Interest only mortgages

[Scott Laws]

Hi I'm new to the property hub and I am looking to start my first investment next year in Norwich.

I just wanted to know if the majority of investors use interest only mortgages for buy to let property's? And also if I could get an example of how you would eventually pay off an interest only mortgage in a buy to let.

Many thanks look forward to hearing from you!

Scott

[Wes Boswell]

Hi Scott,

 

I made the numbers work on my first four investments with repayment mortgages; only now am I approaching interest only in order to increase my income and hopefully leave my job in a few years time!

 

If you can get your numbers to stack up, I would suggest having a repayment mortgage to start with as then you know in 25 years(ish) the asset it yours.  An alternative way of approaching this is to have interest only, but be disciplined in paying off a proportion of the capital each year.  Most lenders allow 10%.  This approach gives you flexibility.

 

The other way to approach this is to buy and hold.  In 25 years, the loan on the property will be the same but the property value will have gone up and rental values will have done too!  If you don't want to sell, your rent will have increased and you can hopefully then change to a repayment mortgage over a shorter term and get rid of the debt.  Obviously don't rely on house prices rising (even though it's very likely!) but overpaying on the mortgage should be a good plan b!

 

Hope this makes sense?

Wes.

[Scott Laws]

Yes that makes sense Wes thanks for your reply. So on your first four investments that you used repayment mortgages on did the rent cover your mortgage on those property's? I'm under the impression that it is very hard to make the rent cover the mortgage on a repayment mortgage. Maybe I'm wrong, I'm still relatively new to this, thanks mate

Scott.

[Ian Cole]

Scott,

 

I would have said interest-only all the way a few years back, as capital appreciation was pretty reliable and therefore you could almost bank on it. However, things aren't the same now, even though we have property prices still rising. Believe me, we are in a totally unsustainable bubble, much as most property investors don't want to hear this and will just keep repeating the mantra 'propery prices have historically doubled every 7-10 years'. Yes they have, but that doesn't mean that you can bank on it in future, when you consider the global economic climate and health right now

 

You see all the drivers aren't underpinned by sound science any longer. When I hosted the last property networking group I ran for a couple of years, there was a question that everyone was asking, and it was to do with interest rates: They'd dropped right down to where they are now, and everyone had an opinion and guess as to what they'd do in the near future. Everyone else, without exception, was bullish about it and all said how they'd' rise again very soon; but they differed on when and by how much of course. They laughed at me, the lone voice, when I said that the rates would stay low. I explained as best I could why, giving the maths behind it, but no one wanted to hear it. No one wanted to believe what I was saying, as I wasn't just saying that interest rates would stay low, but that our economy would flounder too, which would be the reason for the BoE base rate staying put. Without wanting to sound smug, it's now several years later and BoE base rate is still the same 0.5% it was then. They aren't laughing at me any more. But do you know what? Despite having been wrong last time, they still, bizzarely believe that prices will rise and continue to do so, even though our economy is broke, we're in greater debt than we ever have been, the deficit is also still rising; fewer taxes are flowing into the government coffers, and ever fewer people paying taxes too, with more people reaching retirement who also will be drawing government pensions, so the debt and deficit will increase yet further. It's mathematically impossible to have a scenario where the country's debt (not even including personal debt, which is the highest per capita in Europe too) is paid down with the situation we're in and what further burdens are coming. Today's youth are burdened with todays and tomorrow's debt, and many can't even get on the housing ladder either! What hope do they have? I feel so very sorry for them.

 

So, what is this to do with interest-only mortgages versus repayment mortgages? Well as I was alluding to, in the past you could (and it was advisable to) have interest-only mortgages because you knew the capital growth would be such that when it came to the end of the mortgage you could just sell the property/ies and pay off the mortgages of the others; and meanwhile had the greate positive cash-flow meanwhile, as the monthly payments were of course lower. It was also advisable from a tax efficiency point of view: all debt interest could be offset against your tax liability. Wjereas a repayment mortgage doesn't offer the same tax advantages, for its mainly interest you're paying initially, with very little off the principle sum; but as time passes and you pass the half-way-through mark, the interest is then less than capital you're paying off. So the tax offset is also diminishing, which means you're effectively paying an ever increasing tax liability.

 

The lenders do this in order that if you redeem your mortgage in the early years, they effectively punish you for it, as you'll still owe them a large proportion of what you originally borrowed, and they've taken a huge portion in interest - this is quite apart from the fact that they'll also want to impose an early redemption penalty too!

 

However, fast forward a few years and things now are so very different. A repayment mortgage would certainly ensure you pay off your mortgage debt, but it's much, much harder making deals stack. This is why I've personally sold half our portfolio now, for what I believe is just unsustainable property prices. A bird in the hand and all that.

 

I would urge anyone who wants to get into property now to do some flips first. Get some money behind you so you can then put a hefty sum into the property you then buy-to-let. The flips will have provided you with cash, so you're not risking your orther hard-earned savings. Then the deal can stack easier; and moreover I'd tend to go for HMOs, which cash-flow even better.

 

A long post, but I hope it helps in some way - and hasn't confused things!

[rob bence]

Hey Scott,

 

Great question and a common one too.

 

Everyone will have different opinions and there's already a few here. Most investors (including Rob and I) go for interest only mortgages. We do this for three simple reasons.

