I am often asked by landlords which type of mortgage they should go for. My answer is that it depends what you want to achieve.
In effect there are two ways of using mortgage, a traditional repayment mortgage where you pay down the amount of the loan over time or where you use the value of the property to raise money, known as leverage.
With a traditional interest only mortgage you have the choice of what you do with the rental profits after deducting expenses. One option is to save money in order to pay off a part of the mortgage. Alternatively the money could be put towards purchasing another property.
The thing to remember with this type of mortgage is to have sufficient funds to pay off the mortgage, or what remains of it, at the end of the term.
This may best suit your plans if you simply want to make an additional income with minimal risk. You may be approaching retirement age, for instance, and look at the rental income as a way of supplementing your pension pot.
If you have longer term ambitions, the Loan to Value (LTV) route may be preferable, particularly if you are considering building a property portfolio. Current mortgage rules allow you to borrow up to 75% of the property’s value.
Consider this simple example.
You have an initial amount of £100,000. You can:
• Purchase a single property worth £100,000 outright
• Use 50% LTV funding to purchase two properties
• Take maximum 75% LTV loans and purchase four properties
The various portfolio permutations would be:
• One £100,000 property = portfolio value £100,000 (no loan)
• Two £100,000 properties = portfolio value £200,000 (£100,000 loan)
• Four £100,000 properties = portfolio value £400,000 (£300,000 loan)
Your net worth in each case is still £100,000. However, this all changes if the market improves. To take a hypothetical example, if everything remains roughly equal but the property market doubles on the next 15 to 20 years, then your single property will be worth £200,000 with no loan giving you a net worth of £200,000.
However, your four properties would now be worth £800,000 less your loan of £300,000 giving you a net worth of £500,000.
Obviously numerous complications can arise but this is in essence an example of how you can use the leverage available through LTV mortgages to build a property portfolio.
You can also get up to 80% LTV depending on circumstances.
Also we can recommend our specialist interdependent professional mortgage adviser who can offer free, no obligation, detailed advice.
If you are a landlord considering letting a property or a tenant looking for a new home why not give me, Eddie Carter, a call on 01684 292154 to discuss your requirements. Alternatively take a look around our website. We specialise in the Worcestershire, Gloucestershire and Herefordshire areas.