Conflicting advice to Pay down debt or not?

by Readers Question

11:14 AM, 11th January 2016
About 3 years ago

Conflicting advice to Pay down debt or not?

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Conflicting advice to Pay down debt or not?

I’m one of the many ‘accidental landlords’ with a single property that was my primary residence until a work relocation abroad. That prompted a period of rental at the aforementioned and with emotional ties to the property now severed (i.e., no longer a home) I am in the process of withdrawing equity to purchase a number of B2L’s in Manchester to begin on my own investment journey. debt

It is by the by, but I have a 15-20yr view so I am not un duly perturbed by Gideon’s recent spluttering. However, I have been reading all that I can on the subject of investment strategies and to that end I have found Property118 to be a phenomenal recourse in all but one matter: To pay down debt or not.

In the Advice section the point is made a number of times that whenever the opportunity allows a property should be refinanced to withdraw equity up to a predefined amount for purposes of future investment, liquidity, or both. However, in other articles the following is written:

“The great thing about property is that over the long term it is an appreciating asset. 20 years down the line, inflation will have had a positive effect on rental income and capital values, but the loan outstanding on an interest only mortgage will remain the same as day one. In effect, inflation will have reduced the real value of the loan.”

“In my opinion, there is no sensible argument for making capital repayments on the mortgage”

Surely both strategies cannot be pursued at once? If constant refinancing occurs then the loan increases thus negating said inflation. Therefore, while I can see the wisdom in not paying down debt I am struggling to see the benefit of constant refinancing unless one is continuing to build a portfolio.

Have I misconstrued something here?

John



Comments

Neil Patterson

11:21 AM, 11th January 2016
About 3 years ago

Hi John,

With all the recent tax changes when investing in your own name this is going to need a rethink. please see >> http://www.property118.com/budget-2015-landlords-reactions/76164/

However if operated and recognised fully as a business then you would always try to use someone elses money if available on interest only as the old saying is still true that cash is king.

It is still safer to have plenty of rainy day money in your bank account than pay down a loan and leave yourself no margin for error though.

And of course everyone's individual circumstances are different.

Renovate To let

12:23 PM, 11th January 2016
About 3 years ago

Reply to the comment left by "Neil Patterson" at "11/01/2016 - 11:21":

My view is that each person needs to follow a 3 step process:

1. Define your goals in terms of income and assets, including what you want to leave for future generations. Then produce a summary of "now" in terms of income (job and property), assets, liabilities and a short term forecast for each.

2. Thoroughly read and understand the personal tax changes, the SDLT consultation/proposal document and the latest waffle from the Bank of England re possible BTL "controls".

3. Then meet with your own expert "holy trinity" of solicitor, tax expert accountant and broker and craft a plan based on the informed advice of all 3 (tailored to your situation) to meet the goals.

What is certain is that the changes mean there is NO generic plan that works for all now....and there is no need to panic or jump before full details of each change are known.

I have no idea if its intentional but the issuing of "bombshells" once a quarter that each has insufficient detail to safely plan around is an effective way to batter landlords' morale that's for sure.

Anon

13:34 PM, 11th January 2016
About 3 years ago

"It is by the by, but I have a 15-20yr view "

"I am in the process of withdrawing equity to purchase a number of B2L’s in Manchester to begin on my own investment journey."

Historically property appreciation has been good. However, you cannot predict what will happen in 15 to 20 years. We have already seen the most perverse tax changes, where some landlord could end up paying more then 100% tax. (especially if interest rates start to go up). Alarm bells should be rigging!

I made sacrifices, I live in a small cramped home and I tried to be wise and invest in rentals. I was hopping it would help me buy that dream home, but house prices are going up faster. If I sell my rental flat, I have to pay Capital Gains tax tax, but I don't have enough to buy my dream home. I would have been better off focussed on buying my dream home, rather then an investment portfolio. So who is enjoying my asset Me or my Tenants?. When I look at my friends, they have nicer homes, but they don't have any BTL. I feel they are so lucky.