 

1. Better cash flow. The saying is often used, but 'cash is king' and a healthy cashflow will protect you as you build your portfolio.

 

2. You can make your money work harder. This is basic maths, let's say your interest rate is 4% and you know you can get better returns elsewhere then it makes sense to reinvest it rather than pay it down.

 

3. Inflation will erode your debt. This for me is the clincher, it's a big topic so I recommend you listen to this podcast we did on the subject. 

 

Good luck

[Ian Cole]

Rob,

 

Indeed, you make very valid points. They used to be my strategy too. But as I have pointed out, too many property investors rely on inflation, which usually accompanies capital appreciation. The problem being if/when you have a situation where there is very little, if any economic growth. Witness Japan.

 

All the time you have 'interest' payable on loans of any sort, you  must, necessarily, have 'growth' to fund the debt, because you need to not only pay back the original sum, but the interest on it too (though Muslim mortgages  have 0% interest applied to them, and one of the Scandinavian banks offers mortgaes at 0% interest, so it can be done) and globalisation has seen to it that pretty well much of the world is now inter-connected and inter-dependent. So like dominoes, when one falls, they all fall. China could only grow to the size it is today by money flowing from the West to the East. Many of the jobs we had here in the UK in manufacturing once, have effectively been exported. Free trade is both corrosive to the West and undermines those in poor countries too, because they cannot compete on price - due to government subsidies and the like. It's all a very complex quagmire, but it's also very important to understand because it has knock-on effects on ALL economic activity at some point, after a delay as things filter down through the system.

 

Believe me, we cannot rely any  longer on capital growth to 'grow' our way out of debt burden. Everything seems rosy here in the UK now, but this is because there is a delay for things to filter down and especially because our government and banking industry  MUST keep people 'believing' in the system, and in particular money! Money is only worth anything all the time we believe it does. It's not called Fiat curency for no reason!

 

So, like I was alluding to, but didn't explain in detail (even now this is too short to explain such a complex system as has been developed over a very long time) in order to stay as safe as you can, don't rely on capital growth, but see it as a bonus. Icing on the cake! If you plan accordingly you can indeed make a good living from property.

 

So if you flip, and use the proceeds to fund an HMO with a large deposit, so built in equity (for now at any rate) then the debt burden is easier to pay back. You'll hopefully have enough to set aside to pay this back. Inflation has ZERO effect on the sum you owe! So provided you have sufficient positive cash flow to save, or use to flip - but essentially not leverage highly in yet another property - to pull out again, to pay down the mortgage, then you won't have problems sorting out the mortgage debt.

 

Also, if you're buying a property with cash, then again the value of that property can go to zero and it wouldn't matter, as you'd still have an income from it. So see equity as 'theoretical' money, for it's nothing but that. If/when property prices do eventually take a nose dive again, the equity you thought you had, is no longer there. That's why I call it 'theoretical' as that's what it is.

 

My concern is that if you see property prices eventually drop, even by a modest 20% say, then even if the economy is to grow in future, it's not going to grow a nything like it has in the past. So even if it grew by 1% per annum, you'd not get back up to the value the property was when you purchased it, so you'd be in negative equity and unable to pay the mortgae off. Multiply that by however many properties you have and you've just seen yourself go bankrupt, with no income either as they'll be repossessed. All because you believed that there'd be perpetual growth. Sorry to say that this is the mistake that the vast majority of landlords make, and why so many go bankrupt. Britains' former 'richest' landlords went bankrupt, as did Andy Shaw have financial problems a few years back, if you've ever followed him, and many, many more. I know several who have come croppers through lack of foresight and an unfounded belief in things appreciating more than they did.

 

It's really up to you what you believe, but there is a very sensible saying to deal with this: Plan for the limo, but prepare for the bus! Believe me, I haven't spent the last 6 years researching this in great detail only to follow the line that the media touts, such as the BBC etc., when they're in bed with the government and have a vested interest to keep the sheeple working and believing like they do. Those defending the system are the most vociferous and will fight to the death to support and believe it; whereas those who don't, and are in the minority, tend to keep quiet for fear of ridicule. Well, I was right as far as interest rates staying low for a very long time is concerned, when people then were laughing at me, so I'm no stranger to controversy and will happily hold an opposing view to that of the mainstream. I NEVER take things at face value and always question conventional 'wisdom'.

 

Will this make any difference to the debate I wonder?

[rob bence]

Ian it sounds like you should be investing in tinned food and weapons rather than property as it looks pretty bleak from your viewpoint

 

Jokes aside I think it's great to have a contrarian view point!

 

For me the fact that money is fiat is why I believe that inflation will have an effect and the only way our government and others can get out of the debt bubble is to inflate their way out. I have to add though I take a very longterm view and I don't mind if prices dip, wobble or even boom. The same goes for inflation some years it will be high and some it will be low. I don't fear deflation as America and the UK would print cash fast to avoid it happening.

 

Only time will tell!

