Rental Property- Interest Only or Repayment Mortgage.
Discussion
Hi,
I've asked advice on here previously and recently emailed Sarnie about my situation.
I'm in the forces so move around a lot and decided to take my family with me. We have rented our home out for the last 3 years with the first 2 at 3.49% fixed (residential) and have been on the SMR for the last year at 3.99%. My lender usually charges an extra 1.5% but have not added this due to me being in HM Forces.
Recently we have dipped below 75% LTV so I've had a look what is out there as I'd like less costs and maybe a fixed rate. Even though we are renting it out I would still like the capital paid off as time goes on hence staying with a repayment. However I was recently contacted by a mortgage broker who advised me to move to an interest only. This was his basic maths assuming a £1000 repayment mortgage and equal rental income:
Repayment: £1000 - £700 int = £300 capital payment
IO: £1000 - £500 int = £500 to pay of capital/invest/save
What appeals to me is that I believe I would pay less interest and have more from our rental income to pay the capital off this way. I would also appreciate more "just in case" funds for the unexpected bills relating to the property and periods where it may be empty wouldn't affect us as much.
He also said it would also be better from a tax perspective but I'm assuming I'd pay more on the extra surplus. I am also concerned that currently the interest payment will reduce over the term but unsure what would happen on IO.
To throw another spanner in the works. A colleague also has a new mortgage with the same lender and is certain that they allowed him onto a decent residential fixed rate without extra charge as he is also forces. It's their only property and they intend for it to be their eventual main residence which is the same as my situation. I quite fancy their 2.84% 3 year fixed with no fee so will be chatting to my lender on Monday. This way I would avoid the survey, admin and legal fees.
The interest only still sounds appealing but I'm pretty new to this so any advice would be gratefully received!
I've asked advice on here previously and recently emailed Sarnie about my situation.
I'm in the forces so move around a lot and decided to take my family with me. We have rented our home out for the last 3 years with the first 2 at 3.49% fixed (residential) and have been on the SMR for the last year at 3.99%. My lender usually charges an extra 1.5% but have not added this due to me being in HM Forces.
Recently we have dipped below 75% LTV so I've had a look what is out there as I'd like less costs and maybe a fixed rate. Even though we are renting it out I would still like the capital paid off as time goes on hence staying with a repayment. However I was recently contacted by a mortgage broker who advised me to move to an interest only. This was his basic maths assuming a £1000 repayment mortgage and equal rental income:
Repayment: £1000 - £700 int = £300 capital payment
IO: £1000 - £500 int = £500 to pay of capital/invest/save
What appeals to me is that I believe I would pay less interest and have more from our rental income to pay the capital off this way. I would also appreciate more "just in case" funds for the unexpected bills relating to the property and periods where it may be empty wouldn't affect us as much.
He also said it would also be better from a tax perspective but I'm assuming I'd pay more on the extra surplus. I am also concerned that currently the interest payment will reduce over the term but unsure what would happen on IO.
To throw another spanner in the works. A colleague also has a new mortgage with the same lender and is certain that they allowed him onto a decent residential fixed rate without extra charge as he is also forces. It's their only property and they intend for it to be their eventual main residence which is the same as my situation. I quite fancy their 2.84% 3 year fixed with no fee so will be chatting to my lender on Monday. This way I would avoid the survey, admin and legal fees.
The interest only still sounds appealing but I'm pretty new to this so any advice would be gratefully received!
Edited by dai1983 on Saturday 25th January 21:53
What "tax issue".
Interest on borrowings to purchase a rental property can be offset against the rental income. This, of course, helps reduce your rental profits and will obviously lower any tax bills arising.
Obviously, the more interest you are paying, the greater the impact on your tax bill.
But I'd always prefer to have a lower overall outlay and pay the higher tax than have a higher outlay and lower tax.
Interest on borrowings to purchase a rental property can be offset against the rental income. This, of course, helps reduce your rental profits and will obviously lower any tax bills arising.
Obviously, the more interest you are paying, the greater the impact on your tax bill.
