Interest only or Repayment Mortgage

[son]

Hello

I have recently let my house out and I was advised that my mortgage should be Interest only.  I am now thinking that for the small extra payment that I should change it to Repayment.  My mortgage is £415 Interest only or £498 Repayment.  Although this is a long term investment and I do not need it for any kind of monthly income I would ideally like to see it paid off, and us not still owing the full amount that we borrowed. The rent for our property is £495, and then £55 of that goes on Breakdown Cover, Annual Servicing and Certificates and Buildings Insurance, so we have £25 spare every month.  Can anyone advise me if they think I should pay the extra £60 out of my own pocket to get the mortgage paid off?  We have separate savings for any problems with the house or for when it is unoccupied.  I am new to this and haven't looked into the tax side of things yet,

Thanks

Sonya

[propertyfag]

Hey Sonya,

If you switch from Interest only to repayment, there will probably be an admin fee. Why don't you just stay on the interest only and make overpayments each month? It's a lot more flexible.

I have an interest only mortgage that is £500 per month, but I pay £700 per month (£200 overpayment), so i reduce debt. If times become hard, I can always reduce the overpayment amount to £100, and pay £600 per month.

If you change to repayment you won't have that flexibility!

[son]

Thanks,

That sounds like a good idea.  I can make overpayments on the mortgage but only yearly so I might try and save as much as possible and the pay off a load at the end of the year. 

Sonya

[propertyfag]

Hey Sonya,

Hmm...can you only make one over payment per year? Seems quite limited. Normally lenders put a limit on how much you can overpay by per year, and not the amount of times you can make overpayments!

[Jen]

We have both a home loan and loans for our rentals.  The HL is p&i, and the rentals are all interest only.  This is primarily because in Australia you don't get any tax benefits from paying off the interest on investment properties, only the interest.

Therefore we pay any additional money into our home loan, and just service the rental property loans (ie. only pay the interest).  That way we reduce our non-deductible debt as quickly as possible (no tax breaks here for principal place of residence loans) and maximise our tax kickbacks from the investment loans.

It's important that you get some tax advice as your situation may well be very different to ours.

[simhar]

Go for no-redemption - that means you can swap with no penalty when a better deal comes along. Don't get locked in !

[semiproinvestorTim1]

Hi Sonya!

In my opinion (and I have loads of those ;-)) I don't see the point in making repayments as long as your debt is being serviced... How much of a dent is £60 a month really going to make into your mortgage? It may bring your mortgage down by 7K over the next 10 years but the real way to pay off your debt is o take that spare cash and leverage it against other property (or other investments) to make a larger profit - or save it for when your tenant sips out without paying the rent for 3 months...

You can easily work out the impact the money would have with a mortgage calculator: http://www.guardian.co.uk/money/mortgage-calculator

Let me know what you decide I'll be interested to hear other opinions.

Take car

Tim