FREE tenancy agreement
FREE landlord software1. Gearing up your investment is great in a rising property market. The more you can borrow....the more money you make....it's that simple. However just as recent experience demonstrates that when the opposite occurs....it can be a recipe for disaster ....the more you borrow ...the more you loose. As we have also witnessed with the credit crunch, there comes a point when the lenders start pulling the plug and landlords can be left with nothing.
2. Borrowing on an interest only basis will cost your more. Much more. Using a very simple example if you borrow £100,000 at 5% interest over 25 years it will cost you the following in interest payments:
Interest only: £125,000 in interest payments but then you still have the £100,000 debt to repay giving a total repayment sum of £225,000.
Repayment mortgage: £175,377 in interest and capital repayments but you have no debt and the property is yours.
The result is a saving of almost £50,000 in interest payments over the 25 years alone.
Inflation could be key
This assessment between the two methods of loan repayment is complicated by another factor. Inflation. If inflation roars away then your debt gets inflated away to practically nothing. For example, if we assume an annual inflation rate of 5%; in 25 years time then the £100,000 debt will be worth the equivalent in todays terms of only £29,530... a hell of a lot more affordable to repay. However if inflation is only at 1% during the same period, your debt remains at £77,977 not so easy to stump up the cash for.
The choice of whether to elect for a repayment or interest only mortgage is a complicated and personal one. You must carefully consider and be aware of all the factors. In essence though, the low risk option is repayment whilst the optimist is likely to elect for the interest only option. The choice remains yours.
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6 comments:
One other factor is with interest only 100% of the monthly payment is deductable against rental income whilst with repayment only the interest portion is. This will have an effect on your yearly profit and tax situation. Another aspect is CGT. With interest only you could end up with a large bill down the road with not much capital to pay it.
Agreed, cant believe this most important fact has not been included above!
Interest-only might not cost you more in the long run, as it depends what else you do with the "repayment" money... If you could get 6% return in a savings account (or other investment) then your money would be working harder for than on a repayment mortgage.
How does interest only vs repayment relate to CGT? I thought the CGT would only be payable when you sell the property - at which point you would have capital to pay for it. At the end of the mortgage term, either sell the property; get another mortgage on it for the amount owed or ensure you have wisely invested rental profits.
I would ignore inflation as it applies equally to both methods of funding... unless you are spending every penny of rental profit on holidays and fast women (or worse, just wasting it).
Good point GB.Sunbury. Interest only mortgages is the most efficient at using your tax deductions but all this doesn't repay your debt.
it surely makes sense to have some debt on a property as it helps the gearing
but I always have a series of questions about this
what is a sensible proportion going forward over the long term 33%, 50% , 75%
what are the criteria that others would use to decide this?
thanks
wollix
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