 

I think this could make a good podcast subject

[Ian Cole]

Rob, well funny you should say that........(and you might want to make yourself a cuppa, as this is a long post ),

 

But actually, although a long post my last one (and some others) there is a lot of thought  behind it, so please bear with me. Most people don't have the time nor patience - even the capacity, dare I say - to even see the bigger picture. But let me expand on my thoughts to shed light where perhaps it's not been shone:

 

Firstly, I'm not all doom and gloom. Well, not in as much as I'm throwing my hands up in the air. What I deal with is reality, not what I'd 'like' things to be like. About 99.99% of the population are vaguely aware that something's wrong, but all the time they have a roof over their head, are making money and are continuing in their daytime activities, they feel comfortable. That familiarity. That feeling that things are going to to fine. It's business as usual. Well it isn't that I'm denying that things are, currently, like that; I'm more concerned with what's around the corner, so I can prepare. So I feel far more able to deal with what faces us because I am, and have been, making plans to cope as best one can. This means thinking differently, not using the same old recipe, hoping that the result's going to be the same, when you have a different cooker now. We have to live and adapt to our environment. What am I blabbing on about? I'm not all doom and gloom as I say, but what can doom and gloom bring me! No matter what the economic climate, you'll always have opportunitys to make profits from it. But it requires radical rethinking, and what exactly is going to capitalise on it. If one doubts me, and just 'believes' things will go on, and the government will sort out the mess, then that's a belief too far in my books and just plain fanciful. The government is us! WIthout us there would be no government. The government's only function is to collect taxes and redistribute to its employees and public services to keep law and order and some sense of civility. However, as with all systems and democracies there will always be abuse of power and corruption, as I think we'd all agree.

 

The trouble here is that our rulers (the Rothchilds in fact - but that's for another time) and all those below have built a system which no longer works as it once did. Without going too deeply into it, our current troubles pretty much started when they removed gold-backed currency. This allowed financially creative schemes to develop, with wholly unsustainable 'growth' based on the whims and ideas of these creative 'bankers'. To cut a long story short, it had lead to a very, very skewed version of 'money' and hence wealth, with the introduction of derivatives and the like. Commodities such as gold and silver are being deliberately suppressed because certain organisations (I don't want to name them for fear of defamatory backlash, as small as the chance might be) are SO massively exposed to derivatives that they are just dumping gold onto the market to control its worth and keep its value down. If they don't they face bankruptcy which would collapse the whole of the global financial system! Yes, it's that serious. This is not some consipracy theory (that's what big brother wants us to think, so they can keep the current system going for as long as they can, while they milk us all). The Goldman Sachs and JP Morgans of this world are SO exposed to derivatives that it's in their interest to dump gold onto the market, at a loss, in order to keep people from jumping ship from shares (which would happen if gold was to rise too much - people would take out money from the stockmarket and invest in gold instead of shares, which would precipitate their downfall, being so massively leveraged in derivatives).This is why they are effectively fixing the price of commodities. But it can't go on forever. They will run out of gold at some point.

 

This is all at the base of our current financial woes; but to suggest that they'll just print more money is (dare I say, and forgive me for my frankness) a bit naive, Rob. Look, each time they employ QE they devalue everything already created - and out of thin air remember! They cannot, cannot just keep printing. Why do you think there is a reluctance to do this, if it wasn't detrimental to everyone, including governments? Remember, the BoE only 'print' money which is 'borrowed into existance'. So in other words each time they 'print' it's debt; and based on our way of dealing with money, it carries with it interest. So our government is effectively increasing the debt, and at the same time inflation takes hold, which devalues what they and everyone else already has too. So the interest on this newly printed money is added to what's already been borrowed, as well as what they already have being devalued, so the purchasing power diminishes too. We have, in effect, a downward spiral! So we have ever falling value of money, proportional to what's printed, and at the same time have to pay even more interest on the extra borrowing. If we can't pay donw the debt now, then how are we hoping to pay down even greater debt? It's just beyond our capacity, no matter HOW hard we work - especially with less tax revenues and an increasing burden to come, with baby boomers due to retire and a falling proportional number still in work. Sorry, but basic maths tells you that 2-3 means we're in to negative figures

 

So, to recap, and as I have said elsewhere in a post on here, with a falling number of people paying taxes, and the double whammy of the number of people coming up to retirement being at a record level, the burden on those paying the taxes is increasing dramatically. The government cannot, absolutely cannot afford to pay its upcoming commitment in pensions and benefits. Hell, they aren't even managing now! That's why we are having to borrow ever more. It's nonsensical. Just forever printing and borrowing more is not going to sort out the burgeoning debt, is it?

 

I would ask anyone who believes that property is going to continue to rise, with boom and bust as it has in the past, why they think it will follow patterns of old? On the one hand they are saying with (unfounded) confidence that things will be fine; and remember these are the same people who are witnessing the lowest BoE base rate in history, and which has remained at this level for a record time too. If all these cycles of mini boom and mini bust is still continuing, then why are interest rates where they are, and for as long as they are? It's incongruous, and one really does have to ask why?

 

So printing 'cash' would only serve to exacerbate and magnify flaws with our system. When a boat is sinking because of water, you don't punch a few more holes in the sides, hoping the extra water will make it float again!

 

Look, I'm also with all interest-only mortgages! I'm also invested in property - of course. So I must have some sort of faith, as flaky as it is right now. My view is that we have to work with what we have. But where my strategy and thoughts part from 90-99% of property investors, is in what I 'do' with the profits. Bearing in mind what I've said, I would not buy to hold/let in a highly leveraged state, in the hope of capital appreciation working to provide you with the increasing equity you have in your properties. That is willful ignorance in my view. It'd be financial suicide, believe me.

