We look at which route is best for you when looking at mortgage options.
A mortgage is a tool which is used by investors to multiply their investment returns. Understanding the basics of capital repayment or an interest only mortgage can dramatically change your long term profit, and speed of portfolio building.
Speaking to my family anything other than a capital repayment mortgage was seen as a silly thing to do. The idea is that the tenant pays off your mortgage right? You end up in 20 years time with a fully paid off property which is generating rental income and getting some nice capital growth.
One thing every investor should do is sit down with a professional and understand how these two types of lending work, and like with all investment never be set on something so good that you miss out on something better.
What is the difference between the two?
In simple terms an interest only mortgage means you only pay back the interest, none of the amount borrowed is paid back in the monthly payments. This means on a month to month you are almost leasing the money for the property over a term.
A capital repayment means that you are paying interest and a proportion of the money borrowed each month which will mean the debt is cleared in X number of years.
Why would I choose an interest only?
While an interest only mortgage may sound like the wrong way to approach building your property empire, it may be a better solution for you.
Take one of our clients for example, lets call him Paul. He was looking to grow his portfolio the best way possible and had a target of £15,000 income per month from his properties.
In Paul's case an interest only mortgage where he could pay lump sums off the mortgage when he pleased was a better option for him. Paul kept the rental income for 2 years, plus the capital growth and was able to use this to invest in a second property quicker. It also gives him the freedom on subsequent properties on a mortgage renewal to decide whether he wants to pay off a large portion of his mortgage or use the money for another property deposit.
While this method takes planning we are running this like a business and keeping a cash flow and your money inside the 'business' will help you significantly.
Capital appreciation
Buying the right investment should result in the property increasing in value. Between this and the lower mortgage costs each month with an interest only mortgage can often allow an investor to manage their own repayments or re-investment as they wish, rather than the bank managing this on a capital repayment.
End Goals
As an investor you should be working with your broker on the 'end goal'. That is, what are you hoping to achieve in 10 years or 5 years or by retirement. Many clients have a set opinion of what they would like their monthly income to be, at which point your Baron & Cabot broker can work with you as to long term goals, how many properties would be needed and the mortgage specialist can advise on the best mortgages along the way.
For some it may be that it is just one fully paid off property, in which case a capital repayment mortgage may work just fine. For most however the interest only mortgage is where significant value is added to the long term portfolio.
For more advice on mortgages fill in the form here and one of our advisors will call to help with the next steps.
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