Interest only mortgage - can you sell the property at the end of the term?

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    Interest only mortgage - can you sell the property at the end of the term?

    Let's say I buy a house for £150,000, with a £40,000 deposit - My mortgage is £110,000 and its interest only.

    After 20 years I still owe £110,000. Let's say the house value has doubled and is now worth £300,000. What are my options?

    #2
    Yes, you can sell it. Trouble is you will have a hefty chunk of CGT to pay.
    To save them chiming in, JPKeates, Theartfullodger, Boletus, Mindthegap, Macromia, Holy Cow & Ted.E.Bear think the opposite of me on almost every subject.

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      #3
      In my example, what do I get if I sell it? I got the house with a 75% mortgage so I only only own 25% of the house, what happens if I sell it for £300,000? Do I make some profit or do I have to pay any profit and more to the bank to cover the £110,000 that I still owe? The house has doubled in value, what do I get from selling, seeing as I only paid £40,000 and still owe £110,000. I'm just not sure how this is calculated.

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        #4
        You owe the lender £110K

        The rest minus tax, and fees is yours.

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          #5
          you would have £190,000 minus selling costs after paying off the mortgage and then a CGT bill of some amount, there's no complex calculation

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            #6
            You get £300,000 and repay the bank the £110,000 you owe which means you are left with £190,000. The CGT will be due on £150,000 less your annual allowance.

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              #7
              Ah I see. So if after 20 years the house price remains the same, £150,000, I can just sell the house for £150,000, pay the lender £110,000 and i'll have gained back my original £40,000 deposit from the sale? Meaning all rent profits I took during those 20 years leaves me with a decent net gain even though the house price didn't go up?

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                #8
                yes, and if the value has fallen 10% you'll have to find £15,000 to give the bank to make up the shortfall

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                  #9
                  Or to put it another way, you'll only get £25,00 of your original investment back

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                    #10
                    I see. Is there an ideal number of years to take an interest only mortgage for on buy to let? I was thinking if you took a 20 year interest only mortgage, chances are after 20 years the house will have gained value substantially, even if it only increases with inflation of 3%. We all know it has increased much faster than inflation so far. I suppose it also depends on where you buy. A good house in the south of England isn't likely to be worth less after 20 years is it?

                    Also, do I need to wait the full 20 years pay off the full £110,000 loan or can I do it sooner and if I do choose to, is there a penalty?

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                      #11
                      Early repayment penalties dependson the lender and their terms, there's no right answer to that.

                      It doesn't matter how long an interest only mortgage is really - they have expensive arrangement fees and varying interest rates, so you look at what each deal will cost over the period you want to plan for.
                      A usual BTL scenario is a mortgage with a two year deal at x% increasing then to a higher variable rate that costs an arrangement fee of £2,000 or a three year deal at less than x% that costs £3,000 arrangement fee or a 10 year deal at more than x% with an arrangement fee of £995.

                      You select the deal that suits what you want to do for the period you think best.

                      CGT is one thing to factor into your planning (although you're guessing what it will be in 20 year's time).
                      The other - which a lot of people forget - is inflation, which erodes the value of the property by making the money worth less as time passes.
                      Recently inflation has been very low, but it's worth bearing in mind - particularly when comparing shorter term investments with longer term ideas.
                      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

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                        #12
                        cm00,

                        Until Last night, I was in the position of taking on a 63K interest only mortgage with a 42K deposit.

                        My plan, was to repay my wife the 10K out of her ISA, in the first 2 or 3 years, (after taking off the income tax) and then pay off the mortgage over the next 18 years with half the profit. Should the value go up, I would consider the wisdom of remortgaging, to use the equity for another BTL, or ignore it. I suspect it depends how much spare profit I can make in my day job, but ultimately I don't want to get to retirement age, and still owe money on it, and maybe be forced to sell, when I'm not ready to.
                        All academic today as the vendor has sold it to someone else. (Probably)

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