What are your repayment plans?

That's all sorted then. Nice one Mark

Reply to the comment left by "Vanessa Warwick" at "07/12/2013 - 10:31":

Hi Vanessa,
It's quite simple my love, the bank instructs the valuer who comes up with an over-inflated price. Sorry, that was the way in 2006. I know things have changed since then and they are not able to be so flippant these days. I didn't realise you were so new to the game.
Regards,
Philip

Reply to the comment left by "philip allen" at "07/12/2013 - 15:28":

If that was the case banks would be in an even worse place than they currently are. Cheap and easy to obtain credit is without doubt the real cause.

Reply to the comment left by "philip allen" at "07/12/2013 - 15:28":

I don't follow this logic at all, banks don't sell property, they sell finance. Person find property he/she wants to buy, applies to bank/lender for mortgage, lender seeks valuers opinion for it's own security. If valuer says it's worth less than the buyer has agreed to pay the buyer gets upset. If the valuer agrees with the price being paid by the valuer everybody is happy. Therefore, if the market changes or the property was over-valued that's now everybody's problem. The bank has a problem with it's security, the valuer might have a problem if he/she over valued the property and the borrower might have negative equity. If the property goes up in value then everybody is happy. I can't see how it can ever be the bank/lenders fault if a person pays over the market value for the property. In reality it is more likely to be the purchasers own daft fault. If the valuer made a mistake I can see how the bank might have a problem with that but not the purchaser. The only way a purchaser can be protected, in my opinion, is to have his/her own valuation done for his/her own benefit. The valuation for the bank/lender is only for the benefit of the bank/lender.
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Reply to the comment left by "Mark Alexander" at "08/12/2013 - 17:51":

Mark, the comment was meant to be 'tongue in cheek'. Yes, I'm incredibly 'daft'. Like you I retired on my property portfolio which is why I'm able to post 'daft comments', poolside, on the other side of the world.
If any of your contributors care to contact me and simply post the question, 'How did you do it?' I'll be happy to tell them. A service I charge nothing for. The property I referred to is the one 'lemon' in the portfolio and I've had the exit planned since I bought it.
Now stop taking yourself so seriously and enjoy the decisions you made way back. That's, after all, why we got into property isn't it?
Cheers 🙂

An interesting question has been put to me offline which is ....

"at what point does it make sense to pay down a buy to let mortgage as opposed to saving elsewhere?"

It's a good question, my response to which is that IF the money was borrowed for the right reasons in the first place then it is almost NEVER a good idea to repay it until the property is sold.

Now I appreciate that I need to qualify that statement.

For example, if you are borrowing at say 6% and you can only make 3% on saving the maths, on that pure academic basis, taking nothing else into consideration is that it would be better to pay down the debt from surplus investable income. HOWEVER, if it made sense to pay 6% interest rates in the first place then other factors must have come into play. The combination of net cashflow and prospects for capital growth must have been to make a greater return than 6%. If those dynamics still work then surely it makes sense to borrow more, not less?

Now it might not be possible to borrow more or buy more so saving may be necessary for a while. A means to an end if you like, i.e. save more money until you are in a position to do another deal to make more money using somebody else's money as well as your own.

If a deal doesn't make sense then rather than paying down the mortgage I would say sell the property.

Ah but what if you don't have the money to sell I hear you cry. What if the property is in negative equity?

Well my 20% liquidity strategy takes that into consideration. If you buy multiple properties, sometimes you will make a mistake or things will happen outside of your control. You will never know which of your properties will end up being a "lemon" otherwise you would never buy it in the first place would you? That's why it is so important to build a liquidity fund. Paying down mortgages is not liquidity because there is no guarantee that you will be able to access those funds again when you need to. Circumstances might change, e.g. your finances or property values and that might mean you can't borrow more money.

In 1992 interest rates hit 15%. Whilst that is unlikely to happen again in the foreseeable future, when it happened in 1992 it didn't last for long and the people who got through that period had a decent liquidity fund. Equity in property didn't help people because values dropped like a stone and borrowing became virtually impossible.

I could write a book on this subject but the above is intended as a simple overview.

I will be happy to answer questions.

