Interest only or repayment?

[Frokni]

Hi everyone

Am about to purchase my first buy-to-let property (well, avidly property hunting) and will be hopefully making an offer on 1 in the next week. Market is good for both buyers and tenants where I live.

Can i take it to a vote: would you choose or have you chosen either interest only or repayment and why? - phrased that badly, am just very excited about investing :-)

Thanks in advance :-)

Have you run your numbers? From the tone of the question it would seem not...

How long do you intend to retain the property?

Have you done your homework on this?
BTL's are no longer a sure fire way to make money.

3% increased stamp duty
18 or 28% capital gains tax on sale
BTL Interest tax relief being slashed
Increase in void periods and non paying tennants
Gas Safe
Lots of landlord obligations for H&S
Finders fees etc

What NET yield would you be looking for?

Hi guys. Sorry for delay in replying. Didn't get one email saying anyone had posted on my thread.

-In my area/budget the yield is roughly 7-8%
-This is a long term investment. Looking at seeing it through to my retirement essentially. I am 33.
-The additional expenses are somewhat of a deterrent I agree but as this is very long term I am okayish with this
-I am eligible for only 1 interest only mortgage sadly (found this out yesterday)
-I have 40% to put down on a property within my budget
-This money is from inheritance and I want it to do something and not just sit in my account
-I currently also invest in stocks and shares with my financial advisor he also agrees this is a good idea for a long term investment and he has helped me weigh up risks.

Just giving way too much info about my situation so you can help me weigh things up.

There is absolutely no other type of investment which is of any interest to me but I am very much open to suggestions lol!

Thanks for your replies guys

Hi, it's a very interesting question you pose and I just wanted to add my view. I'm sure there will be others along to disagree and I will be more then happy to listen to their points and willing to change my mind if I see it makes sense.
This something close to my heart and been investing in property for a while now. I would also like to add that it really isn't thales business that it used to with all the extra taxes and legislation but I still can't think of anything with the same returns and same level of risk. You also have seem to have done your homework and know the risks.
I think terminology confused some people so they get warped view of what BTL is.
At the end of the day you are not buying a house or flat or a home, you are buying a business. Also people call it a mortgage but in reality it is a business loan and the mortgage payments are a business expense.
As with any business you need to keep the expenses as low as possible. So it makes sense to pay the whichever type of payment is lower. In most cases this would be the interest only option.
Of course there is a an argument in favour of paying the loan of as a long term investment.
This would give you a smaller loan in the future hence leave you with more money at later date and that is the overall idea. To have more money at the end of the month and an asset that's worth more then you've paid for. Of course none of this is guaranteed.
If you don't need the extra money every month at the moment so you're not doing it for income purposes, you can always set up a standing order and overpay an interest only mortgage (most lenders will have maximum overpayment criteria) but it's not possible to under pay a repayment mortgage.
Also you it is a lot easier to revert a interest only to a repayment then vice versa.
One more thing to think about is that you normally only need to put 25% on a btl mortgage do rather then putting 40% down now why not do another one with the money left over and after you saved the rent money and buy another one in few months time. Not sure where you got the idea that you can only have one interest only mortgage from. Check that one again with your financial advisor.

Sorry not great grammar or spelling in post. Hard to write on a phone with fat fingers and eyes as old as mine. But I hope you get the drift.
Willing answers any questions you might have.
Good luck with whatever you decide.

Hi @Bashfull900 thank you very much for your views, especially as you have some great knowledge and experience. I should definitely be thinking of it as a business venture with the added benefit of being able to build up a portfolio for the long term.

I could consider keeping some of my deposit aside to build up to a second property in a few years.

I am speaking to my financial advisor again. The company who only found 1 interest only was the mortgage group.com or something similar. My actual advisor will come up with more choice I'm sure.

How many properties do you rent out @bashful?
Thanks again x

OP, you really need to run some numbers. You can even find spreadsheet templates for BTL calculations online.

I would not touch property with a bargepole right now - too much uncertainty between Brexit and the virus, but to each their own.

Ignoring the virus, in general you need to set up a spreadsheet that looks at cash inflows and outflows: how much gross rent you get, estate agency fees, mortgage, maintenance, repairs, costs like boiler servicing and gas safety certificates, taxes.

