Interest only v repayment - btl mortgage.

[absolutelynotfabulous]

I'm not sure if this is an utterly stupid question but is it possible to change from an interest only mortgage on a btl property to a repayment one?

I've got a rental property on a btl which I bought 6 years ago. The property hasn't increased in value and may not do so significantly, even by the end of the 25 year term.

It's not a massive mortgage (35k). I bought for 50k.

I have interest-only, but overpay every month.

Yes we have one. As long as the rent still covers the mortgage repayment (i think by 125% each month). If the house is still worth only 50 k you should still just about be ok with LTV.

I wouldn't bother with changing he mortgage as it might be relatively faffy. Double check the terms and conditions- you're likely to be allowed overpayments- just pay it down.

We have an interest only mortgage but asked the bank what the payments would be if it were a repayment mortgage - and that's the amount we pay every month. So in effect we're treating it as a repayment mortgage but have the option to pay a lot less if cash flow is tight, for example if we have a period without tenants and don't want to leave ourselves short.

elpin sorry, I don't quite understand. . Has the bank agreed to your overspending and how do you manage paying a different amount each month? Sorry if I've got the wrong end of the stick.

I'm just applying for this just now & had 2 options on BTL - interest only, £230 pm or repayment £440 p/m. I can overpay on interest only by up to 10% a year. If I overpay by min amount each year over 25 yrs (for me that 4% so £300 p/m) that's more than repayment but obviously I'm tied into fixed payment on repayment & that also impacts level of rent I need to secure.

Check your existing mortgage terms or phone & ask there terms on overpayments & what the cost of applying & arranging repayment is, & figure out from that what suits your situation best.

Or what elping said - serves me right for skim reading!

Hi absolutely. We had the option of either an interest only mortgage at £260ish per month or repayment at £480ish per month. If we'd taken the repayment mortgage we would be committed to paying £480 every month. So we took the interest only mortgage but elect to pay £480 each month with the option to reduce it to £260 if we need to. Just gives us more flexibility. If we keep paying £480 every month our mortgage will be paid off at the end of 25 years. We have no restriction on overpayments so this is easiest for us, though of course if your mortgage had different rules it might make it more complicated. Hope that makes a bit more sense, sorry for confusion earlier.

DEpends on the terms and conditions of the mortgage you have. Ordinary mortgages you can pay whatever you want to over the minimum, as and when you like - ie doesn't have to be on your 'monthly repayment' day, but a lot of mortgage companies set up deals where they say we'll give you a better rate, but overpayments aren't allowed. Or 'you can only overpay up to 10% a year, or whatever, in which case you just save what you want to over pay into a saving account until you come out of that deal, and then pay a chunk off.
It will depend totally on what you signed up to.

Thanks all. Some interesting options! Hadn't thought of over/underpaying.

We do same as Elpinguino have an interest only mortgage that we overpay. We can pay up 10% extra a year. It's taken the interest payments down by 1/3 in five years which is great and I can go back to interest only whenever I want (usually Dec and Jan so I have a bit more money over Christmas)

You can't 'underpay'. You agree to what to pay the bank and that's the minimum you must pay to not be in trouble. For example, elpin's repayments are £260 per month. However, she chooses to pay £480 which means she is getting the debt down and will be rid of it over 25 years. In the months that are a bit tighter, she only pays the agreed amount, ie £260 which is her contract with the bank/DD amount.

In your case, you must pay whatever your DD is every month. However, you can also choose to pay more. If you pay £300 extra every month, then you will repay the whole thing in 10 years. But you must check what overpayments are allowed on your mortgage.

Thanks Jojo . I see. Elpin's is a repayment mortgage; mine's an interest only.

I think I'm getting confused.

mortgage is interest-only at 150£ per month. I'm not repaying capital, am I? I can make lump sum overpayments, though. But I can only make one a year.

I'm rather thick this morning. . I didn't realise that
you could actually get a repayment mortgage on a btl property, for a start. Not on a new mortgage, at least.

I think I"d rather change to a repayment mortgage if I can and start actually paying the thing off.

What everyone else says. Have a think about your long-term goals with the property - do you plan to hold it forever (everything else being equal)? Is it a pension for you? What do you see happening at the end of the term?

I have one on IO, because I can see the value going up steadily and eventually selling it, many years from now, and using the money to pay off our home loan or as a retirement fund.

My current home is likely to either be sold soon, or if that doesn't work I'll keep it as a BTL, on a repayment mortgage, or IO but with a lot of overpayments. It's in a good bit of London, and I can imagine my DC living there one day, and I'd want to see it paid off.

mortgage is interest-only at 150£ per month. I'm not repaying capital, am I?

No, not repaying capital.

Well, you can change the mortgage completely but have a look at the costs involved - often there are fees of 1000 or 2000.... Might not worth it. Alternatively, just set up a savings account - have a direct debit going into it every month. For example, if you save £200 a month, after a year you'll have £2400. You can then pay the £2400 as a lump sum - your mortgage balance will go down from £30,000 to £27,600. Then you carry on until you've paid it off.

If you change it to a repayment mortgage, you might get charged 1-2k in fees increasing your mortagage to 31-32k. You will then have to make higher payments, eg £300/month - would you struggle if the tenant couldn't pay etc? It's more commitment.

Also, not to be mean, but do you have any family or friends who have a bit more Maths/money sense to possibly help you compare some options? You could ask a mortgage advisor, but again - a new mortgage would entail high fees...

Absolutely - ours is not a repayment mortgage, it's interest only. We're just paying it off AS IF it's a repayment one. Our product lets us make whatever overpayments we want to, so we overpay every month so that we're clearing the capital in exactly the same way as if it were repayment.

Sorry, elpin, I'm really not with it today!

It really depends on your mortgage company - with one of mine I can overpay each month (by any amount), with another I can only pay 10% of the total owed off a year. You need to look at your original mortgage paperwork and/or call them.

Your current provider may swap you to a repayment mortgage for free and without any paperwork.

If not, I really wouldnt bother changing your mortgage. You could end up paying £1000 just in fees, let alone the pain of applying for a new mortgage and supplying shed-loads of paperwork to them.

Plus, each time you pay a lump off, then the amount of interest you pay each month will go down, so you can add a bit on to the 'repayment' bit.

So, in the example above. Let's say you are currently paying £150 pm interest. If you do nothing, and interest rates stayed the same (which seems unlikely) then you pay £150 per month, every month, and, at the end of the mortgage you have to find £35 000 to pay off what you originally borrowed.
If you save £200pm into a saving account and each year do a single payment of £2400, then the actual amount you will be paying interest on, goes down.
So, say you are paying £150pm on a loan of £35 000, next year you will be paying {wild guess} £145pm on your new amount, of £32 600, so all other things being equal, you can then save £205 pm and have £2460 to pay off next year as your lump sum. It doesn't make much difference in the first couple of year, but really does make a good difference 10 yrs down the line.

As you are saving it into a savings account, you will get a tiny amount of interest too, plus, if you have some kind of emergency, or change in circumstances, you aren't actually committed to be doing the over payments. OTOH, if you find you have extra money over what you commit to saving each month, then you can throw it in the savings account and pay down the capital quicker.