Welcome!

Blog Feed Post

Is it time to switch to a buy to let repayment mortgage?

When 2013 took its final bow, it was to a mixed reception. Continued austerity, the climbing state pension age and stinging hikes in energy prices invited a few boos from the stalls, but a slight pickup in the economy and a last-minute fall in unemployment sent a couple of bouquets flying in the direction of the stage, too.

Convoluted metaphors aside, the economy is enjoying a little bit of a pickup. The markers that signify the ‘beginning of the end’ are falling into place; including the all-important fall in unemployment, which Mark Carney (the governor of the Bank of England) has signified will need to lower to 7.0% before he considers raising interest rates.

Any economic recovery is going to be tempered by caveats. Clichés such as ‘don’t run before you walk’ start to do the rounds, and there’s an element of wisdom to them: if the government and the Bank try to build too quickly on what they’ve achieved so far, the whole thing could come crashing down.

There are two threats, then, to a portfolio that is heavily geared with interest-only buy to let mortgages. One is the possibility of another housing crash brought on by over-eager stoking of the housing market. The other is the probability of interest rate rises.

So, should you switch to a buy to let repayment mortgage?

Some landlords don’t like interest-only mortgages, but a lot prefer them. Ultimately, it comes down to risk – less risk-averse landlords are happy to not tie up their cash in equity, despite the financial safety it would afford them.

As such, there are largely two perspectives from which you can approach the question ‘should I switch to a buy to let repayment mortgage?’ – a risk perspective, and an investment perspective.

Risk

Interest-only is always the more risky route.

Firstly, it means that you need to pay off the entirety of the capital at the end of the loan. If an investment vehicle intended to do that falls through, then you’re reliant on the sale of the property (which scuppers any other plans you might have had for it).

Secondly, whilst the monthly repayments are smaller, the total amount of interest payable is higher. The monthly payments also suffer more from interest rate increases, as they will affect the whole repayment, rather than just a proportion of it.

Imagine that you have a £100,000 mortgage with a 3.5% interest rate, which suddenly doubles to 7.0%. The most your payments will increase by on a capital repayment basis (assuming that you are right at the beginning of a 25-year term) is just over £200 – from £501 to £707. Your interest only repayments, on the other hand, will double – from £292 per month to £584 per month. And this is just at the outset.

With a repayment buy to let mortgage, the further you are into the term, the smaller the interest aspect of your repayments is. Consequently, the further in you are, the safer you are from rising interest rates.

Investment

Buy to let investment is all about numbers, but there’s more to consider. Are you happy with a one-property nest-egg, or do you want to build a buy to let portfolio? Will your monthly cash flow comfortably account for emergencies such as repairs or arrears, or are your margins pretty thin?

One of the main factors in the favour of interest-only is the tax saving it affords landlords. You can offset the interest portion of your buy to let mortgage repayments against your rental income when calculating tax – so obviously, the larger the interest aspect of your mortgage bill, the less tax you pay. Smaller monthly repayments? A smaller tax bill at the end of the year? To quote everyone’s favourite entrepreneur: “Cushty!”

Now, there aren’t many circumstances where the tax savings of an interest-only mortgage outweigh the interest savings of a buy to let repayment mortgage. Observe:

Scenario one: interest-only

Loan size – £100,000

Interest rate – 3.5%

Payments – £291.67 per month; £3,500 per year; £87,500 over 25 years

Total maximum tax savings over 25 years: £17,500 (lower rate); £35,000 (higher rate); £39,375 (additional rate)

Scenario two: capital repayment

Loan size – £100,000

Interest rate – 3.5%

Payments – £500.62 per month; £6,007.44 per year, £150,186 over 25 years (£50,186 of which is interest)

Total maximum tax savings over 25 years: £10,037.20 (lower rate); £20,074.40 (higher rate); £22,583.70 (additional rate).

As you can see, the tax savings do not outweigh the interest savings, and this is to say nothing of interest rate changes, equity releases, capital appreciation or depreciation, etc. On paper, in the long-term, repayment mortgages are definitely the better option.

But not every investment is a long-term one, and not all landlords want to tie up their cash in equity. Hopefully this article put some of the more common arguments against buy to let repayment mortgages in perspective, but every situation is different and the best way forward for you will depend on your circumstances.

If you wish to find out more about switching to a buy to let repayment mortgage, call our advisers for free on the number above or visit our buy to let remortgage page.

Read the original blog entry...

More Stories By TurnKey Landlords

Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.

