn out to be a wise move.

The 'bubble' in property has to burst at some time - although most people don't want to believe it.

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ask yourself this, how much was the average house price 25 years ago? (the lenght of a tyopical mortgage)

i'll tell you....£6,500! aboput the price of a second hand car today.

bubble my backside, property is like everything else it's cyclical, some time growth is good, sometimes it's bad, but it always grows!

i look at it this way (and believe me, it took me along time to come round to the idea that int only was a good idea)

you borrow money at 5% (from a bank) you invest it at 8+% (in a property) why pay it back? you only pay more tax, you reduce your capital saved (for next property)(save the same as you would repay to buy another property) and in 25 years the property will have gone up massively in value and the mortgage you have to pay off will be about the same as the cost of a second hand car!

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I think there's quite a few people who would disagree with you - I for one.

House prices go up 'massively' in a house price bubble such as we are experiencing now.

The effect of low inflation hasn't totally taken effect as yet.

With zero inflation - salaries don't go up by much and the burden of a mortgage would last for the term - 25 years for a traditional mortgage. It's the effect of inflation that whittles away debt, the higher the better - imagine it was say 15%, then you salary goes up more or less in line, but the repayments stay the same and the sum outstanding becomes more and more insignificant.

In this low inflation situation debt goes away more slowly.

We employed a builder about 10 years ago to do a small job for us - and he mentioned that he once had 19 houses in the area - lost the lot - all repossessed after the last bubble.

In '84 I bought a 4 bedroom house for £32,000 - '89 -'90 there was a similar house on the market for £115,000 - nice capital gain, but a few years afterwards, a developer friend of mine bought another identical one , but needing refurbishment for £67,000.

I bought another , 2 bedroom, house in '88 for £72,000, and for quite a few years afterwards similar, but slightly larger houses were going for £55,000.

Cyclical is the right word - but growth isn't continuous - and when interest rates climb again quite a few people will be clobbered.

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£100,000 repayment mortgage will cost you about £592 a month, but interest only will cost £417.

Thats £175 a month more you contract to pay out, and will continue to pay even when you get a void.

Try changing your own personal mortgage to an offset, and 'overpay' by the balance every month. It's more tax efficient, and you can take a payment holiday whenever the going gets tough.

Sorry, I forgot: I used 5% for the interest rate.

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I am also an advocate of the Interest only route but I must admit that if I was only thinking of building a small portfolio of properties (perhaps 2 or 3 in total to provide a pension etc) then I would probably go for the repayment rather than interest only option.

In my opinion, Landlords with 1 or 2 or 3 investment properties are "investor landlords" and will probably want to try and buy the asset over a number of years,

and a repayment mortgage (although not the most tax efficient) might make more sense.

Landlords who acquire 4+ properties are, in my view, "professional landlords" and are running their buy-to-let portfolio as a business and will want to keep buying properties, and re-mortgaging existing properties, on an on-going basis.

Interest only mortgages make sense for professional landlords as they don't want to own loads and loads of property in the future - they simply want to build as big a portfolio as possible then sell everything when they retire.

Hope that helps and good luck ......


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It's much more cost effective generally to buy two properties on interest only with the intention of selling one on retirement to pay off the mortgage on the other.

Over (say) a 25 year period, property will fluctuate, but the trend will only be upwards, because the supply of land has to be finite.

At an annual increase of only 3%, a property will double in value in about 24 years: at 5% this reduces to 15 years. During this time you have a contribution from both properties (income - expense), that will rise roughly in line with demand and affordability.

Excluding any tax issues, if this is taken to it's logical conclusion, then after 24 years at 3%; you have 2 houses worth double, and twice as much rent coming in on a monthly basis.

The increases we have seen over the last few years have been pretty unrealistic, but property generally is sold on mortgage affordability and not price, and as such, as earnings rise (which they surely must) then prices (and rents) will rise.


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  • 1 month later...

Now you've all really got me thinking. I'm buying a small property for cash because I'm already mortgaged up to the hilt - repayment style. Was thinking of selling current home and buying one smaller and another one to rent out - then I might be able to borrow against the fully paid up one.

Does anyone else have experience of these matters - can anyone save me from making huge investment mistakes?

Many thanks, Annie

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