I appreciate that people will put scenario's to me where it does make sense to reduce debt as opposed to saving. However, please note that my response to that is highly likely to be that something was badly thought out in the first place. I say that so that anybody putting those scenario's to me understands that my responses are nothing personal. I will also explain what could have been done differently to avoid such problems. In most cases, the people who are worried now over-stretched themselves. They got into property with little if any of their own money and/or paid no regard to the need for a liquidity fund. Most people start off being well intentioned but I have met several who have speculated to excess and may come unstuck as a result of doing so.
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I agree broadly with Mark . There is little point in paying down debt in my eyes. Keep the cash so you retain control which is absolutely vital . I invest my cash and aim to make 20-40% on every pound so even if I have got a loan at say 7% it makes no logical sense to pay that down. I cant understand the mind set that invests using a high leveraging strategy but then wants to pay it down. You bust a gut to jump through hoops to get 75% LTV in the first place then why would you then want to pay it down the next day or next year. You might as well have only taken out a 74% loan in the first place!

Its a comfort zone attitude more than anything I believe. Having thousands/ millions of debt is perhaps too much of a mental burden for some. It was ingrained by my parents to pay off debt so its a hangover from ones upbringing often. But mortgage debt is good debt . The more debt you have I find the burden gets easier in fact because as the years go by the gap between your debt and the value of your properties gets bigger and bigger. Your equity likewise increases on a pro rat basis. Each 0.5% rise in property prices is magnified through the total value. Also the more debt you have the more the balance of power shifts between borrower and lender. With 500K of debt if you falter you have a problem. But with 5 million of debt if you falter it becomes more of the banks problem.

Where I differ with you Mark is that you advocate a 20% contingency fund on debt which is fair enough but for me far too high . The thought of having a million pound of debt thereby having 200K in the bank sitting idly by when it could be working for you would frustrate me. I would buy maybe 5 more 100K houses with that at 80% LTV . My contingency fund runs at around 5% which I find adequate. But then we start discussing what constitutes a contingency fund - but hey thats another story ................................ 🙂
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With no science I have explained this to people before like this - all figures basically random.

If you have a 100K mortgage and pay it down in the good times by 10K, when the bad times come and your monthly payment is 900 pcm, you will last about 6 months before penniless repossession.

If you hang onto the cash and the monthly payment goes up to 1000 pcm, then you will last about 15 months, and in 15 months there is more chance for things to change.

The sheer complication of the tax return if your mortgage payments are part interest, part capital are enough to persuade me 🙂

This discussion went a little off piste, but I do agree more with Mark's comments about overpayments, although Vanessa's comments about buyers needing to understand that they will need some way of paying off their mortgages at the end of the term. I suspect the majority are simply sticking their heads in the sand because they don't, and probably never will, especially if they have significant negative equity.

Getting back on topic, I too recently received the same letter from BoS about my main home. I have a good interest-only rate, and 13 years remaining, and suspect they would like me to move, but I also have some 70% equity, and plans in place to repay it . Therefore, I have no problem telling them my plans if it means they go away (not that anyone can ever be certain about what will happen in 13 years!), but I will become very suspicious of their motives if they come back with more questions.

Of course paying down the mortgage reduces your immediate outgoings, and the final debt, but as Chris and Mark have mentioned, a contingency fund is essential.

If my mortgage is running at 1.5% and I can get 3% for savings, then it's obvious! - putting the money in the savings account is going to accumulate more than the saving on the mortgage.
When the two are of similar rates, then it's slightly more of a personal preference ( once you have a slush fund to draw from).

If the mortgage and savings (after tax) are similar, or even the other way, it may still be better to save the cash, since when you need further monies, it can be quite complicated and expensive to persuade the bank to advance you further funds, if they will at all !!

Example:

If you've got a 100k loan and 25k savings:
Need new loan? - yes! I have 25% deposit here!...
Bank says - Yes Please, here you are, here's another 75k.

But use savings to pay off 25k of the original 100k...
Now you need a new loan? -
Bank says: Where's your deposit??... Oh, I gave it to you to pay off some of the last loan...
Result - No Deposit - No 2nd Loan!

It's really simple when you think about it.

You've got to think ahead when it comes to dealing with fickle people like banks !!