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Interest only or Repayment Mortgage

Started by son, October 07, 2009, 10:36:41 AM

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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

son

Hi,

Thanks for all of the replies.  For now I have decided just to leave it as interest only.  But I am going to wait and see what changes the new government may bring in how it might affect me, and then go and get some all round tax advice.

Jaffery32

You have to ask the mortgage company. Normally simple mortgage loans that don't have
variable rates, options, interest only and any of those scams don't have early repayment penalties.

mva21

Can't believe some of the comments on these posts.  You should easily be able to talk to a regulated financial adviser about this without paying an upfront fee.  I work close to this sector, and whilst i am not an adviser myself i am highly confident that you can easily get such advice.  If you can not, i will get somebody to contact you if needed! 

jenny.smith

You can make your mortgage is 7K in the next 10 years, but the real way to pay your debt or take the money and spare leverage against other assets (or other) to make more profit - or save it for when your SIPS tenant not paying rent for three months.

jeffo

I have several interest only mortgages. Recently the difference between int only and repayment has been relatively negligible. I have taken out the repayment deals for several reasons. The deciding factor for me was that I can alter it to interest only at a moments notice which is a godsend when you are worried about the base rate going back to 5% and the bank taking 4.5% over that to line their greedy pockets. As a general rule though, I have always been led to believe it to be financially better to have int only and make overpayment's, but in truth I have never made an overpayment and cannot be bothered finding out how.

akirasmith

With a repayment mortgage you make monthly payments to cover interest on the loan and the repayment of the loan itself. With mortgage interest payments you do the mortgage lender each month, containing only the interest you owe them for months. So you do not pay off all of the capital you owe.

MA60ULD

Quote from: akirasmith on November 13, 2010, 07:12:08 AM
With a repayment mortgage you make monthly payments to cover interest on the loan and the repayment of the loan itself. With mortgage interest payments you do the mortgage lender each month, containing only the interest you owe them for months. So you do not pay off all of the capital you owe.

My accountant always insists that I have interest only mortgages, he said they are better for rental, which I agree that it increases cash flow.  When I was chatting to him last week, he mentioned that I should not keep any property for the Cycle (12 years).    I'm unsure why.

I was only dropping documents off on a different subject when he started chatting.  Does anyone know why you would not want to keep the property more then 12 years.

I can see why you'd want to buy low and sell at the peak, that make's perfect sense, is it that simple, or is there something I'm over looking. :-\

Mike

timatno21

My BTL mortgages have always been interest only. The taxman allows your interest payment to be put against tax - not the repayment element - simples !

kerrymark

The mortgage itself might be of interest only. But the crucial element is not only the mortgage disappear.A guarantees your loan is repaid in full at the end of the mortgage repayment term.A agreement provides assurance that, once the final payment was made You've paid the mortgage in full.

mickdamons

Although we all know, there is no such thing as a free lunch, and borrowed money must be repaid at some point, interest only repayment option makes the action seem more and more forgotten.

petermark23

There are a number of risks here. Firstly, house prices are not guaranteed to go up, and could even fall. Furthermore, if you want to shorten the life of the mortgage and reduce its cost, any increase in monthly repayments will go towards both the interest and capital elements of the loan. The only problem is, the capital debt is still outstanding. In other words, you haven't actually paid back any of the amount you originally borrowed.

Mr X

I feel interest only is the best option mainly for tax reasons but also lets you make overpayments, so like the repayment mortgage but more flexible. It can be slightly more risky depending on your strategy, but there is a lot of benefits to it.

One way is to hope the capital appreciation on the property will cover your loan. (average house price doubles every 10 years). If the house does not appreciate, simply extend the mortgage term and convert to repayment, so you would have enjoyed the low payments so far, hopefully invested the savings in other properties/investments, and then gradually start paying back the loan.

My plan is to have positive cash flow and not have too much money/equity tied up in property, because we cant be too sure of what will happen.

colemanblair

With a mortgage you make monthly payments to cover interest on the loan and the repayment of the loan itself. With mortgage interest payments you what the mortgage lender each month, which contains only the interest you owe them for months. So you do not pay all the capital you owe.

madonjersy

A method used to be very common, but is now less favorable to an endowment policy. An endowment is indeed a life that takes place throughout the duration of the mortgage, but also returning cash through contributions and returns on investments.

Jeremy

Hello madonjersy,

I've always gone for interest only mortgages because if the poo hits the fan I've only got to fork out for the interest whilst I get things back on track again.  I've got a couple of mortgages backed with Endowments and they have been dreadful.  Honestly. I'd have done better if I'd stuffed the money into a matress.

Now I show the bank I own a number of properties outright; they give me a mortgage and I religiously make a cash saving each month which is at least enough to pay off the mortgate at the end of the term.

victoravee

The deciding factor for me was that I can change it to interest only a moments notice is a godsend when you are worried about the base rate up to 5% and the bank by taking 4.5% from the line their greedy pockets.

ronierichard

You have to ask the mortgage company. Usually simple mortgage loans that do not have variable rates, options, only the interests of the scams and have no prepayment penalties.