But I'd always prefer to have a lower overall outlay and pay the higher tax than have a higher outlay and lower tax.
for anyone to answer your question they would need to know much more about your situation...amount of rent rec'd for instance as a starter
you only pay tax on money earned so you may pay less tax if it were full I/O (over the longer term) but in turn it is only because you are not reducing the debt and hence paying more interest! Whereas with repayment the interest is reducing month by month (by virtue of the debt reducing) so you may pay more tax (as less interest to offset against rent) but you are reducing the debt...
swings and roundabouts
Ultimately it depends upon your own finances, the margin between rent and monthly payment and your ability to cover the rental voids and maintenance plus factoring in future rate increases affecting the payments too.
Sarnie is correct in the fact Nationwide don't do I/O any longer (unless you re-mortgage to The Mortgage Works and you need a Broker to do that as they don't deal direct which is fortunate for us Mortgage Brokers!).
If you can re-mortgage onto one of the Nationwide's resi rates by virtue of the fact they are more considerate to forces personnel (allowing them to do so knowing you are letting it out) then you wont beat the rate, your downside is the fact that you will have to keep it on a repayment basis...that said if the rent is high enough compared to the lower mortgage payment you will get, then maybe the fact it is fixed for 3 years (or whatever) re-assures you that it is affordable to retain on the repayment basis anyway...
you only pay tax on money earned so you may pay less tax if it were full I/O (over the longer term) but in turn it is only because you are not reducing the debt and hence paying more interest! Whereas with repayment the interest is reducing month by month (by virtue of the debt reducing) so you may pay more tax (as less interest to offset against rent) but you are reducing the debt...
swings and roundabouts
Ultimately it depends upon your own finances, the margin between rent and monthly payment and your ability to cover the rental voids and maintenance plus factoring in future rate increases affecting the payments too.
Sarnie is correct in the fact Nationwide don't do I/O any longer (unless you re-mortgage to The Mortgage Works and you need a Broker to do that as they don't deal direct which is fortunate for us Mortgage Brokers!).
If you can re-mortgage onto one of the Nationwide's resi rates by virtue of the fact they are more considerate to forces personnel (allowing them to do so knowing you are letting it out) then you wont beat the rate, your downside is the fact that you will have to keep it on a repayment basis...that said if the rent is high enough compared to the lower mortgage payment you will get, then maybe the fact it is fixed for 3 years (or whatever) re-assures you that it is affordable to retain on the repayment basis anyway...
I personally prefer a IO simply because it gives me the most flexibility, although I ensure I have an overpayment facility.
IO is more appealing as it's cheaper but some people lose sight of the fact that with IO you will always owe 100% of your mortgage amount, and if you do pay off capital then you pay less interest to start with!
IO is more appealing as it's cheaper but some people lose sight of the fact that with IO you will always owe 100% of your mortgage amount, and if you do pay off capital then you pay less interest to start with!
Edited by Sir Bagalot on Monday 27th January 00:17
A repayment mortgage carries the hidden opportunity cost of what that capital could be doing for you elsewhere. Clearly this is an investment/speculative POV not a conservative one.
Tax is the main reason my clients gear their BTL's, they would rather pay CGT (which they can control) than income tax. What would you rather have, one unencumbered BTL valued at say £200k and bringing in rental income taxed at 40%+ or take three £50k deposits out of it, have four BTL's and thus £800k of assets appreciating at similar rates (hopefully) and nominal income tax exposure?
Clearly more risky, and those who followed the Inside Track method (look it up) will have learned a harsh lesson, but the basic principles are sound.
Tax is the main reason my clients gear their BTL's, they would rather pay CGT (which they can control) than income tax. What would you rather have, one unencumbered BTL valued at say £200k and bringing in rental income taxed at 40%+ or take three £50k deposits out of it, have four BTL's and thus £800k of assets appreciating at similar rates (hopefully) and nominal income tax exposure?
Clearly more risky, and those who followed the Inside Track method (look it up) will have learned a harsh lesson, but the basic principles are sound.
Gassing Station | Finance | Top of Page | What's New | My Stuff