Latest Stories
The Internet giants are fully embracing AI. All the services they offer to their customers are aimed at drawing a map of the world with the data they get. The AIs from these companies are used to build disruptive approaches that cannot be used by established enterprises, which are threatened by these disruptions. However, most leaders underestimate the effect this will have on their businesses. In his session at 21st Cloud Expo, Rene Buest, Director Market Research & Technology Evangelism at Ara...
In his session at @ThingsExpo, Eric Lachapelle, CEO of the Professional Evaluation and Certification Board (PECB), provided an overview of various initiatives to certify the security of connected devices and future trends in ensuring public trust of IoT. Eric Lachapelle is the Chief Executive Officer of the Professional Evaluation and Certification Board (PECB), an international certification body. His role is to help companies and individuals to achieve professional, accredited and worldwide re...
It is ironic, but perhaps not unexpected, that many organizations who want the benefits of using an Agile approach to deliver software use a waterfall approach to adopting Agile practices: they form plans, they set milestones, and they measure progress by how many teams they have engaged. Old habits die hard, but like most waterfall software projects, most waterfall-style Agile adoption efforts fail to produce the results desired. The problem is that to get the results they want, they have to ch...
Cloud Expo, Inc. has announced today that Andi Mann and Aruna Ravichandran have been named Co-Chairs of @DevOpsSummit at Cloud Expo Silicon Valley which will take place Oct. 31-Nov. 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. "DevOps is at the intersection of technology and business-optimizing tools, organizations and processes to bring measurable improvements in productivity and profitability," said Aruna Ravichandran, vice president, DevOps product and solutions marketing...
Wooed by the promise of faster innovation, lower TCO, and greater agility, businesses of every shape and size have embraced the cloud at every layer of the IT stack – from apps to file sharing to infrastructure. The typical organization currently uses more than a dozen sanctioned cloud apps and will shift more than half of all workloads to the cloud by 2018. Such cloud investments have delivered measurable benefits. But they’ve also resulted in some unintended side-effects: complexity and risk. ...
"Loom is applying artificial intelligence and machine learning into the entire log analysis process, from start to finish and at the end you will get a human touch,” explained Sabo Taylor Diab, Vice President, Marketing at Loom Systems, in this SYS-CON.tv interview at 20th Cloud Expo, held June 6-8, 2017, at the Javits Center in New York City, NY.
"We are a monitoring company. We work with Salesforce, BBC, and quite a few other big logos. We basically provide monitoring for them, structure for their cloud services and we fit into the DevOps world" explained David Gildeh, Co-founder and CEO of Outlyer, in this SYS-CON.tv interview at DevOps Summit at 20th Cloud Expo, held June 6-8, 2017, at the Javits Center in New York City, NY.
21st International Cloud Expo, taking place October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy. Me...
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend 21st Cloud Expo October 31 - November 2, 2017, at the Santa Clara Convention Center, CA, and June 12-14, 2018, at the Javits Center in New York City, NY, and learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.
SYS-CON Events announced today that Enzu will exhibit at SYS-CON's 21st Int\ernational Cloud Expo®, which will take place October 31-November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Enzu’s mission is to be the leading provider of enterprise cloud solutions worldwide. Enzu enables online businesses to use its IT infrastructure to their competitive advantage. By offering a suite of proven hosting and management services, Enzu wants companies to focus on the core of their ...
In 2014, Amazon announced a new form of compute called Lambda. We didn't know it at the time, but this represented a fundamental shift in what we expect from cloud computing. Now, all of the major cloud computing vendors want to take part in this disruptive technology. In his session at 20th Cloud Expo, Doug Vanderweide, an instructor at Linux Academy, discussed why major players like AWS, Microsoft Azure, IBM Bluemix, and Google Cloud Platform are all trying to sidestep VMs and containers wit...
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend 21st Cloud Expo October 31 - November 2, 2017, at the Santa Clara Convention Center, CA, and June 12-14, 2018, at the Javits Center in New York City, NY, and learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.
DevOps at Cloud Expo, taking place October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA, is co-located with 21st Cloud Expo and will feature technical sessions from a rock star conference faculty and the leading industry players in the world. The widespread success of cloud computing is driving the DevOps revolution in enterprise IT. Now as never before, development teams must communicate and collaborate in a dynamic, 24/7/365 environment. There is no time to w...
Internet of @ThingsExpo, taking place October 31 - November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA, is co-located with 21st Cloud Expo and will feature technical sessions from a rock star conference faculty and the leading industry players in the world. The Internet of Things (IoT) is the most profound change in personal and enterprise IT since the creation of the Worldwide Web more than 20 years ago. All major researchers estimate there will be tens of billions devic...
Amazon started as an online bookseller 20 years ago. Since then, it has evolved into a technology juggernaut that has disrupted multiple markets and industries and touches many aspects of our lives. It is a relentless technology and business model innovator driving disruption throughout numerous ecosystems. Amazon’s AWS revenues alone are approaching $16B a year making it one of the largest IT companies in the world. With dominant offerings in Cloud, IoT, eCommerce, Big Data, AI, Digital Assista...