There are a range of options available to help landlords invest in properties that deliver a lower yield, including deferring interest or rolling some of it up. But which technique leads to a better outcome for your clients?
First, it is important to understand the difference between both methods:
Deferred interest
With a product offering deferred interest, the all-in rate may be quoted at 6.99%, which includes 2% deferred interest and a serviced rate of 4.99%. Interest on the deferred element of the loan is compounded and then added back to the loan for payment of the total balance at redemption.
Roll-up interest
With a roll-up interest product there are no monthly payments required as interest is rolled up to redemption and, any interest which is capitalised is not subject to a stress test. Rolling up all of the interest can reduce the maximum LTV available and so a blended approach is popular. This is where a loan is structured so that some of the interest is serviced, but the interest on the remainder of the loan is rolled up. When the two are combined, the rates can be aggregated to give one set of loan terms.
Both deferring interest and rolling up interest can provide a solution for landlords to invest in low yielding properties, but which is the better option for your clients? The simple truth is that every case is different and depending on the circumstances one approach may deliver the right cash flow model or be more cost effective for your client.
At first sight, a loan with deferred interest might look like the cheaper option but remember that interest on the deferred element of the loan is compounded and this can result in a higher balance to pay off at redemption than you might expect.
So, when it comes to structuring a deal for your buy to let clients, it is worth taking the time to consider in detail the available options and stacking up the figures to see which provides the best outcome, as the deferred choice may not always be the preferred choice.