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> Repayment
v Interest Only |
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Article kindly provided by Bobby Gill
www.bobbygill.co.uk
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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?
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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 rates 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!!
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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?
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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.
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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.
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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.
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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. Really!?
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! |
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are featured regularly.
Bobby
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For
those of you that know Bobby Gill, no introduction
is necessary.
For
those of you that don't - Bobby has been
on the property scene for 10 years.
He has always had his ear to the ground
and been ready to help those with less experience.
If you're familiar with Parmdeep Vadesha's
Tycoon Forum, he was a big contributor there.
He has covered (and has personal experience)
in renting, auctions, letting and estate
agents, HMO's, student lets, Banking, Solicitors,
Bank Receivers to name a few areas of property.
He
likes to learn about and get immersed in
various subjects and has more recently been
involved in social media, wealth creation
and personal development events.
He
doesn't claim to be an expert or guru but
does have a lot of knowledge in various
areas. He's also not afraid to voice his
opinion or speak the truth - so whether
people agree with him or not, you can be
sure he will say it as it is.
Bobby Gill will be writing for MPPT to provide
you with an alternative viewpoint on what
you hear at all the seminars and in the
news.
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