 

What I'd suggest is to flip, several times over, as I have said, in order to make enough profit to reinvest in such a way as you put a hefty deposit in. Not only will it cash flow better because of lower borrowing ratio versus rental income, but you'll have more of a buffer too.  However, that's still not necessarily going to be enough, IF things go badly wrong - we don't know by how much yet, when or for how long. But prepare for it anyway. However, as long as you have enough rent coming in to pay down the principle sum and have some income too, then this is the way to go. However, I'm not saying to pay this  mortgage money to the lender at this stage. No. You keep it and you make it work for you, by using it to do more flips, while you can. but the golden rule: don't leverage highly and to a level where you don't have the capacity to profit enough on the cash flow to repay the mortgage at the end of term.

 

Keep records of what you're theoretically 'saving' (though you're also using the money to fund flips meanwhile,which pays far more in returns than leaving it on deposit, or using it to pay down the mortgage to the lender as you go - no. You keep it, recycling it, so it can work for you, but always know how much you should have allocated at the end of each year, to go towards the theoretically diminishing sum owed: net of these savings).

 

So guys, I'm really one to take advantage of what's in the 'here and now', as in 'flips'. Just borrowing and leveraging as much as possible is a highly risky strategy on this economic landscape. What worked yesterday won't always work tomorrow, as we face very, very uncertain times. Make hay while the sun shines, yes; but don't bank on the sun continuing to shine like this for ever, and plan accordingly.

 

I say this from 15-year buy-to-let experience, having worked overseas and set up companies, including an import company, an eco-build company and experience in finance (my wife and I ran a bridging company for professional landlords, in the days of daylight bridging), as well as having set up, ran and hosted a monthly property networking meet building it up to 82 members. I say this not to boast, but to demonstrate that I wasn't born yesterday and don't have a blind, baseless belief based on what the media or whatever other brainwashing I'm subjected to tries to dictate. I've always questioned authority (not to be awkward, but just to see if there isn't a better way of doing something) and I always try to ask the questions that no one else is asking, not to be clever, but because I want to stretch the boundaries and work outside my comfort zone, and learn in ways that provide alternative solutions to problems.

 

Geepers, this is another long post, and a bit in-depth in a couple of places (sorry if it's a bit heavy, but it's difficult to avoid on a complex subject like this). But believe me I'm not talking through my hat and I'm not in conspiracy theory territory either. I just want to truly understand what we face and deal with it instead of denying the elephant in the room! Simply put, we cannot forever going on printing money and proping up debt with more debt. Greece is the canary in the coalmine!

 

I tell people that politics is like arguing over the deckchair order on the Titanic. It's futile and ignores the far, far greater problems and implications we face. You basically have three reactions to the sinking: 1/ those that in denial, and boldly say 'no, this ship's unsinkable!'; 2/ Those who have until now just denied the ship could sink, but are now like the rabbit in the headlights: 'Sh*t! WTF?!', and are frozen, unable to move or know what to even do, as their belief is shattered before them; 3/ those who admit the ships damaged and WILL sink, and step up and say: 'right, well what do we do now?'. Ask yourself which category you are in? I know where I stand, and I'm guessing that you know where I do too......don't be a casualty, when you see and admit something's wrong, and face up to the challenge and work towards mitigating the effects as much as possible. Now that's empowering!

[Ian Cole]

Thank you for the thumbs up Paul. I kind of feel that sometimes I'm talking to myself, or in a vacuum. Oh the discomfort of facing the truth of what faces us, as the masses still just don't get it. Without sounding like the cliche, if just one person is motivated to take sensible decisions because of the warning flags, then it'll be worth having spoken out and rattled a few cages along the way. Those who do, and are brave enough to look the tiger in the eye, deserve to profit from their responsible, prudent attitude. Hell, it's not just me who's woken up and worked it out, it's with the help of many others, countless sources and a lot of soul searching and reading of people who think for themselves.

 

Anyway, thanks again, and I hope it encourages you just to think and use a different strategy, not put you off property altogether. That's not what I'm saying of course

[Ian Cole]

Thank you too Alenuk for your support!

[Scott Laws]

Great feedback rob and Ian thanks for your help! I completely understand what your saying, as a first time buyer/invester I am very cautious about making my first investment, but at the same time realise there will always be a risk. The plan is to start by flipping property's to get the experience and also as you said get a big deposit together for my first buy to let. What percentage would you say is safe to have for a deposit on my first buy to let? If I was to use interest only, the profit I make on my rentals would go back into paying the mortgage off rather than being used as an income as I plan to stay employed so I can do this. What do you guys think? Thanks again

Scott.

[Ian Cole]

You're more than welcome, Scott.

 

One question: I see you're in Oz. The economy therre is likely a bit different to the UK, though essentially you still have a western, developed economy and government monetary problems furrther down the line too. However, as with 'pockets' of the UK doing very well and other pockets not, I wouldn't like to speculate as much for the property market where you are - except, as I say, that it is pretty much a carbon copy, of sorts, of the rest of the developed world. I just don't want to speak too much out of turn when I don't have first hand experience on the market there.

