Jump to content
House Price Crash Forum
Anonn

Repayment Or Interest Only Mortgage For Property Investment?

Recommended Posts

This is huge subject that I'll be coming back over in a few different ways in the future.

Let me start by saying how I discovered which was best and that may help you more than me just giving the answer straight off the bat.

It was around April 2002 that I discovered the answer to this. I had already started to buy property in bulk, I just hadn't completed on any yet. Of course I was buying with interest only Buy-to-let mortgages. This was because there was no way the rents would stack up with repayment mortgages.

One of the reasoning's I'd come to in the time of researching the property market was an example that was quite close to home - My Dad.

He had bought his home on the 4th January 1971 for £5,600. He took out an endowment mortgage, which on the 4th of February 1996 matured and gave him I think about £6,500. He promptly paid off his mortgage and they sent him the deeds.

When he took his mortgage out, he was paying a fixed rate, which I think he got over the entire term (Dads a bit woolly on finances). He was paying £41/mth, which consisted of £26 interest and £15 endowment (these were the figures he gave me at the time and I know there not totally accurate now, but it's the gist I'm looking to get over here).

My Dad was a schoolteacher all of his life and in 1971, his monthly income was about £100 net. Things were very tight for my parents and would have remained so for a long time, if my Mum had not started a business, which gave us all a comfortable life.

Dad struggled to make ends meet but never missed a payment in his life. He paid that £41 right up until he paid of his mortgage.

By 1996 Dad was retired, he had a school pension, a government pension, stocks and shares, in total he had an unearned income of around £20,000 a year or £1,667/mth. The £41 a month that he paid on his mortgage didn't even raise his eyebrow anymore.

His current account always had £5,000 in it, let alone any deposit accounts, he could have just written a cheque and paid off his mortgage and not even noticed it. But the endowment that was still costing him £15/mth paid it off instead.

The mortgage as a percentage of his income in 1971 was 26%.

The mortgage as a percentage of his income in 1996 was 1.56%

The endowment as a percentage of his income in 1971 was 15%

The endowment as a percentage of his income in 1996 was 0.9%

(Obviously my intention here is for you to look at the endowment as if it were a repayment of the mortgage)

So if my Dad had paid interest only in 1971 he would have been 15% / month better off. Which is obviously a massive percentage of his take home pay.

Then in 1996, he would have had to pay just 25% of his annual income to clear his entire mortgage.

Is time powerful or what!

There is absolutely no financial gain in having a repayment mortgage at all - it is an illusion! It is pure peace of mind rubbish.

Furthermore a repayment mortgage is based on the assumption that you actually want to pay your mortgage off!

If anybody wants me to expose that assumption in another article just let me know.

I knew all of this and still struggled with changing my own residential mortgage over to an interest only one. In the end I had to con myself into it because my brain, sorry my programming wouldn't accept it.

I had been so severely programmed by my parents, the media, the government, and the banks to pay off my mortgage, that I could not bring myself to stop my repayment mortgage.

Even though I had proved to myself beyond any doubt that I was better off on interest only.

So I tricked myself into it, I had to agree with myself that we'd try it for a while and we'd give it one year and if that didn't work then we'd switch back to a repayment mortgage and ‘we'd fell better that we'd tried and it had failed.

Anyway, I suckered my brain into it and it let my hand dial the number and my voice say, "please convert my mortgage to interest only".

The following month the payment came out of my bank. My repayment mortgage at the time was quite high, around £2,800. When the interest only payment came out it dropped to around £1,600.

I could not believe the wave of relief that came over me, it swept my programming away in an instant and I was able to use another one of the powers of property in my favour.

The answer is - Interest only 100% no doubt in my mind.

That was 2002; in 2003 I refinanced my home and pulled out around £200k, which I used to fund a large part of my portfolio.

My interest only payment jumped up to around £2,800 (what I was paying as a repayment mortgage before).

Since I converted to interest only, I have missed I think 40 repayment payments, which would mean my mortgage would be paid off by £48,000. Obviously I've paid the interest element!

At this time I am re-financing some of my extensive portfolio as I am consolidating my old portfolio, whilst building others, with my business partners.

My consolidation is to put all my buy-to-let mortgages into 3-5year fixed deals on a cheap interest rate and pull out a seven-figure sum as a fall back protection against bad weather.

The money I'm pulling out will pay down my mortgage to around £10,000 on my own home and a similar amount on some of my other key properties. I do not want to pay off my mortgages because the lenders are happy to allow me to draw back down at any time, up to my total mortgage within the 25 years term.

I digress...

The point I'm trying to make, even though I can't seem to make it is - Why pay off debt today with real money now, when you can pay the debt off in years to come with the same sum of money, but that money is worth much less then!

For further information visit: :rolleyes:http://www.propertyinvestmentsecrets.co.uk/offer/mfn.htm

Share this post


Link to post
Share on other sites

Ahh, it all depends on wage inflation..... we had double digit wage inflation for many years if wages go up quickly i agree there is no point having a repayment mortgage...., however in history we have seen periods of deflation (recently japan), years of falling wages wont erode the debt away...

I/O is great, but you need to understand the risk of leverage/gearing. 100% gearing is VERY VERY risky, however it can be very profitable.

Edited by moosetea

Share this post


Link to post
Share on other sites

It's all very simple - if you can get investment returns greater than your mortgage interest payment then interest only is worthwhile.

It's similar to the choice on whether to overpay on your mortgage. My mortgage is fixed at 4.99. I would fill up any ISAs over 5%, but taxed savings will still probably be less than 4.99% so the rest goes into paying off the mortgage.

Share this post


Link to post
Share on other sites

Oh dear.

If we're heading for a sustained period of high (not just higher than we have been used to) interest rates, then you will be giraffing.

If we see interest rates hold at a mere 7% to 8%, you're knackered.

I.O.'s are for mugs who have been on an Inside Track seminar.

Share this post


Link to post
Share on other sites

With the massive choice of foreign currency mortgages available today i wonder why anyone would want to pay 6-7% on a mortgage for a second home.

Why not take advantage of Swiss Francs or even Euro's as an interest only option. At interest rates of 2.81% and 4.4% respectively.. why not.

The Euro and Franc are closely correlated with the pound, i know id rather have a 50% reduction on my mortgage payments. Id use that to go buy more property.

Most companies put in a buffer at 15% so that if the loan amount increases due to exchange rate versitility, then the currency can automatically be switched back to Pounds, but back to full UK rate.

Offset any potential increase in loan with the knowledge of the savings in interest per annum over say a 10 year period plus the increased value of the house.

Obviously, nothing is certain (crystal ball time)... but hey.. interest rates could continue to climb in the UK also...

We can arrange lending on any 2nd property from as low as 40,000GBP, 75%LTV, 4.25 times single salary, no minimum term, no exit penalties, extremely low bank fee's.

Want more info on taking advantage of another currency email me at alan_ofsspain@yahoo.com.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 355 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.