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Editor: Shaun Callacher
When borrowing money via a mortgage, there are two ways you can repay the loan. You can repay small chunks of the loan every month, this will knock down the total amount of the loan each month - this is known as a repayment mortgage. Or you can choose to just pay the monthly interest charges every month, but with no payments towards paying down the loan - This is known as an interest only mortgage.
In this post, I share the Pros & Cons of each method. Many investors are often unsure as to which method to use for their buy to let mortgages, so hopefully with this knowledge, you can then decide which borrowing method is best suited to you.
Pros & Cons of Repayments & Interest Only Mortgages
See below the Pros & Cons of each method:
As illustrated from the chart above, you can see the repayment mortgages have more pros and less cons then the interest only mortgage.
However, for those who are investing to generate an income, the interest-only option may be best.
If it is capital growth and a lump sum that are required, or you want to pass on a fully-owned asset to your beneficiaries, a repayment mortgage may prove to be a better choice for you.
My Own Personal Preference
Which one do I prefer? - This depends on the individual deal, and in particular the monthly profit.
If there is plenty of scope within the monthly rental to pay repayments on a mortgage and still make a nice profit, then I will get a repayment mortgage. If there isn’t scope in the monthly rental to create positive cash flow after the repayments, then I will opt for interest only, for me, MONTHLY CASH IS KING.
When it comes to the end of the mortgage term time on a interest only mortgage, I will look to re-finance on a new mortgage product (pulling out any tax free money, if there is enough equity in the property) and repeat the interest only process. This is because my intention is to never sell my properties – as long as they are profiting every month.
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