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Pay off an interest only Buy to Let mortgage?

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
Coolshades
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Pay off an interest only Buy to Let mortgage?

#193488

Postby Coolshades » January 14th, 2019, 5:19 pm

I am new to this board and am also a newbie property investor. We bought our first BTL property a few months back by taking out an interest only mortgage. Our mortgage advisor told us that many in this business never paid off those mortgages and passed on the property down to their heirs.

Is this a thing? Are there pros and cons to paying off an interest only BTL mortgage?

tjh290633
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Re: Pay off an interest only Buy to Let mortgage?

#193494

Postby tjh290633 » January 14th, 2019, 5:52 pm

I thought that those who really made money from Buy-to-let used their free cash to buy more properties. That is, of course, again using an interest-only mortgage on each new property. Mortgage interest is (or was) tax deductible.

TJH

JonE
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Re: Pay off an interest only Buy to Let mortgage?

#193495

Postby JonE » January 14th, 2019, 5:58 pm

Coolshades wrote: Our mortgage advisor told us that many in this business never paid off those mortgages and passed on the property down to their heirs.

Is this a thing?


No, it isn't. The property is merely security for a loan taken out by the legal owners of that property. The debt is 'personal' to those borrowers and can't be 'passed on' with the property.

It used to be the case that even BTL mortgages were of a fixed term that could not extend beyond the oldest borrower's 70th birthday and some may still include a similar inappropriate condition. Lenders did not understand the BTL market and usually just cut'n'pasted terms and conditions from their residential mortgages with some even specifying a minimum level of earned income for applications to be considered.

Multi-generation mortgages exist under some other legal systems and have received occasional mention in the UK media but factors such as the SDLT-surcharge on 2nd property acquisitions may make them trickier in the UK for residential mortgages and I don't expect lenders to be too enthusiastic about them for BTL lending.

Some may have planned to sell off part of their portfolio and use the proceeds to pay off all their borrowing so as to leave unencumbered properties to their heirs and not have sales forced on their executors (in order to pay off the mortgages) at what may be an unfortunate point in time with regard to property values. Some may have planned to exit the market altogether before it became too difficult or too tedious to continue but gift the properties or proceeds of sale to their heirs. Whatever the plan, it should, of course, have included making a will and donating appropriate power(s) of attorney.

Cheers!

monabri
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Re: Pay off an interest only Buy to Let mortgage?

#193505

Postby monabri » January 14th, 2019, 6:53 pm

The mortgage debt is with you (coolshades) or whoever's name is on the mortgage. I doubt you can simply hand it onto your kids as you don't own the property and never will on an interest only mortgage. If you want to pass it on, you will need to do it legally with the approval of your mortgage provider (and they may look at the apple of your eye and say "no"....please pay the full balance owing....now!).

The mortgage company has loaned YOU the money..it knows nothing about your children.

Hmmm... you could also ask the same question on the landlords forum

https://www.propertyinvestmentproject.co.uk


Pros, Cons ...I assume you are aware of Section 24 which relates to tax relief on mortgage payments ( its covered in the link above)

Pastcaring
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Re: Pay off an interest only Buy to Let mortgage?

#216486

Postby Pastcaring » April 21st, 2019, 1:23 pm

tjh290633 wrote:I thought that those who really made money from Buy-to-let used their free cash to buy more properties. That is, of course, again using an interest-only mortgage on each new property. Mortgage interest is (or was) tax deductible.

TJH



I think he has been sold a financial product,one of the reasons I stopped investing in property in the 1980 s and moved to shares.The scam artists here moved to the UK after saturating the market here.

The interest only maximises returns for the lender and product seller .Using Australian rules on a house I bought in mid 1980 ish.Interest is a deduction here.Capital growth is not really good in real terms,say 4 years wages to buy it back then,worth 5 years wages now,very disappointing.

Now the interest only bit,the mortgages were sold with numbers that were reasonably accurate.Future predictions etc.

Now the catch,borrow $80K interest only 30 years ago.Average interest rates across the period @ 10% or whatever number you are happy with.

30 years at $8K means you have paid $$240K,and you still owe the bank$80K.Sold on the basis of " tax deduction" you will pay less tax.Pay the loan off on a basic PandI mortgage and it costs less than $240 K and you own the house.

Today round numbers and not accurate,$ 20K in rent ,call it $6K in holding costs,$$4K in interest costs on the house ( $80K x 5%) then pay tax on the $ 10 K left ,terrible return.$7 K net on a house worth $400 K.

The product is sold on the basis of buy another house 5 years later using the equity in the first house.Same again 5 years later.After 20 years you "own" 5 houses.They are worth $2 million.The debt is probably $700K.Adjust it accordingly if you like.

Gross income $100K.Interest payable $35K. Leaves $ 65K to meet all other costs.

I would be doing what I did all those years ago,look for something else to invest in.


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