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

Reply to the comment left by "Mark Alexander" at "16/01/2014 - 13:12":

Hi Mark,

I take your point re. offset mortgages, but if people have been caught out with changes to their T&C regarding their offset facility, that's partly their fault for not keeping up with communications from their providers, which will have given them the opportunity to move their funds elsewhere.

I don't claim offset is any panacea, just useful occasionally. I don't actually use mine at the moment, because like you, my mortgages are below 2% and my capital can earn better rates elsewhere or be used to support my development business. However, if interest rates do go back up to, say, 5%, and normal service is resumed where mortgage rates exceed savings rates and stock market dividends, then it is comforting to know that I could move a large chunk of my capital into my offset facility. I will then be protected to some extent against the rise in interest rates, but will still have the flexibility to deploy the cash elsewhere if I need to.

Reply to the comment left by "Tony Atkins" at "16/01/2014 - 16:27":

Now I follow your logic entirely Tony, I hope you are using your facility to its full extent on this basis then.

I have a similar philosophy. If Armageddon occurs and interest rates go up to 15% whilst property values halve I too will be in control of my destiny. I will have :-

1) Have money to subsidise negative cashflow
2) Have the money become a predator and snap up a load of bargains
3) The ability to feel sorry for my poor, over exposed mortgage lenders do something about it, i.e. give them some of their money back and reduce my interest payments in the bargain.

Somehow I doubt I would ever go for option three but it does leave me feeling rather smug that I would have all of these options whereas a person who previously had 40% gearing and no cash would, under these circumstances, then have 80% gearing, still have no cash, have a very expensive mortgage and not have any of the choices that I would have 🙂
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Reply to the comment left by "Mark Alexander" at "16/01/2014 - 16:15":

Ooh Mark u, don’t u get me involved in a debate with u cause u will always win as u have more time than me, as I am snided out HB Landlord.

I didn’t say commit. As u know, I can talk from experience both sides of the coin. And verbal talk could explain much better.

But quickly, for example, low interest rate, mortgage £100pm interest only. Rent £500. Landlord thinks Wow. 1 year later, Landlord thinks Crap, putting that extra £400pm into interest rate getting 1%.
As we know, Tax complications have to be worked out, but & I do recommend this, pay for example £200pm (voluntarily), u paying extra off your balance, so next year your balance is £1200 less, & subsequently, your new interest payment the bank requires is now lower, so if u still pay £200pm, u r now for example paying roughly £110 off the balance every month.

You are also covering yourself for future interest rate rises. So no nasty shocks when rates start rising-Your outgoings haven’t increased.
Should u buy some more, & monthly outgoings become tight, drop the £200 to £100 or £90 what the bank now requires.

You don’t have the admin of remembering every year to pay some off if u have the spare funds.

But I do also agree with u about paying off in lump sum with most expensive interest rate-I’m doing exactly the same now ha ha.

I’ve been doing my first scenario for 15 years-And ‘our’ second scenario for approx 7 years.

I do agree about being crazy to pay off low rate loans, I’m in that boat now. But a low rate loan is still an outgoing if u have nowhere else to put the money. It’s nuts me thinking about paying off loans that’s costing me virtually nothing, but what else is a man to do? Unless Pamela Anderson wishes to spend a night with me at £100 per night for the next year, we could get rid of some cash that way.

Ha ha, I’m not telling u my loans on here, I’ll tell u privately, suffice to say they’re ruddy lower than people could imagine. Let’s test the knowledge of some Landlords, shall we? I switched 24 with the Woolwich in 2007 at their best & I believe the best ever tracker of buy to let in the history of lending-There’s your answer-And I’ll bet you’ll ruddy know the answer being an ex successful mortgage broker.

We all have our own sums, but again roughly, if u can borrow at 1% over BOE, & u can save the excess at maybe 3% bank savings interest rate, then I’d say that’s the way to go, but I can’t find any ruddy 3%.

Reply to the comment left by "Mick Roberts" at "16/01/2014 - 16:39":

But from what you've said Mick you are borrowing at 1% and that's very easy to beat with deposit rates.

If you are prepared to lock your money up for 5 years then Aldermore are offering 3.25% right now. You can still get at your cash if you are desperate but there would be penalties. Better than paying down your 1% mortgages though, especially if you believe base rates will stay low for several years.