 

That said, the basic premise of using your existing pot of money, or borrowing on bridging, to develop and flip I would hope is as beneficial ass it is here. That's your judgement call; though the methodology and principles of recycling money, I believe will hold you in good stead, provided you turn things around as swiftly as you can, and don't take months on end to complete if you can avoid it.

 

So what percentage to put down? Well, I'd not want to put a figure on that so much as say as much as you can afford! No point in having money in the bank, when you're property developing, apart from working capital of course, plus 10%, to 15% preferably, for contingency. The more you can put in, the less cost to you, and hence the largest margin in your pocket.

 

I would just keep flipping and see how you feel after a few before deciding what percentage you'd like to leave in the property. 50% Would be a good example, but I wouldn't say that's set in stone. At that level you'd hopfully be able to have even better cash flow, and hence pay into an allocated account in order to use that pot to eventually pay off the mortgage. But, you can still use that pot, by withdrawing it (I'm doing the same) to help finance other flips.

 

So essentially my strategy is borrowing as little as you can, by using as much of your own capital as you can. You cut costs this way and maximise profits as a result. You'll climb the ladder more quickly and get to your goal even quicker. However, it's not as simple as that, as sometimes it 'pays' to borrow from a lender in order to make even more margin, for there is often mpore money in bigger deals. So borrowing does often pay for itself. Again it's your judgement call.

 

If you are happy in your current work, then by all means continue witht he job. However, sometimes you can be even more productive by property developing full-time. Maybe project manage and do some of the work yourself, if you're able and if you enjoy that more than your current job. It's really down to what you feel happiest doing. Money isn't always, or shouldn't be anyway, the driver for you. I'd take a lower paid job that I enjoyed over a hgiher paid one that I hated, any day. Too many people are greedy and take the latter and wonder why they are tressed and unhappy further down the line. Money's nice to have, but we need to keep its worth in perspective

 

So if you do enjoy your job and you use the income from that toeffectively reduce what you'd have taken from the profit of letting, and put it into the sum to build to pay off hte mortgage, then that's fine. But as I say, just make sure it's in an easy access account, so you c an use it for your flips too!

 

Good luck!

[Scott Laws]

Yes I'm currently studying and working in Sydney after doing a bit of traveling, but I plan to head home after my study's and start investing in England, I've read a couple of books, listened to all the property podcasts (mainly the property podcast!) over and over again, and will carry on doing so until I start my first investment. I would consider investing in oz at some point as the economy is pretty strong at the moment, but my main focus is investing in England. The only reason I would stay in a job whilst property developing is for the extra income, but If I can make more money flipping property's than in my normal job, nothing would stop me from going full time in property as that is my passion!

As I'm a first time buyer would it be difficult for me to get bridging finance?

I know most people would start off by buying or renting there first home but i would prefer to start investing whilst living with my dad, so I have he extra capital to invest with, not sure how the mortgage lenders would take this?

Thanks Ian

Scott.

[PatrickWrayWray]

Ian - do you have a timescale range in mind for the collapse of (all?) fiat currencies and all assets classess such as property. I assume you dont expect it in months or even a few years , decades perhaps? If sooner than that I would expect you to be selling your houses for gold bars!

[Ian Cole]

Patrick - Sorry, but that's pretty well impossible to answer, given that we've never in history faced what we do now. The only three people I know who have, and got it wrong, are respected international speakers. One's Nicole Foss (see her excellent website 'automaticearth') the widely travelled Canadian speaker about the monetary system. Also an ex-banker from Ireland, who's name I forget as well as one of the guys who's half Irish, half Icelandic who first reported the troubles in one of the middle-east countries via YouTube, who works for Wikileaks. They predicted between 6 and 10 months before collapse, and that was over 3 years ago. You'll of course have the usual rabble of voices from those deniers saying 'see, it didn't happen, so what are worried about? It's just conspiracy' and all that. They somehow delight in poo-pooing this, but it's just a symptom of their ignorance and their temporary relief, and their baseless belief that things will somehow just carry on as they are.

 

So, I'm sorry to not be of much help here. It doesn't detract from the fact that we are in deep, deep trouble though; but when it'll happen is up for debate. It could be 6 months, 1yr, 2yrs, 5yrs or even longer. It's impossible to know. I rather liken it to earthquakes, volcanic eruptions and tidal waves. We know they will happen, but it's difficult to predict when; though they they know roughly, as at least these things happen with a bit more regularity than this man-made mess.

 

Their are two schools of thought: It could be rapid, very rapid once it starts; or it could be more gradual, with a steady decline - or a mixture of both (which I tend to believe is more likely: a gradual beginning, until the masses actually finally wake up, then fear sets in, and this itself precipitates the fall). But the sooner it happens the better for everyone in the long run, as the higher we go, the further we'll fall. Best swallow the pill earlier than later - but we can't control it quite so readliy.

 

But like I say, if one's at least mentally prepared and already factored this scenario in, then you will undoubtedly weather the storm better than most other people.

 

I certainly won't be selling all our portfolio, no. As long as you have the means to pay back the principle sum, as people will always need a place to live, so renting will continue. However, we have already sold half our portfolio! So I put my money where my mouth is.

