Should I take out a personal loan to reduce my buy-to-let mortgage?

5 January 2015

Q

My buy-to-let mortgage rate is 5.49% and has approximately 20 years left to run. Does it make sense to take out an unsecured loan for £15,000 at a 3.9% rate to repay over four years to reduce the mortgage balance that stands at approximately £36,500?
From
MM/Bristol

A

On the face of it taking a loan with a lower interest rate to repay one that carries a higher interest rate sounds like a sensible idea.

In blunt terms of total interest over the life of the loan, it will be less on the personal loan than you are paying on the full mortgage balance for the next 20 years.

However, you need to factor in that the personal loan is structured over a short term of four years and the monthly payments will cover the capital and interest. As a result, the payments will be much higher than maintaining the £15,000 as an interest-only mortgage, which landlords typically opt for.

Higher monthly payments could mean that the rental income no longer covers the total monthly payments on the loan and mortgage. Landlords typically take an interest-only mortgage as they are not concerned about repaying the loan and will clear it through the sale of the property.

They also like the fact that they can set mortgage interest against rental income for tax purposes to reduce their liability and that is also something to consider.

Your aim of cutting the cost of your mortgage is a good one but you should firstly consider whether you could switch to a better deal with another lender.

Rates are very competitive now, and lenders also offer deals with free valuation and free legal work. Depending on the deal, you could potentially beat the personal loan rate by remortgaging.

If your goal is to also to repay capital, then look for a deal that allows overpayments without penalty. This gives the flexibility to overpay as and when you can, rather than tying you to a higher monthly payment. Approach an adviser to help you work out the best overall deal for you and ensure that you will meet the lender's criteria.

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