Take the long-term view and you can cash in

LAST week we looked at the pros and cons of taking out a 10-year or 25-year mortgage for buy-to-let landlords.

I would seriously consider taking the 25-year buy-to-let mortgage and make additional payments every month to help you to pay the mortgage off early.

Therefore, if for example, you have a bad couple of months without any rent coming in or unexpected bills, you can return to making the mandatory lower monthly payments without getting your property repossessed. By taking on the longer-term mortgage, you decrease your risk because it has the lower required payments.

Let me give you an example – if our landlord wanted to buy a terraced house property for £325,800 and put down a 25-per-cent deposit of £81,450, the best buy-to-let deal I found online on the day of writing this article was a 1.79-per cent Santander five-year fixed-rate mortgage.

On the 10-year mortgage, the mortgage payment would be £2,245.07 per month. Therefore, our landlord would have to top up from personal savings to make up the monthly mortgage payments.

But if they choose the 25-year mortgage, the payment would be £1,032.12 per month, so our landlord would be in profit from day one. Some might say that the longer term means more interest payments, as it’s 25 years and not 10 years.

Yet, at today’s low interest rates, that would mean an additional £40,229 in interest payments spread over 15 years – not much in the grand scheme of things.

Therefore, by taking the longer-term mortgage, as a savvy landlord, you are

‘cash flow positive’, meaning you can build a reserve fund for every one of your rental properties to enable you to deal with any unforeseen voids and repairs.

The best way to deal with a buy-to-let property is to see it as a small mini-business and, as with all businesses, you need to grow your income and reduce your expenses while in the background provide a decent rate of return for your investment.

The greater the amount of mortgage debt you carry, the greater your monthly mortgage payments, and the simple fact is, the shorter the mortgage term, the higher the monthly mortgage payments.

So, if you take on a sensible level of mortgage debt and be ‘cash flow positive’, you can profit from much better returns without taking on excessive risk.

Before I go, I have to say this to cover my proverbial. My comments are only a very brief commentary on the issues raised and should not be relied on as financial advice and that no liability is accepted for such reliance. Anyone needing such advice should consult a qualified financial adviser or other authorised person.