 

You have to remember also that the government wants to keep anarchy at bay, so when things go tits up, they might possibly take radical measures, such as resetting monetary policy - if it gets really bad. So they might wipe the debt slate clean. However, landlords needn't rub their hands together, for I'm pretty sure it'd only be for owner-occupiers. There'd be huge public outcry if they let landlords off their mortgage debt! The public already have a deep-seated dislike of landlords, so if the government was to help us then there'd be a lot of animosity indeed. No, they'd chase and hound us for the mortgages still. There'd be no getting away from it.

 

So just plan as best you can and make money while you can, to provide yourself with as much capital as you can muster in order to lessen, or eradicate even, your mortgage debt burden. The more you have the less pain tomorrow.

[PatrickWrayWray]

Ian - i think most people (including me) recognise extreme economic events as being possible but where we all differ is over our percieved liklihood of such an event occurring. Clearly you ascribe a collapse as 'very likely/certain' albeit not within a defined timescale; I'm therefore interested into which asset classes you have/are putting the proceeds of the sale of your property porfolio? Surely you perceive all asset classes to be at risk of huge price falls other than precious metals which would liklely appreciate relateive to other falling asset classes in any 'collapse'?  

[Marius H]

I believe that Ian presents a more extreme viewpoint, but raises valid points that much of the population do not understand nor care to.  The fact is that UK debt now is far greater than in 2008, and still accumulating at a scary rate day for day.  That's well and good if you can turn it around and get solid growth going again, but I'm astonished that the deficit is still there after all these years.  Unless growth can be given a boost by a completely new market being developed where the UK is a defacto leader, it will take MANY years to get back to a healthy economy.  I reckon another 10 years if things gradually improve.

 

In this time however, I don't think there will be a monumental crash, as I still believe in the principles presented in the 18 year cycle, as well as overlying principles such as supply and demand.  I am however prepared for a severely squashed version of the cycle, where the growth cycle has much more modest levels of growth.  

 

Personally I maintain 3 financial forecasts for my small portfolio:

1. 3% annual growth (pessimistic)

2. 5% annual growth (realistic)

3. 7% annual growth (optimistic)

 

Based on this, I'm happy keeping my properties on interest only mortgages as I still believe in capital growth over a 5-10 year horizon.  

 

And for those times when my beliefs in economic principles governing our world waver, I recite Mark Twains quote to myself: 'buy land, they don't make it anymore'  

[Ian Cole]

Patrick,

 

If you read between the lines, the answer to this is in w hat I've said in my posts on this thread - though not addressed directly. I was kind of hoping that it would speak for itself, but obviously I didn't make it clear enough.

 

This I'll address from two angles, as both are crucial elements:

 

My post above (21/3 @ 2:22pm) I stated that 'inflation has zero effect on the the sum you owe'. I of course am referring to the mortgage. So no matter what happens to inflation, and hence the 'worth' or 'purchasing power' of you savings/money/currency whatever you like to call it, even if you've stockpiled it under your mattress (pretty uncomfortable as the years go by and the pile gets all lumpy - but you get my drift) you can still use that money, however worthless, to pay off your mortgage when the day to do so comes.

 

Secondly, my point of principle, being that your savings/investments/assets or whatever, is that you use as much of your own money as possible (so not employing a repayment mortgage, where you say goodbye to the the capital sum reduction each month, when you could have used it to leverage your investments) for employing to reinvest, over and over, in flips. You're then compounding your money as you recycle it repeatedly. That way you make far, far more in the long term than you would have otherwise.

 

The crucial point here is to maximise on both of these aspects in order to make hay while the sun shines, so to speak. Once you reach a level that you're happy with, whether it's cash flow, your savings pot, or a combination of the two, then you can pay down a large chunk, or all of what you owe, so you're mortgage/debt-free. If the collapse were to happen sooner rather than later, you've at least done all you can to build your assets. People will still need homes to live in, so you have whatever income is appropriate at the time of the economic woes.

 

It matters NOT what you're properties are worth, as in 'market value', as you've either no mortgage to pay, or a very much reduced one. Everyone will be in the same boat. Everything will be relative. But you still have an income, whatever this would then be! That's my point. It matters diddly squat what your formerly costly properties were 'worth' as that's not what's supporting you; and you've used all the money you had to reduce your future liabilities. You'll be far, far better off than those other nay-sayers who were banking on capital growth of old, all highly leveraged in DEBT and then in the unenviable position of being forced into bankruptcy, along with millions of other people.

 

So that's where you've put your money - into paying down you mortgage debt! At least you can then wait until the day it happens, as you've still got your savings working for you, a nd you can at ANY time use that to pay down, or pay off your debts. Those are fixed debts, not increasing, so inflation has zero effect on what you owe.

 

Does that explain what you wanted to know, Patrick?

[Ian Cole]

Hi Marius,

 

Concerning your last post. I've inserted my comments in red below. Thanks in advance

 

I believe that Ian presents a more extreme viewpoint, but raises valid points that much of the population do not understand nor care to.  The fact is that UK debt now is far greater than in 2008, and still accumulating at a scary rate day for day.  That's well and good if you can turn it around and get solid growth going again, but I'm astonished that the deficit is still there after all these years.  Unless growth can be given a boost by a completely new market being developed where the UK is a defacto leader, it will take MANY years to get back to a healthy economy.  I reckon another 10 years if things gradually improve.

