Repayment vs Interest Only

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    Repayment vs Interest Only

    I wonder if anyone could please help me. My buy to lets are all repayment as I like the idea of owning the property at the end rather than never actually paying off the debt. However, what would be the difference, if any, when you compare a repayment mortgage with an interest only mortgage in which you just overpaid any money left over when you deduct the mortgage payment from the monthly rent? I know this needs a bit of self-discipline in terms of not spending some of the excess money but, aside from that, what financial differences would there be?
    Thanks in advance.

    #2
    It would depend on how much you over paid by. What I would favour is finding a vehicle such as peer to peer loans where you could get 12% on your money. Then rather than paying money back to the bank you could pay in to an investment vehicle. I will quickly do some sums on a compound interest calculator..............

    If you paid 100 capital per month back 1200 per annum over 25 year you have paid back 30 to the bank, lets use some other figures.

    If you paid 100 in to a savings system earning 8% over a 25 year period then you would end up with 96,470 after 25 years

    If you paid 100 in to a savings system earning 12% over a 25 year period then you would end up with 191,742 after 25 years

    See the difference? This is why many professional investors use interest only. Paying the bank back is better for the bank as they have more security for less LTV. Taking as much as you can is better for you as you can re invest it. You must always make sure you can pay the bank back if need be though but usually over 25 years the property will of went up significantly and you can sell out or re finance

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      #3
      When you take out a mortgage loan to buy a property, the annual cost of the loan is interest (for one year) + partial repayment of the loan .

      The "repayment mortgage" means making "higher monthly payment" to reduce both loan + interest and to pay off the loan when reaching the end of the borrowing term.

      The "interest only mortgage" mean "lower monthly payment" to pay the cost of interest but the debt is not reduced . You have more money available to spend NOW ( i.e better cash flow ) . But the "real cost" is paying higher interest and having to pay off the entire loan at the end of the period.

      Have you seen the youtube videos by Robert Kiyosaki ( Rich Dad , Poor Dad ) ? He recommends putting all effort into fully paying off the lowest mortgage first and then use the rental income from mortgage-free property to help you pay off the second lowest mortgage .

      He promotes the idea that property is an "asset" when it pays you money but it is a "liability" when you pay money to hold the property.

      You only become rich by creating assets and using those assets to help pay off your debt.

      Comment


        #4
        Thanks very much to you both. I can see the logic in taking the money and investing it elsewhere in order to generate a return which, over time, will pay off the amount owed and leave a healthy pot left over too.
        In terms of assets and liabilities, I would have considered something that generates you more income than it loses you to be an asset. This is why I hope to secure many buy to lets which, if bought at the right price, should generate more money than they cost. That's the theory anyway!

        Comment


          #5
          Exactly right Spartan landlord. A property which is making money is an asset whether it has a mortgage or not. If you can borrow money at 4% and make 20% that is how you become rich. A decent rental property with gearing can generate 20% easily on capital employed. I suppose it depends how much risk you are willing to take, how old you are, your attitude to growth. Sure you can spend the next 10-15 years paying off a mortgage and own one property or you can re invest, re borrow, re invest, re borrow and build a portfolio.

          Certainly no one should pay money to hold a property unless you live in it.

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