Interest Only, Repayment, or Mortgage Free?

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    Interest Only, Repayment, or Mortgage Free?

    Hi guys,

    I've got a question – I'm looking at buying a house – its £90k
    The deposit will be £27k – a 30% deposit. So the total mortgage will be £63k.

    I've tried to work out which mortgage option would be best – To keep it simple, I’ve imagined that I could get the same rates for 25 years (like If I kept re-mortgaging, and kept getting the same monthly repayments), I’ve also not included the fees/solicitor costs,etc.

    Rent on the property will be £450 per month. (£135,000.00 over 25 years)

    So –

    Interest Only...
    • Monthly repayment - £191
    • After 25 years - £57,300.00 + Initial loan amount (£63k) = £120,300.00
    • Money from rent after 25 years – £14,700.00

    Repayment Mortgage...
    • Monthly repayment - £342
    • After 25 years – £102,600.00 (Initial loan paid off)
    • Money from rent after 25 years – £32,400.00

    No mortgage...
    • Full rent is profit? Full £135,000.00???

    As you can see – this may be too simple – But to me - Repayment is the clear winner. It's more each month - but saves £20k in the long run.
    What i cannot understand is -- all the mortgage advisors i have spoke to have recommeneded Interest only.

    Could someone please help! Should i be choosing Intrest only? Or am i right in a repayment mortgage? If i can afford it - is no mortgage the best? What about tax? So confused!!!

    Thanks for reading – and thanks for any help!

    If it's buy to let they are advising interest only on ,Its so you get more cash flow now.If you have the cash to buy outright do it !


      Using your model figures , here my calculation assuming your tax rate at 20%:

      1. Interest Only Mortgage ( 27000 deposit )-

      - 25 years payment at 191 per month = 57,300 total interest paid

      - surplus from 25 years rental income = 135000 - 57300 = 77,700

      - tax paid on surplus at 20% = 15,540

      = total income from rents = 135000-57300-15540 = 62,160

      Capital Account = Property Value at 25 years - 63000 loan

      2. Repayment Mortgage ( 27000 deposit )-

      Loan interest over 25 years assumed 50% of 57300 = 28,650

      -surplus from 25 years rent = 135000- 28650 = 106350

      - tax paid on surplus at 20% = 21,270

      - total income from rents = 135000 -102600 - 21270 = 11,130

      Capital Account = Property Value at 25 years.

      3. Purchase Without Mortgage Loan ( 90000 paid )

      - total income from 25 years rent = 135000- 20% tax = 108,000

      Capital Account = Property Vaue at 25 years.


        In terms of your income calculations you don't appear to have considered the value of income from an increase in property prices. If you take that into consideration the you might easily rule out option 3 (mortgage free).

        Over the past 25 years UK property prices have risen by a factor of about 4.6.
        If you use your 90k to buy the property outright and the market performs similarly over the next 25yrs your original investment will be worth £414k. A profit of £324,000.

        But instead you could split your 90K as deposits across three properties and borrow the balance. At the end of the same period you would have an investment worth over £1,200K. A profit of £1,110,000.

        Obviously, no one knows how the market is expected to perform over the next 25 years so use the historic figure as a guide only.
        Assume I know nothing.


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