 

You've just confirmed things the way they are, Marius. I would just like to ask you why you are 'astonished the the deficit is still there after all these years'? It only goes to support my point about it being impossible to reduce the deficit AND pay down the debt, or it would have started to happen before now. The fact that the debt is increasing despite all the economic measures put in place, tells you something, does it not? As I have stated before, we have even more people coming up for retirement pension while fewer paying into the tax coffers, which will, obviously, mean we have an even greater problem to come.

 

In this time however, I don't think there will be a monumental crash, as I still believe in the principles presented in the 18 year cycle, as well as overlying principles such as supply and demand.  I am however prepared for a severely squashed version of the cycle, where the growth cycle has much more modest levels of growth.  

 

You may be right, perhaps there won't be a monumental crash; but there will be some sort of crash, far greater than we now have. Cycles of yesteryear cannot be relied on to forecast future cycles, as they used to. Demand can be as high as one likes, but if there isn't the economy to support this, especially if the government still resorts to its bad habits of QE, then even greater problems occur as people have also to deal with the effects of inflation. With fewer people owning property, as they just can't afford to get on the housing ladder, they have very limited choices as to where to put their money. Precious metals are usually good bets in these scenarios but IF things do get even worse, then gold and silver, for instance, won't have any value either, as you can't eat them! People will be struggling to survive. They won't have much if any spare to 'invest' in precious metals. But this is extreme, I'll admit. We just don't know when or if things will occur and how bad they get. No body knows.

 

Personally I maintain 3 financial forecasts for my small portfolio:

1. 3% annual growth (pessimistic)

2. 5% annual growth (realistic)

3. 7% annual growth (optimistic)

 

On what are you basing these figures, might I ask? Even mainstream media are now talking about the possibility of zero growth. Worse, maybe deflation. I'd say all those figures are optimistic, dare I say

 

Based on this, I'm happy keeping my properties on interest only mortgages as I still believe in capital growth over a 5-10 year horizon.  

I do hope you're right, though sadly I don't believe this will happen.

 

And for those times when my beliefs in economic principles governing our world waver, I recite Mark Twains quote to myself: 'buy land, they don't make it anymore'

Now THIS I do wholly agree with! The only touble being that if only a very small portion of people own land, then when things get bad, you're going to have to face up to the masses just invading your land and taking what they can. There won't be a lot one can do then. However, burying supplies is one way of increasing your chances. But this is a depressing thought, though a real possibility at some point. Though I hope it never gets to that point - and it may never. We just have to make the best of what we have and enjoy the moment!

[Marius H]

 

Personally I maintain 3 financial forecasts for my small portfolio:

1. 3% annual growth (pessimistic)

2. 5% annual growth (realistic)

3. 7% annual growth (optimistic)

 

On what are you basing these figures, might I ask? Even mainstream media are now talking about the possibility of zero growth. Worse, maybe deflation. I'd say all those figures are optimistic, dare I say

 

 

 

 

I'd like to say they're based on a 1000 line excel sheet formula, but they're based on something much more complex, personal sentiment

 

Compared to historical levels they're conservative, and though it plays to your argument that the public (and many investors included) refuse to accept that anything but growth can happen, I'm happy taking that risk as I believe both domestic and international market sentiment in the form of trust in the UK economy will continue to be strong even if there is still a deficit for the next decade.

 

[Ian Cole]

I respect your view Marius. I can't say I agree, as I can't see how mere trust or a belief is going to solve or change anything to fix the economy. But everyone to their own. .

 

I wish you luck!

[PatrickWrayWray]

I understand your strategy is to pay down debt but I dont agree with this statement - 'inflation has zero effect on the the sum you owe'-  inflation generally results in a rise in interest rates increasing the cost of debt unless you borrowed at a fixed rate; but even if you have, the value of debt is meaningless without comparing to the value of assets; and high inflation generally results in both a rise in asset values and asset income (rent) ultimately resulting in a rise in net wealth. Deflation would have the opposite effect; is that what your strategy is trying to mitigate?

[Ian Cole]

Patrick - I think you've missed the point. I agree with what you say, all the time you borrow and therefore owe the debt, as the interest on the debt increases in line with the lenders increase in interest. But this misses my point:

 

I'm talking about the principle sum you originally having borrowed doesn't and won't change, in as much as you've locked yourself in at that price, as it's what you have agreed to pay when you bought the property. The mortgage loan on this therefore based on this, as it would with a car purchase, for example.

 

Unlike when you're saving up for something that's increasing in cost, such as property, inflation really does affect you because as you're saving to buy a property, so too are the prices rising, as your purchase power diminishes (inflation sees to this).

 

So with a fixed sum owing on the property (the mortgage borrowed on it) you know that come what may, and irrespective of the falling value of money you owe as inflation takes hold (if it does), that you can pay off the mortgage debt at a time of your choosing, if you've been making your money work for you, having recycled it repeatedly. Whatever you owe doesn't change! That is what I was talking about. The cost of borrowing can, and does change as we all know. I'm not talking about this. Maybe you were thinking I was?

 

Essentially what I'm trying to get at is that inflation has zero effect on what you have already paid, and your mortgage statement gives, compared to saving for something which is then very much at the behest of inflation, as it rises in price. Sure, interest rates fluctuate, as will the monthly cost of the mortgage, but with the capacity to pay down, or pay off what's owed - depending on how much you've managed to accumulate doing flips, by effectively releasing equity as soon as you sell - you can take advantage of reducing your monthly costs by doing the said.