Another option is Vanquis at 3.19%

You can ever do better than 1% with a sainsbury current account, they are paying 1.3%.

All sourced in a few seconds on the web 🙂
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I knew you’d beat me, Mr Free time.

I don’t want 5 year, just in case, don’t mind 2 year. So let’s throw Aldermore away.

And as u know 1.3% with the tax, gives us 0.78%, & even more of a throw-in, is if interest rates do go up, the savings rate quite often stays the same for a bit, but the mortgage rate goes up.

But I’m all ears & open to suggestions, as I’m sure many other Landlords in my boat, stuck between paying off or saving in paltry pittance account.

Reply to the comment left by "Mick Roberts" at "16/01/2014 - 17:07":

I assume you pay tax at 20% or 40% Mick?

If that's the case, remember to net off your tax relief on your mortgage interest. If you are paying 1% and you are a 40% tax payer your net rate is only 0.6%.

So what if interest rates go up?

You will have the cash, you will have the choices - see my post above regarding the choices you would have.

Of course I will win by the way, it's nothing to do with having the time, it's because I am right - not always but definitely so in this case LOL
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Reply to the comment left by "Mick Roberts" at "16/01/2014 - 17:07":

Mick - you're not really stuck: You could invest a proportion of your capital in shares - the likes of Centrica, BT, AstraZeneca and Lloyds are paying 5-6% p.a. in dividends, and you have a chance of a capital gain as well: most UK-based investment trusts saw gains of 30% last year.

I know many people aren't happy investing in shares, but interest-only versus repayment mortgages is not just about holding cash deposits versus paying down the mortgage: there are alternative uses for your surpluses. Even in the property sector, there are options such as moving into renovation and development work as a sideline if you don't want to commit funds to buying more houses.

Reply to the comment left by "Tony Atkins" at "16/01/2014 - 17:45":

Here, here.

Shares scare me because I don't know what I'm doing and I have very little trust in people who sell them.

However, I do love a good refurb protect and it's not that hard to make a very handsome double digit return on your money plus a fair return for your time if you know how and what to buy and have all the trade contacts. I know for sure that Mick can tick those boxes 🙂
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Many a profitable business fails because of cashflow issues. So use of debt should form part of the overall strategy. Most entities that I have become involved with over the years. Suffer due to a lack of even the most basic business plan. Let alone when that assesses the impact of variables. How many LL's are currently running their business based on the past. Rather than looking forward. As others have said previously strategy is key. Along with tax planning. I suspect many are going to be disappointed with the returns they make ultimately.

I can’t divulge my tax rate on public wall, but let’s not forget there’s another Tax rate out there.

Yes, done all the sums years ago-Is there a site where there’s a simple formula for one trade off against the other? ie. After all tax has been worked out on interest rate pay-out & tax on savings income, then ie. 1% mortgage needs 1.6% savings rate to be equal?
Working out obviously if no loan, more profit, but more tax to pay, or keep the loan, less tax, but more pay out in interest, but income from putting the loan money in savings. Lots of variables there.

I think years ago, decision was easier as there was normally always easy to find easy access savings accounts that beat the mortgage interest rate we were paying.
And if u do find one now, because of the bank crisis, some of us are paranoid about not putting in too much in each bank.

If rates go up, we end out paying more. And some could have enough cash anyway, should they choose to buy a few bargains.
Ask your missus, she’s normally right ha ha.

Ooh not the shares, I’m with Mark on that one. Yes I have a few shares, not a lot, but a few. For me, I just like that feeling of putting money in that house, & normally it’s safe & normally goes up in value, with rent coming in as well.

Done & doing the renovations. I’m also building a few new builds as we speak, & for me I tell u now & LOUD, a lot more to pay out than I thought there would be with Gas, water, Elec connections, etc. etc. Suffice to say, if & when I finally find me own land to build on for me own house, I’m getting builders in with their own diggers & dumper trucks etc.

And I kid u not, as much as my HB rented houses give me hassle, I do think they are less time than buying & selling houses. More stress to me buying & selling than renting & forget about em. But hey, I suppose if I took buying & selling seriously, I’d have different people in.