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

Hi Mick

You can either compare gross rates or net rates. There is no logic in comparing a gross mortgage rate with a net savings rate.

You pay tax on the saving interest, you get tax relief on the mortgage interest at the same rate. Therefore, it's important that you compare like with like. You don't need a calculator to do that.

If interest rates on mortgages go up and saving rates stay the same, look at the numbers again and if it doesn't work for you at that point, reconsider your strategy. There's nothing to stop you paying down the mortgage at that point is there? However, new opportunities might also present themselves at that point.

There is an age old saying Mick "Cash is King!"
.

"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."

Extremely unlikely. As until around the year 2000. Retail deposits funded mortgages.

Cheap mortgage funding came on the back of wholesale funding from 2003-2007. All £600 billion of it. This is the issue that the BOE and Treasury have been contending with since 2008. Maintaining liquidity in the banking system. All part of the reason we are where we are today.

Reply to the comment left by "Colin Childs" at "17/01/2014 - 17:41":

Just leaving the office & caught this comment. Not at all unlikely in my case. And all depends on what we call years ago? And what mortgage rate we could get?

Yes totally agree, with the savers funding the deposits, but then come 2004ish-2007ish (& I can only talk from my experience & Mark will know the deals that were there), I was getting locked into savings accounts at 6%, while borrowing rates were tumbling. Easy to beat the scenarios talked about.

Yes I now see your years ago different to mine. I'd only just started borrowing for buy to let approx 1998, so I was just interested in putting everything into property. My last pennies if I remember right ha ha.
Although have to say, the sums were easy then to buy as prices were so cheap.

Reply to the comment left by "Mick Roberts" at "17/01/2014 - 18:39":

Banks were desperate for cash when deposit rates exceeded mortgage rates. If I recall correctly in 2009 banks had to refinance around £800 billion of credit lines.

So far we've had SLS, SGS, FLS, HTB 1 , HTB 2, and QE. Not to mention short term loans made directly to the banks by the Treasury. Then of course NRAM still has around £25 billion of direct funding to repay.

With banks contracting balance sheets. Rates for both mortgages and savings will normalise in due course. BOE is obviously trying to do this in a controlled fashion. As some of the banks are still fairly weak balance sheet wise. Given their property exposure. With 6 years to go before Basle 3 capital regulations come into full effect. Far from clear what the eventual landscape will pan out like.

Hi All

I am an interest only fan and do not see the point of making capital repayments. If you believe the price of properties will rise in future over time, then there is no point in making repayments. Any business that is asset rich but cash flow poor is in trouble. Interest only allows you to maximise cash flow - save for the next deposit or simply accumulate in the bank to cover voids, repairs, etc. Interest only is even more applicable when you are trying to grow the business, refinancing or purchasing new properties every six months. If you are inclined to make repayments, why not save the difference (between interest only and repayment) in a separate account and then make a one off payment once per year as your finances allow.

Mark, I really do have to respond to your following comment:.....

"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?"

....What mess is the USA in at the moment?, having to close parks and tourist attractions recently !!
Yes, I agree, you need to make a better return on the money than you pay for it....

Why do countries run at a deficit every year ?...because they don't make better use of the cash.
They would be better without any borrowing, reducing their outgoings since they don't have the ability to service them, just digging the hole deeper !!
But once you are in the hole, you have to buy the spade and pay the workers to dig you out !! - very difficult to do !!
And a country doesn't have any exit strategy, it never needs one, it just passes the mess onto it's children....You could do the same Mark !! (Ha ha, they'd love you for that !!)

..Yes, we know that over time inflation will make these debts smaller relatively (%), but they still have it hanging round their necks...

..We all know what will happen here in the UK when interest rates start to rise and the national debt % rate rises too,... the UK will not be able to service it's debt! ( it can't at the moment, we still run a deficit every year)....one reason the BoE is keeping the rate down, hoping inflation will do its job for them.

Reply to the comment left by "Jeremy Smith" at "20/01/2014 - 12:06":

Never buy a spade when you are in a hole and stop digging!

A ladder is a far better investment 🙂 LOL
.

ROFL !!!

...... that is the one thing countries do not think of buying !!!, or even investing in for the future.

Working with a variety of clients in the BTL market they normally only have two opinions so - I ask the key question - is this for retirement income or for long term capital gain.

If you are looking to sell the property within a set period and look for a capital gain, then I would consider Interest Only.

If you are looking long term and wish to retire by using the property rental for income then look for repayment.

I see little use of talking about anything else - as the Meerkat says - Skimple!!

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "20/01/2014 - 13:10":

Hi Simone

I have another question you could ask ....

Do you ever intend to borrow more to buy more?
.