"Don't part with your dreams - when they are gone you may still exist but you will have ceased to live" - Mark Twain

"Do you know that this blog wouldn't exist if it wasn't for you being here to read it!?" - Bobby Gill

Monday, 12 September 2011

Repayment v Interest Only

This has always been a popular topic for property investors.
Should they keep their payments low or high and build some more equity?
Should they pay off their debt as they go along or pay it off at the end with the sale of their property?

There are a few options to consider but what is best for you?
Well only you know the answer to that but let me first give you some facts (or things I believe are true from my experiential truth).

I know my opinions are not always popular but they are true.  My ideas may not be mainstream (pop-News style) but why would you read what I wrote if they were ;-)

As you know I have nothing to sell so come from a place of honesty, integrity and truth.
I'm not suggesting those with things to sell aren't, just that occasionally they may mislead you just a little to get a sale. (I really should charge for my insights!)
My 'sale' does go directly into the Universal bank account, which you fund by reading, paying attention and taking Action if necessary.

Quick History lesson - Mortgage

Origin of the word Mortgage is from 1350–1400;
earlier morgage Middle English < Old French mortgage,
 equivalent to mort: dead (< Latin mortuus ) + gage:  pledge
= A pledge till death!

Repayment -v- Interest only?

Once you're involved with this pledge, which is the right payment to make?
Well it all depends, as always.  What does it depend on you may ask, well on your cashflow and equity!

If you invested recently, have good equity and high cashflow, maybe from a HMO, then repayment may be a good option - but what if you didn't…

Banks and population control 'dogma' has taught us that is a good idea to pay a mortgage off using repayment over a long term - NO!  This 'may' be true on your own home - but that thinking too has changed too now for some.

Firstly Cashflow 

Consider the following:
How is your cashflow?
Can you afford your current interest payments at the moment?

Now consider risk planning.
Did the apartment you buy have 'hidden' (as in the small print) service charges?
Is the boiler regularly serviced and insured? What about the pipes and other appliances?
What if your tenants leave with arrears and damage?
As you know you may have big bills that occasionally turn up unexpectedly or tenants leave a property and you have damage and vacancies to deal with, so it is good to keep some money aside.

Also when interest rated go up how is this going to affect your payments?
Might it not be a good idea to put some money aside now to cover for this later?
Many landlords have been lucky and are still in business because of low tracker rates but it's not going to last forever.

Do you want your cashflow to be in or out?

Next Equity

Many investors I know bought properties pre-2007 before the crash and have lost their equity and more.
Now if you think the markets can't go lower, did you think prices would fall 10% from the peak or how about 20%?  Well I think they fell around 25% and there is still plenty of downside.
So do you believe they could possibly fall another 25%? If not, why not… they already fell 25% and the USA has got some places where they fell 50% and more!  It could happen here too!!

So how is your equity position?
If it's good you might consider repayments and get the mortgage paid off sooner (I never said it was a bad idea to pay the properties off)

BUT if you're in negative equity (along with cash-flow challenges) then why would you increase your payments to give the Bank more money, making your current position worse and cash-flow even tighter?

Consider what else you can do with the money like putting it aside for higher interest rates or contingencies. Maybe even investing it elsewhere.

If you are doing repayment and still paying off negative equity and the market gets worse, then you're more likely to go bust and have been worse off in the duration.
If you do get into positive equity, there is still the risk of going bust - so why not leave the risk with the fat cat bankers who can afford it?

Of course if the market improves and you ride the storm through, then the equity will return and you can either make repayments then or sell the properties.

Remember you have to make it to the finish line to Win - and right now companies, corporations, businesses and even Countries are failing to do that!

This informational/ rationale/ thinking doesn't only just apply to your investments.
I have an intelligent friend who is thinking the same about his house and believes there are signs that property might go down another 90% (as this will hurt your head we're not going to cover this figure or reasoning right now) - just know that some markets in the US are down over 50% and who thought that would happen!?  He is happy to make interest only payments, invest the difference somewhere and let the properties go to the Banks if the situation gets worse.

If you get into financial difficulty later, they will try to take your house, even if you have plenty of equity in it!  You're just a number to cross off, a liability and an annoyance if not paying them more and more every month.

- No payments is also an option but I won't be discussing that here.
Yes it really is, if you're struggling you can stop paying and default.
Better to do it now than fund a bad position.
If you have no access to Government funding and bailouts it is easily justifiable.

People have to start treating houses and investments like business decisions not emotional things they have to hang onto.  When the business is failing get rid of it. 
The Banks do NOT give a merde (excuse my French) about you, so why should you care about them?
They've already been paid because they failed!  Don't let it cost you more if you have an option to give them less.

Want to hear the truth from the horse's mouth? Well your local branch of the Bank is a good place to start and you will be able to deduce the truth from what they won't say

Speak to your Bank Manager or Relationship Manager (aka. payment chasers with fancy titles) at your local Bank, as the call centres aren't paid to provide service and answer questions and Regional Managers and CEO's are too important to deal with you the lowly customer.  Someone in your branch can't 'accidentally' hang up on you or keep transferring indefinitely.

Ask them what they recommend would be the best payment method for YOU.  And wait for the answer…
You'll be surprised how they may start to waffle, start speaking legal or say they can't give advice.
If they do answer your question - (which was what is best for you) they will tell you to pay off your debt faster and give the Bank your money.

Try it and see how much honesty you get with respect to you, as opposed to them looking after only the Bank's interests.

So which payment?

If you've thought it through, it has to be interest only in my opinion - saving the money for when rates go up and your payments increase or investing it somewhere else.

If the property market improves then great, the equity problem will fix itself.

If it doesn't improve, then at least you didn't feed the Banks from the bottom at the same time as the Government fed them from the top! Screwing you in the process if things don't work out.
Remember the house (bank) is always set up to Win (even if it means cheating) - so stop playing by their stacked rules!

Do what's RIGHT for YOU and your family! 
Not what a Bank employee says because they want to keep their job or hit their bonuses.

Bonus legal stuff

If you have a bigger portfolio and money to spare, do what the corporations do and separate the assets into 'good' investments and 'bad' investments.  This is all legal, though not very honest in my book - but it's OK as you would only be following the examples of our dishonest Government, untrustworthy leaders and the corrupt soul-less Corporate bankers.
Legal is a term used to turn dishonesty into 'acceptable' by lawyers and judges.

That way you can dump the bad assets or sell them on (sub-prime style) if they don't go well.
Please check the legalities of this with your accountant and solicitors - but note the answer may change the higher the fees you pay them (just how the system and lawyers work).
Find those lawyers (and judges) that re-represent councils, governments and Banks to find those with lower standards.

If you are having problems with your portfolio then give us a shout, I know we can help you turn it around or make it less painful making the changes you need to!