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Saturday, February 22, 2014

Waking up to a repayment world

I have built my property portfolio on debt.  Absolutely, nothing wrong with that.  It's what investors call a geared investment.  When prices go up then it's a way to increasing wealth and assets.  My approach during my property investing decades is largely to use interest only mortgages and wait for rising living standards, house prices and inflation to inflate away the relative size of the debt.

A repayment world.

It appears increasingly clear to me that we are facing a very different world.  I really can't see property prices increasingly significant ahead of inflation for decades.  Interest rates can only go one way which will counterbalance the recovering confidence in the property market.  I'm increasingly thinking that as far as property investment unless you fancy yourself as a bit of a 'wheeler dealer' or developer, the only way is a repayment mortgage.  I currently have two in my property portfolio.  They give me great joy, as every year without fail I owe less and assuming prices don't fall - I'm richer!

In this new reality, I would advise all landlords to consider the repayment option of mortgage first, unless you are looking to build a portfolio rapidly and desperately need the extra cashflow.  I still think that debt for investment is good.  However, this time the reality is that it won't just go away.

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Graham NE said...

Although Im only a small investor 2 properties in 10 years and looking to buy my 3rd soon, I have always been skeptical of interest only, especially if I lost my job I would lose the properties. This month I just paid off the 1st property bought in 2003, its only a 2 bedroom ground floor flat but its now mine. I never trusted money that's easy to come by and I will continue to invest small but steady until I can semi retire on the income. Not the most ambitious or avaricious investment plan but the risks are lower and that's fine by me.

Perry Ismangil said...

Does this mean buying property should be classed as savings/investment at all?

David Holmes said...

Interest only is still the best option for a very good reason - the more interest you can off-set against rental income the less tax you will pay. The option is always there to put away the extra money you would have paid on a repayment mortgage into a savings account and have the best of both worlds.


Very interesting ,I have been investing since 1989 . Only becoming very active in 2004 when all the get rich quick seminars where booming, and all the strategies were based on interest only lending.

Now here is a very good strategy that no lender or broker will advertise to you.

If your property values have risen since you purchased, your original LTV will have changed in your favour.
Most lenders will swap you to a lower rate of interest if your LTV is 50,60 or 70% .

If you have savings or equity in properties you can swap around move that equity to loans to get teh lowest LTV and re negotiate your rate.

I have 35 properties and have just re negotited 6 loans on this basis and have saved £12700 per annum. Quite handy if you want to pay down debt and you control which lenders you pay down when and by how much, so in my experience much more attractive than a repayment mortgage

Anonymous said...

If you are relying on interest only borrowing and not making provision to repay then yes, you are taking a big risk (in my opinion).

However if you are using interest only borrowing but utilising in another form the funds that you would otherwise use to repay the capital then that can surely be efficient.

For example, you have interest only borrowing but invest what would have been the capital payment into an ISA, you get income tax relief on the interest element of the borrowing and you get income tax free interest and capital growth on the ISA.

When you come to repay the borrowing you can either sell the property and retain the ISA or close the ISA and retain the property (assuming you don't have savings outside of the ISA - or that the Govt. don't mess around too much with the ISA or similar tax free savings schemes!)

The Editor said...

Thanks for your comments about the ISA. I do the same but with VCTs or Venture Capital Trusts. Many of which pay between 6-8% dividend which is free from income and capital gains tax.