Interest only OR capital plus interest Mortgage

[PoalaMCR]

Hi everyone, 

I'm looking for opinions to help me make a rather large decision on a property I am looking to 'remortgage'. It's a bit of an unusual situation which I will explain as briefly as possible below. I've come to Property Hub as I know I will get impartial and professional advice and opinions from people who have 'been there and done that'. Thank you all in advance for your opinions.

My dad and I co-own (both our names on the deeds) a property with no mortgage. My dad bought it outright, and my name was put on the deeds to help me be recognised as a home owner (to allow me to get a B2L in the future). A family member used to live in it - it's never been rented. My dad wants to retire and sell the house, so we have decided that I will essentially buy him out of the property. I'm going to be taking out a buy to let mortgage on the property. It's a 2 to 1 mortgage so my dad's name will be removed from the deeds, and he will receive all of the capital taken out of the property. Moving forward, I have signed a contract with my local council who are going to renovate the property free of charge and then sublease it from me for 5 years. It's guaranteed rent every month for 5 years (30% lower rent than I could get if I did it all myself but in my opinion worth it for the renovation which I didn't have the capital to do myself).

The renovation is now complete and it is time for me to start the remortgage process. This will be my first B2L. My broker has recommended I get a 5-year fixed, interest only mortgage. I know that this will mean I am left with more capital each month to save for future ventures, however I feel a little uneasy knowing that my debt will not go down and also believe I could get a better interest rate deal if I were to get a capital plus interest repayment mortgage. I've listened to the podcasts on interest rates cancelling themselves out, but still feel a little nervous.

I've been offered an interest only mortgage at a rate of 2.74%. The number of mortgages I was eligible for was quite limited because I am using the Council who will have a hold of 20K in the property which they are eligible to take should I cancel our 5-year contract early. 

I'd be very interested to hear your opinions on the type of mortgage I should go for. - Fixed rate or variable.... 2 year fixed or 5 year fixed.... interest only or interest and capital. 

The mortgage company is Birmingham Midshires.

Thank you for reading this far and I look forward to hearing your opinions...

[Farmer Andrew]

27 minutes ago, poalamcr said:

believe I could get a better interest rate deal if I were to get a capital plus interest repayment mortgage.

I've been offered an interest only mortgage at a rate of 2.74%.

Assume that the 2.74% is 5yr interest only fixed. What is the rate on the 5yr fixed repayment? What variable rates have you been offered at 5 yr? What rates have you been offered at 2yr? Also useful if you could add details of product fees and broker fees if these differ between products.

What is the net rental yield (in %) before finance costs? Does the council guarantee rent amount change over the 5yr? If so, how?

[PoalaMCR]

Assume that the 2.74% is 5yr interest only fixed. - yes

What is the rate on the 5yr fixed repayment? - according to the illustration, also 2.74%

What variable rates have you been offered at 5 yr? - I have not looked into this.

What rates have you been offered at 2yr? Have not looked into this (mainly because the contract with the council is 5 years so ideally want it fixed over the contracted period, not have to think about this property again and then look into new options once the contract ends)

Also useful if you could add details of product fees and broker fees if these differ between products. - Broker fee £995 minus a £350 mortgage incentive from Bham Midshires.

What is the net rental yield (in %) before finance costs? 5% 

Does the council guarantee rent amount change over the 5yr? If so, how? - It does not change overtime, it's a fixed rate.

Thanks.

[Farmer Andrew]

9 minutes ago, poalamcr said:

What is the rate on the 5yr fixed repayment? - according to the illustration, also 2.74%

I thought that you could get a better rate with a repayment?

10 minutes ago, poalamcr said:

What variable rates have you been offered at 5 yr? - I have not looked into this.

What rates have you been offered at 2yr? Have not looked into this (mainly because the contract with the council is 5 years so ideally want it fixed over the contracted period, not have to think about this property again and then look into new options once the contract ends)

it is difficult to comment on these alternatives without this information. If you were seriously considering these as options, the information should be readily available from your broker.

Based on the information provided, it is a choice between 2.74% 5 year fixed interest only and 2.74% 5 year fixed repayment.  I would go for the former.  Just my preference.  Other people will have different ideas Im sure.

[Propertyhubfan]

I would suggest you go for the interest only. These usual allow overpayments of u- to 10% per your, giving you the flexibility to repay more if you have the money, but not committing you to anything. Check that the terms of the mortgage allow this.

Try to get as long a term as possible -25 years or more if you can, a shorter term on interest only doesn’t give you anything. It only forces you to work harder to repay the capital, which you can do if you are disciplined.