 

So I was talking about one aspect, and that aspect alone.

 

Interrestingly, until only very recently, we had very high inflation (yes, I know the government was telling us it was low; but look how they measure it). Food that we all buy was going up double digit percentages, but it wasn't the items that the government like to pick to measure inflation. It's a complete fudge. Anyone who did the grocery shop could see how hugely prices were rissing, all the while being told by the government and the media that it was around the 2% mark. What BS! Our weekly grocery grew from about £70-80/wk for a family of 4 only a few years back, to over £120 today! Nothing has changed in our eating habits. My wife always looks for offers and redduced items, though we do buy as much organic as we can too. This figure is purtely food that we eat at home. It doesn't include any meals out. But that varies from once to maybe twice a month, and is over and above the £120/wk (£520/mth). To get from and average of £75/wk to £120/wk in a few sort years is way, way over rthe inflation figure the government disingenuously state.

 

Sorry to stay on this topic (but it's illustrative of how how I'm angered and frustrted by the misinformation we're fed from the media, as it's so wilfully dishonest, IMO) but we had the Council Tax rises of significant percentages for a few years, and the furore over the manner in which the councils were raising the rates well above inflation. But still these are not factored into their inflation figures.

 

They also fail to account for the diminishing size of packets/bottles or packs of items. They just list standard items one miught purchase in a week, but DON'T take into account the fact that capacities have reduced. So rather than manufacturers raising their prices, they just intoduce a different design pack, and at the same time usually decrease the size too! This can easily be 10%, or as high as 25% depending what it is. But this is not factored into their inflation figures at all. What a white wash!

 

Anyway, I digressed a little there, but to me it's all part of the same thing: The cost of living.

 

For quite some time we had marked inflation, but still interest rates stay historically low. They will for the forseeable future too. The last thing the government wants is to precipitate a collapse. We're on shaky, very shaky ground now, and things aren't improving - despite what they tell you! So, like I say our economy is so fragile that they daren't raise interest rates, and why they fudge them to look as if they are low, so they can continue to pressure the B0E to keep rates low - all despite at the same time telling us we're coming out of recession....did I just see a pig fly by my window?

 

What's the difference between now and 2007/8? Well apparently we had a crisis then. Then you get these headlines about 'coming out of recession' (it sends does make me roll my eyes when I hear this claptrap, time and time again. Total and utter rubbish.) We are borrowing more than ever before. More and more people are falling through the net. More people are relying on food banks than ever before, and the working middle class are being squeezed like never before too (except mortgages of course, which is good news for borrowers, though not savers).  More people are in employment, yes, but that's because effectively they are dividing the work available between more people. The average we earn is lessening because it's a lot of part-time work. So more people are employed, yes, but under-employed.

 

So I repeat the question, to anyone who believes what the Tel-Lie-Vision and the BBC (Biased British Corporation) radio tells them, and that we're coming out of recession and 'growing' our economy: What's different now to the periods when they said we were in recession, and how we supposedly aren't now, according to these media and economist bufoons? Before you answer, remember that we are far more endebted as a country than we've ever been. Even MORE than when they announced we were coming out of recession. So I ask you, what DID happen to make them admit there was a problem back in 2007/8, but they've since 'fixed'? Since when does someone borrowing yet more money and in record debt, be considered rich, or richer than he/she was before? It beggars belief! All the smoke and mirrors.

 

Sorry but I have almost no faith at all in government. I hope you can empathise with this? And sorry to have gone on rather.

[PatrickWrayWray]

Ian - I agree the principle sum is unaffected by inflation in nominal terms but in real terms it is hugely affected by inflation. For example if we experienced Zimbabwean levels of inflation I might be able to earn enough in 10 minutes to pay off the principle value!

 

 

Also, I think I may have found you the perfect property investment  http://www.bbc.co.uk/news/uk-england-nottinghamshire-31143404

[Ian Cole]

Patrick,

 

I'm pretty sure, for the forseeable future, that we won't have runaway inflation, no. That is hugely damaging. No I wassn't talking about inflation in those terms, as for me they are less likely than a crash would be, IMO. Post crash there could be all osrts of problems, one of which mightbe runaway inflation. But in reality, I think we've a long way to go before that would happen, even if it does. So, you see I'm not perhaps quite as pessimistic as some people suspect on here

 

But like I also have said, if one makes hay while the sun thines, then any inflationary pressures further don the road will be mitigated by prudent strategies, as suggested. All those gung ho landlords who take out all the equlity they can, and reinvesting it in the next property, and mortgage the rest, will be the first to fall. It's happened before, even in a mild market dip. So you'd think they'd have learned their lesson. Sometimes not, for people have short memories - or 'selective' memories I guess you might say.

 

Ha ha! I did like, and laugh at the bunker. I'm still smiling form ear to ear now. But yes, if you hav emoney to burn, then it might help you. But trouble is if things got to the level that a bunker might be useful, then there'd be a lot of dog eat dog going on; and you'd not long survive before you'd be raided! You can only keep them at bay for so long. Dear me, sounds like that apocolypse movie with Mel Gibson in. I forget the title now, but it was pretty dire. God help us if things ever get that bad. But one never knows

 

Anyway thanks for your reply.