Interest Only Mortgage

Hi,

We currently have an interest only mortgage on an investment property €255,000 over 25 yrs - 24 yrs remaining). I know that interest only is better for investment properties as the interest can be offset against the rental income, thus reducing any tax liabilities.

However, I am concerned about the fact that we are not paying anything off the capital and will still owe the full mortgage at the end of the term. Obviously even if we save what we would be paying in capital if it were a regular mortgage (approx €500 per month), this will not be enough to cover the loan amount at the end of the term.
What do people with interest only loans usually do to save enough to cover the mortgage (without selling the house)??

Thanks.

If you saved €540 a month and achieved a 4% net return you would have €256 k after 24 years

Tweety said:

We currently have an interest only mortgage on an investment property

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Moved from Mortgages and Buying and Selling Homes.

Thanks for that Vandriver. Obviously I didnt do my figures correctly!!

I am just wondering would I be better off accumulating the savings over the 25 years and then clearing the mortgage or should I pay a lump sum of €5k-€6k off the mortgage at the end of each year? Does it make any difference financially which way I do this?

Paying €5-6k off the mortgage each year would be the same as having a regular mortgage - you would no longer be getting the full benefit of being interest only.
Do you have a mortgage on your PPR you could pay the money into, or have you considered investing it in a pension?

Hi,
We refinanced last year and combined our home mortgage and the investment mortgage into one and secured it on the Investment property. So although we only have one mortgage, it is made up of borrowings for our home and the investment together.

I don't want to pay tax on the rental income but I am also wary of not reducing the mortgage any bit and also the fact that any increase in rates is pushing the Repayments up and up. Would we be better to maybe to pay off some lump sums over the next few years to bring the mortgage to a level that the interest only payments match the rent (at the moment the rent is not covering the interest fully because our own mortgage was included). That way we could avoid paying tax and once we are at that stage, we could then save the extra €400 - €500 per month and let that build up with a view to paying off the mortgage at the end of the term?

Thanks

Only the proportion of the mortgage that was explicitly used to purchase the investment property can be offset against rental income. You cannot secure other borrowings against your Investment property to reduce your tax bill.

It sounds as if you've been given "bar room" tax advice, that a Broker or someone selling you your consolidated mortgage gave you confusing or incorrect information.

From the begining: You bought property A for how much ... what happened next? Which is your Investment, which is your own residence, how much of the mortgage does each represent?

In this type of scenario you should have 2 completely seperate mortgages, Investment Interest Only and Residential on a repayment basis. Use the saving by going IO on the investment to pay down your Residential property. Quite why you would go in the opposite direction is a mystery to me and smells as if you were missold something, or conceivably became an "accidental" landlord by renting out your old residence when you traded up and, again, received poor advice.

Our home cost £86,500 (€109,832) and the balance on the mortgage last year was approx. €77,500.

The investment property cost €180,000 (financed by top up loan secured on our home and 90% secured on the investment property) and the total balance on these mortgages last year was approx. €177,500.

I realise that we cannot claim the full monthly interest against the rental income... sorry that was a mistake on my part on the previous post.

We consolidated to reduce the monthly repayments as my husband was going into business for himself and we were afraid we would not be able to afford the repayments that we had at the time over the 3 separate mortgages.