A question about buy to let mortgages

[Iamblossom]

I found out last night that buy to let mortgages are interest only. I thought that if we bought a property to rent out we could use the rent people pay to pay off the mortgage (and give us a monthly income) and when the mortgage is paid off, all the rent would be ours.

What happens at the end of the interest only mortgage? You then still owe all of what you borrowed? How do you then pay off that whole amount? Am I missing something here??

[PennyJennyPie]

Its like any interest only mortgage. You either have to make capital repayments when you can or save the money corresponding to the repayment elsewhere. At the end of the mortgage the bank wants its money back so you have to make sure it is.

Also bear in mind that the repayment part of the mortgage can not be deducted in your annual tax return.

[Iamblossom]

Right. Which is why I've always shied away from interest onlys....

So every month you have to save a corresponding amount elsewhere in prep for the repayment. Which swallows up any profit in rent you might be making. Plus the risk of having no tenant for a period. Plus the risk of the interest rate increasing so you have to increase the rent which may put tenants off...

I see the benefit of doing this for 20 years, having enough to then pay off the mortgage at the end of it's term and then all the rent generated goes straight in your pocket. But that would take 20 years wouldn't it??

[purplemurple1]

I just took a capital repayment btl, and threw all my spare money at it so I got it paid off, is there a reason you can't do that?

[Iamblossom]

Ok so it's not just interest only, you can get btls that allow you to repay....

[Iamblossom]

How long did it take you to pay it off?

[thatstoast]

You sound quite risk averse so maybe BTL isn't for you?

You can have capital repayment or interest only. Interest only is better for tax purposes. If you don't have the money to pay off the capital you could sell the house. The risk being that house prices may not be where you want them.

[Iamblossom]

Not risk averse.....just trying to understand it.....

[purplemurple1]

Eight yrs, as I'd already paid the mortgage where I live so was able to overpay quite a bit each month.

[loveisagirlnameddaisy]

BTL mortgages are targeted at landlords who aren't necessarily wanting to pay off the capital as its a poor use of income. You would pay the interest only which is tax deductible and over the long term remortgage the property to buy more properties and increase your portfolio. This is what DP has done. The option is there to pay off any capital if you wish although this isn't tax deductible. He never gets to the end of a mortgage term because he's usually remortgaged by then.

Capital repayment is more traditional for homeowners who need the security of knowing they will eventually own their home outright.

I don't understand why you're averse to saving for the capital separately? Either the rent covers it or it doesn't no matter which type of mortgage you have.

[Needmoresleep]

All our BTL mortgages are repayment including a recent one from The Mortgage Works, a subsidary of Nationwide.

It is reasonably short term (20 years) as we are essentially using it as a pension vehicle. When the fix comes to an end, we will try to pay off a lump sum and increase repayments to reduce the term further. When broken down we are effectively saving a significant amount each year, mainly covered by our rental income/tax allowances.

This probably is not the most tax efficient way of doing things, but I like arranging my finance in a way I understand. Interalia we might want to use the properties for something else, indeed we see one property as a potential second home at a point when we have more time, and a chance now to get to know the area.

Plus my father dabbled in rented property as a retirement hobby, but failed to recognise when he was struggling to cope, leading to a cycle of run down property and poor tenants. The estate agent says this is not unusual and that in this area blocks around 25 years old often have a number of elderly owners. The paperwork, eg Powers of Attorney and probate is complicated, and we have had to essentially lend my mother the money to carry out a comprehensive refurbishment, plus overseeing the works has been time consuming and stressful. Luckily he did not have mortgages. My guess is that at probate the lenders would not have been willing to reassign mortgages to my elderly mother, so there would have had to have been a firesale of poorly maintained property, which using a probate lawyer would have been inefficient and costly. As it is, though after a lot of hard work on my part, she has assets which provide sufficient income to pay for her care provision, and which should sell promptly. A bit of an essay but our intention is to ensure that we don't land our children with a similar burden.

BTL mortgages can be quite complicated as there is quite an array different fees and terms. (Some don't like novice landlords, rates improve dramatically if you have a 40%+ deposit, etc) When we were looking a significant number were only available through brokers and I was finding comparing the alternatives difficult. Things may have changed a bit. A quick glance suggests you can now buy TMW products direct. However we had a very good experience with our fee free broker (London and Country) who listened to what we wanted, suggested some alternatives and gave us an agreement in principle within a day or so. All the paperwork was routed through them, and it was helpful to have someone to ask questions of who I felt was on my side. (Not naivety! Just he wanted the mortgage to go through like we did.) Happy to PM the name of the guy we used, simply because he deserves something for his efficiency.

Good luck and I think you are on the right track.

[Iamblossom]

thankyou very much everyone

[PestoStormissimos]

Just to say, when you've finally re-paid your mortgage, the rent does not go 'straight in my pocket' as it is part of your taxable income & you will be taxed accordingly.

[Greengrow]

Indeed, taxed at 40% or 45% in many cases.

You can certainly have repayment mortgages for buy to lets. Of course they are more expensive and it is only the interest element which is an expense of buying so only the interest part is set against the rent in your accounts as paying back capital is not an income expense.