Interest Only or Repayment – what do you do believe and why?

Reply to the comment left by "Some One" at "16/01/2014 - 13:00":

Three quick points in response to your post.

1) Lifetime mortgages are available on BTL at rates of circa 6%

2) If it made sense to borrow the money in the first place how can it make sense to repay any of it before you need to?

3) By paying down your mortgages instead of growing your portfolio then you are choosing to limit your exposure to the prospective growth of the property market. That's fair enough if you don't believe there will be any growth in the property market but if you believed that why wouldn't you just sell up now?

I'm not sure whether you are playing devils advocate or whether our strategies really are poles apart but either way I am enjoying our debates. Welcome to Property118, whoever you are 🙂
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Britannic Money (and then Mortgage Trust) used to have a really good setup for BTL offset/flexible, you even got a cheque book with it. Unfortunately, it's been killed off.

For companies that were primarily lenders I guess it came down to liquidity and reserve issues.

Reply to the comment left by "Some One" at "16/01/2014 - 13:00":

Hello, thank you for your reply....... I have to admit when you say exit strategy I generally get the impression that anyone in BTL doesn't really have an exit strategy. No one sells they just maximize the cash flow and sit on the long game of property appreciation if you are in a good area. This might sound like a bit of a generalization .

Reply to the comment left by "Tony Atkins" at "16/01/2014 - 13:00":

Hi Tony, thank you for replying. I like the way you and Mark put things, and I see your points. I think I need to figure out why sitting on a large amount of debt, all be it "Good Debt" makes me so uncomfortable.

Also I have never really looked into offsets, but as Mark has pointed out that some banks tie you in with the offset as well, I guess I probably will stay away from that as well, but I'll do a bit more research as well before deciding.

Reply to the comment left by "Ben George" at "16/01/2014 - 13:18":

Let's look at this from another perspective. The worlds largest super power is the USA? Does it operate on a credit or a debt basis?

The use of OPM "Other Peoples Money" makes a lot of sense if you can get a better return on the use of the borrowed money than you pay for it. Fundamentally, that's why people borrow to buy property as an investment isn't it?

I can accept the argument that most people will need to borrow money if they want to own the property they live in. Also, given that a loan to opurchase a property you are living in needs to be serviced from your earned income then it makes a lot of sense to have a strategy to pay off that loan before income reduces as the point when you retire. Your home will rarely produce an income and that's why a different strategy needs to be applied to that. Also, given that most people do not invest into rental property, paying down their personal mortgages is one of the few strategies to get it paid off before retirement age. For property investors though there is an alternative strategy, i.e. sell a few property investments at retirement age and utilise any capital gains to repay your personal mortgage. CGT is nowhere near as costly in terms of tax and tax on income is either and can also be manipulated legally to your advantage.

Loving this debate by the way 🙂
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Reply to the comment left by "Mark Alexander" at "16/01/2014 - 12:04":

Hi Mark, again thank you for the forum as a whole for interesting debate. If I play devil's advocate. Now that you have stopped actively pursuing investments from what I understand..... Isn't it worth paying of the mortgages over time to give you unlimited peace of mind like Mervin and Some One.

I suppose the overall questions is, do you have an exit strategy? It may be that I have not reached that part of your property journey as I haven't read all your articles, but I guess I'm curious 😉

Reply to the comment left by "Ben George" at "16/01/2014 - 13:30":

Hi Ben

Only a fool would not have considered an exit strategy, we all have one whether we like it or not, unless of course somebody has found a cure for mortality LOL

So far this year one third of my consultations have been to discuss exit strategies and in particular; CGT, IHT, refinancing beyond retirement age.

I touch upon my own exit strategy in this article >>> http://www.property118.com/financing-beyond-retirement-age/ which should be read in conjunction with the entire series of linked articles 🙂
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Reply to the comment left by "Ben George" at "16/01/2014 - 13:50":

Hi Ben

I think our posts must have crossed.

My exit strategy is hinted at in the series of articles you are currently working you way through. There are three parts to it:-

1) If property inflation reduces my LTV's to a low enough level I will convert to lifetime mortgages at the point it becomes difficult to get more competitive finance elsewhere. This will be an age thing.

2) If my property values do not rise sufficiently to switch over to lifetime mortgages then I will sell a few and utilise the profits to adjust my gearing accordingly, but only when I need to do so.

3) The ultimate exit strategy is, of course, death. I have made provisions for this in terms of life insurance, Wills and various other forms of estate planning. I'm not planning to pop off anytime soon but I've made my plans now just in case 😉

You are quite right, I have stopped buying. This is because I have completed that stage of my plan. I am now able to live off my rental profits until such time as age related circumstances mean that I need to adjust my financing arrangements. Meantime, if I need to raise extra cash my wife and I will trade properties, either between ourselves in order to maximise tax releif without having to use the money for reinvestment, or taking the opportunity to buy/refurb/flip deals which can also be a lot of fun and very fulfilling both financially and emotionally. You will eventually get to all of this in a lot more detail in the series of articles you are reading 🙂

I hope that helps to fill in a few gaos for you.
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I’ve done both.

To start out, interest only, get your Capital built up, buy as many houses as u can or want.
Take a view when u thinking of slowing down & then pay more per month off on certain houses or all of ‘em to start reducing the balances-Only when u happy u don’t need any more money.

There’s arguments for both & I think it’s a definite at beginning, but as one gets older, there’s nothing like having no outgoings on a house, or a major outgoing like the mortgage.

Then there’s the Tax implications u have to think about with interest part being tax deductible.

And then u have to think when mortgages start coming to an end, & u still have ALL the balance owing the bank. But u don’t want to sell it, but the bank want their money back. You may not want the hassle or re-mortgaging as u get older.

Lots of arguments for & against. If you’d have asked me 15 years ago, interest only was a clear winner. If u ask me now, I still say most definite at the beginning, but I have to say I really recommend eating into them balances as time passes by. Unless of course u want to keep buying & buying & buying. Which is what I thought I would keep doing, but things change, we never know & I truly recommend as some say on here, get yourself a cash reserve built up, but when you decide u have too much cash, change your view.

And yes, I’ve had quite a few offset mortgages as well, if they are still about, they can brilliant if u r disciplined.
Those are really good if you see loads of bargains all at once & don’t want to miss any of ‘em.

Reply to the comment left by "Mick Roberts" at "16/01/2014 - 16:02":

If you are going to pay your loans down why commit to doing it monthly. Save up a lump sum and then if/when the time is right for you pay it off the loan with the most expensive interest rate.

Most of my rates are below 2% because the mortgages were arranged when crazy deals were about just before the crash. It would be crazy for me to pay off those loans because the rate of return I can get on savings is higher than the rate I pay for the mortgages! I suspect many of your own loans are the same Mick?
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