Then you need to consider slightly different scenarios: maybe it all works great if the tenants pay on time and the property is never empty, but what if the tenant leaves after one year and it takes 3 weeks before a new one moves in? What if it takes 5? What if you need to replace the boiler? Etc

Until you have actually quantifies any of this there isn't really much to talk about. Of course no one has a crystal ball and no one can predict how many vacant weeks you will have in a year, but you need to know how your returns are affected if you have x vacant weeks etc

Hi @ParentOfOne thank you for your advice. I am going to have a look and a play with one of the spreadsheets when DH is home. I have researchedthe top managing agents in the area and they all charge around the same. I have put a lot of money aside for the initial outlay which I estimate to be around 11k before a tenant moves in and the touch ups in the house have been done. Along with certificates, legal fees etc.

I am not looking at this as my only income as I am about to return to work. Plus, this is a very long term investment.

I am going to put another list together i think tomake sure I have taken everyone's advice on board.

Thank you :-)

Repayment.

Is your financial adviser an Independent Financial Adviser (IFA)?

If not, then find one who is, and do it quickly.

You also need to speak to a qualified accountant who is thoroughly familiar with taxation, because a financial adviser will not be as up to speed on that side of things. You could find yourself in an appalling mess in the future.

I think most interest only mortgages for BTL require hefty deposits &/or high income these days. The criteria is definitely tighter.

Personally I would only do it these days if the property was somewhere I would use in retirement etc & I would chose repayment & if I rented it out that would be a bonus but essentially the costs would be totally on me.

I wouldn't be looking at it as a way to make money.

Hi @dubdown I sadly don't have that financial option to purchase a retirement destination property but I would like to aspire to that eventually.

The interest only is recommended by my mortgage advisor who does the same thing with his property and has given me a financial plan to help me overpay when I feel I can.

Thanks again guys. Keep the advice coming!! loads of food for thought.

7-8% gross yield? Are you absolutely, categorically, undeniably sure about this? In London this is unthinkable. I understand yields can be higher outside the M25, but, still, it seems like a very high number.

Have you verified this by looking at the asking prices of rental properties on rightmove and comparing them to the sold (actual sale prices, not asking prices) of similar properties?

Hi there to those who have posted. I have BTL property now and am going to have about £300 profit for myself after mortgage each month. I am on a 5 year fixed interest only mortgage at 2.61%

Am very excited as I feel I actually have a pension for myself in 30 years time.

@Frokni congratulations on getting your first BTL property. Is it outside London may I ask as pondering whether I should do too st some time. Given all the tax and costs for BTL, if one can afford it can they buy second place and not rent it out and just wait for it to increase in value longer term?

Hi @Mollyeyes I know if you have a mortgage you have to fill the property with a tenant. If you're a cash buyer then you can do as you please with the property. Air bnb is ideal for a BTL but not if it's mortgaged as the bank need more consistency I suppose?

I know there are negatives to a BTL. This is my 25 year investment and I am ready to take the risk on long-term.

My property is within a 1.5 hour drive from London but only 45-50 minutes on the train. It's a very mixed part of the country - South Northamptonshire.

I am AMAZED at how competitive the market is here. The estate agents have been non-stop and properties are going for asking price. Glad I jumped on board when I did. :-)

Where are you thinking of buying?

I wouldn't put anointing BTL right now. The tax is so high for landlords it's just not worth it.

If your goal is a good pension, just look at how best to invest the money you have without involving property or tenants - who IMHO will trash your property nicely for you, ensuring that the £300 per month you get will be used up repairing and maintaining your property (if you even have any money left from the £300 per month that hasn't been spent in tax).

*anything into

Argh... it's too late... you've already done it. Good luck OP hang on for the ride.

Good luck, OP! As a long term investment I like property. I think you'll do well

Repayment all the way.

I had an ''Interest only'' mortgage once, and the Capital never diminishes.
You are running to stand still, in financial terms.

I know of older people with Interest only mortgages, and they STILL need to pay a whack of capital off...It seems insanity that these mortgages even exist.

Repayment.. 💯

The interest only is recommended by my mortgage advisor who does the same thing with his property and has given me a financial plan to help me overpay when I feel I can.

What is his recommendation for your capital repayment vehicle/what have you gone for?