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Hi. Welcome back to Whiteboard Wednesday from Domino Letting. I'm James Callaghan.
Today we're going to cover something really important to buy-to-let landlords; which is
thinking of which mortgage to choose, when you're looking to buy a buy-to-let property.
There are two options available. You could choose:
• 'Repayment Mortgage': where you are paying it back every single month.
• 'Interest-only Mortgage': where you are only paying the interest on the mortgage.
So, we'll look at those alongside the lending criteria the banks are looking for; and the
advantages and disadvantages of each. Both models we're looking at are for risk-averse
landlords who are looking to build growth in the long-term, possibly as a pension replacement
plan. Well start on this now.
First of all let's look at the Bank / Lender criteria -
We've spoken about this in Whiteboard Wednesday before; for example we've spoken about Loan
to Value, where the banks are looking for you to have 25% deposit, and they'll provide
the other 75%. It's a 75% Loan to Value. The other things banks are looking for is
a Rent to Interest figure. For example if a mortgage is coming in at £1,000 per month,
the banks are looking for that to generate £1300 of rent; so you've got a good cover,
well above the mortgage itself. They wish to ensure you are comfortable every single
month. Lastly, they might look at yourself, in terms
of your own salary. A lot of banks are looking for a minimum of £25,000 of your own personal
earnings, before they would offer you a buy-to-let loan.
On to the 'Mortgage' vehicles themselves - - On a Repayment Mortgage: you are paying
towards it every single month, so it's constantly going down. The cycle looks like this - you
start in Year Zero, and the capital is being paid back over 15, 20, 25 years - depending
on your choice. The capital is very simply being paid-off the whole time.
- On Interest only: what you are doing is only paying the Interest on the loan, so you
have to find some way of paying back the capital the bank has given you at the start.
Pro's and Cons' of 'Repayment Mortgage' Advantages of Repayment Mortgage: It is a
safer vehicle, there's not a lot to think about. It just gets repaid every single month,
and it brings the debt down every single month for you.
Disadvantages of Repayment Mortgage: It can bring a lower yield because the mortgage is
that much higher, your yield struggles; the yield being the difference between the rent
and the mortgage. It can be harder to achieve this figure we're talking about here (your
Rent to Interest figure). It can be harder to reach that if you've got the higher mortgage,
so it really needs thinking about, if selecting this model.
Pro's and Cons' of 'Interest-only' vehicle: Advantages of Interest-only Mortgage: It gives
you a much better yield so you can use that money at your choosing, but what we're recommending
with this model is that you use that spare money to pay the capital down, much as if
it was a repayment mortgage. Its' also more flexible, so you can use that money for property
repairs, or getting another property, it's your choice. But you've got to balance that
out with how you're going to pay back the mortgage over the fullness of time.
Disadvantages of Interest-only Mortgage: It requires a lot of discipline to have an Interest
only mortgage, because you've always got to be thinking -- 'how am I going to pay that
capital sum down'. If you take a payment holiday, that can be costly. If you decide we'll not
pay off more of the mortgage this month, 'we'll take a wee break from that', then that means
it's going to take longer to pay off the capital itself.
So that's a wee whistle-stop tour of Interest-only v's Repayment Mortgage. If you're looking
at Domino Letting's Sourcing Services, this is part of the consultation we provide for
our landlords. So if this is something you are thinking about, then give us a wee call,
and we'll be happy to help you out. Thanks for now.