Lettings specialists Belvoir Lettings in Melton Mowbray. Charlotte Baker releases her latest article on mortgages - interest only or repayment?
I had a landlord visit me last week in my office on Burton Street interested in purchasing a property on Eagles Drive. We had an interesting discussion about the best way to borrow funds for a property investment.
She had £50,000 for use as a deposit on a 3 bed semi with a purchase price of £140,000. She had set aside the £4,500 for the stamp duty and solicitor’s fees and was planning to secure a mortgage for the remaining £90,000. The property should see a rental income of £650 pcm.
An independent mortgage broker had searched the market and come up with a few options - one of which came with no lender arrangement fee, 2 year fixed rate 2.39% and worked out at:
25 Year repayment mortgage would be £398 per month, Interest only mortgage £179 per month.
She wondered which would be the best type of mortgage to go for. My preference would be to say a repayment mortgage but you have to consider an individual’s circumstance and exactly how they would like their investment to perform.
In her case she was looking for an income from her inheritance, already in early retirement she never planned to own the property. So an interest only mortgage would suit her for the next 10 years of property rental. This would maximise the monthly income she would receive until she sold.
With an interest only mortgage she would need to repay the mortgage when she sold it. If property prices have remained the same over 10 years then she would be able to repay the original sum borrowed and retrieve the cash invested.
There is a risk that house prices may fall over that time and the value it is sold for will not cover the mortgage.
The history of sale prices is readily available on the Land Registry site or Rightmove and Zoopla websites so it is possible to track how these have performed over many years.
By discussing your options and researching your local market you are more likely to get the type of returns you are looking for.
When planning any investment it is important to understand tax liabilities that may be due when you come to sell the property. We advise anyone looking to invest to seek independent financial advice.
Figures supplied by Thomas Nicholas Financial Services in Melton Mowbray 8th Feb 2017.