Even if you invest in stocks and shares, you can sell up to £10k per year tax free. With property, when you sell, you have to pay a big lump sum to the tax man.

21:00 PM, 12th January 2016
About 3 years ago

Occupier’s Consent & Postponement Deed

is this correct landlords have been receiving these form when remortgaging and tenants are being asked to sign them if so is it good or bad news for landlords and tenants

stuart edwards

9:23 AM, 14th January 2016
About 3 years ago

Why can't think you do a bit of both. Like already has been mentioned.....cash is your best friend. It gives you a safety margin. My preference is to grow my portfolio slowly. To that end I accept smaller running yields by taking out repayments mortgages. That way my tenants are buying my property. As a margin of protection I have 6 months of repayments in reserve in the bank to cover any hiccups and never buy a new property above 70% Ltv. Of course the advantage of having someone pay down your mortgage is that over time it gives you access to cheaper finance. Of course it means you will grow your portfolio much slower....but better to have a smaller portfolio that you eventually own outright than one that you will be forced to sell one day to pay off debts.

Jonathan Clarke

23:03 PM, 14th January 2016
About 3 years ago

For me it was borrow, re finance buy another. All on interest only at 75/80 /85% LTV Got to the size i wanted and then stash the surplus cash and wait for capital growth and rent rises to do their bit whilst inflation gradually erodes the debt. Then extend the term but not the LTV until you want to exit. Then just sell some on a rolling basis taking advantage of CGT relief where possible

The more you buy the more you enjoy the benefits of compound interest. and the richer you get. As long as you always have a contingency reserve to take the stress test variables that will occur at some point then its counter intuitive for me to pay down debt.

I`ve yet to see a model which makes you more if you pay down debt

It all about though how risk adverse you are towards debt
.

Matthew Ward

23:22 PM, 14th January 2016
About 3 years ago

Only wage inflation sees debt eroded. Of course other factors like a local or global credit expansion can have same effect as wage inflation when its pouring into the economy.

If I'm wrong, explain how inflation sees debt eroded.

If everything goes up with inflation, such as rail fares, but without corresponding wage inflation, it just means people have less money to spend on housing.

Jonathan Clarke

23:51 PM, 14th January 2016
About 3 years ago

Reply to the comment left by "Matthew Ward" at "14/01/2016 - 23:22":

A 100K interest only debt is still only 100K of debt after 25 years. If inflation went up say 2% pa then whilst goods, services, wages, house prices or whatever may go up 2% pa in line with inflation as well - your 100K debt does not go up to 102K.

100K in 25 years will seem far less than it does today precisely because of inflation. I used to be able a mars bar and a packet of crisps for 10p at my school tuck shop. Inflation makes that seem like bargain now. The effect on your mortgage is the same - it will be like it is frozen in time

If deflation were to occur though then the opposite would be true .
.

david porter

4:22 AM, 15th January 2016
About 3 years ago

Do you trust the bank over a long term?
Will they have a change of policy?
Will there be a banking crisis somewhere?
Whatever happened over the years to all those building societies?
Does the loan have a material adverse change clause?

Jonathan Clarke

9:06 AM, 15th January 2016
About 3 years ago

Reply to the comment left by "david porter" at "15/01/2016 - 04:22":

In order to live our lives we have to put our faith in dozens and dozens of people outside our control. The Banks as I see are just one of those people. What we do control is our ability to work out and assess the risks to the best of our ability and make decisions based on that assessment within what we perceive to be certain risk parameters. The banks are no where near perfect but they do in my view offer a significant degree of stability in a volatile world around us

They are prepared to JV with me each time I buy even though they have never met me. They trust me but naturally want to put in safeguards in their T&C`s . I accept that. Its a mutual symbiotic trust between us as we both attempt to attain our respective goals .

They have a vested interest in my success as well as me. In fact they put in 80%. I only put in 20%. So one could argue they in fact take the lions share of the risk.

Both of our exit strategy is to sell up if our JV goes awry for some reason
.

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