Buy To Let Mortgage (Interest Only) - Overpaying and Tax Implications?

2

Comments

  • Gorgeous_George
    Gorgeous_George Posts: 7,964 Forumite
    First Anniversary Combo Breaker
    edited 16 March 2010 at 6:59PM
    Nothing to stop you at all. You can remortgage after 26 years if you wish (subject to meeting the lender's requirements).

    When does the 1.25% rate end or is it a lifetime tracker?

    GG
    There are 10 types of people in this world. Those who understand binary and those that don't.
  • big_leon
    big_leon Posts: 47 Forumite
    First Anniversary Combo Breaker
    It is a 5 year tracker (expires in October 2012) that has a premium of 0.74% on top of the Bank of England base rate.

    On October 2012 it reverts to the Bank of England base rate plus a premium of 0.99% for the rest of the 20 years.

    This would lead me to believe that if the base rate rises too far I will sell off the property as the rent (£350 per month) will not cover this.
  • Gorgeous_George
    Gorgeous_George Posts: 7,964 Forumite
    First Anniversary Combo Breaker
    That's a great rate and the follow-on deal is good too! Keep an eye on the rental market and make sure you are getting a good rent. Keep costs down by encouraging long term tenants.

    £350 per month is low - I assume it's a flat or very small house. I walked away from a 3 bedroomed house that could easily command a £450 per month rent when my offer of £50K was refused.

    GG
    There are 10 types of people in this world. Those who understand binary and those that don't.
  • big_leon
    big_leon Posts: 47 Forumite
    First Anniversary Combo Breaker
    Yes a small two bed flat in a non expensive area.

    Thanks again for the advice - I'll keep an eye on the base rates and I will sell the property if it goes too high.
  • NorthLondonChick
    NorthLondonChick Posts: 61 Forumite
    I know this is an old thread but just wanted to say thanks for clarifying this. I have been searching for an answer to this for a while!

    I bought a small BTL 1 bed flat in Scotland in the village I'm from in 2004 for £19k (mortgage was £14k), spent £1000 sprucing it up and then got it valued at £40k 2 weeks later. I remortgaged it on a BTL mortgage in 2007 and got £20k released which I used as a desposit for my current home here in London. So the mortgage was then £34k as I only had to leave 15% as deposit. Thankfully my fixed rate on the BTL of 6.3% ended last yr and it is now on the variable rate of 2.7%. My rental income is £325 pcm minus 10% agent fees and my BTL mortgage is £77pcm. House prices have dropped in that area now but thankfully my tenant has been there for over 4 yrs and is showing no signs of wanting to move. He is a slightly troublesome tenant who costs me a few hundred pounds a yr in repairs but this is still less than what his rental income earns me.

    I had been considering trying to overpay the mortgage to bring down the amount owed as if my tenant moved out then I would struggle to find another as it is a very slow market where the flat is. I would have to sell and the flat is probably only valued at around £22-25k now so there'd be a bit of a short fall.

    But now I know not to overpay - save the money instead and try to build up a lump sum! Last month I started overpaying but I will cancel that now.

    Thanks so much for the info! Greatly appreciated!! :beer:
    She believed she could, so she did.
  • unmissable
    unmissable Posts: 62 Forumite
    First Anniversary
    Hold on!

    This is the way I see a very similar situation.

    Say I have a £100k mortgage at 5%. Interest only I would 'give' £5000 per year to the bank, never to be seen again.

    Suddenly, I am able to pay off this mortgage, so I do. Now I make a profit of £5000 per year (since I can no longer reduce my tax bill with mortgage interest payments) so I pay tax on that £5000. This means that £1000 (at 20%) or £2000 (at 40%) is 'given' to the tax man...never to be seen again.

    So...

    Don't over pay and give £5000 to the bank manager each year

    Do over pay and give maximum £2000 to the taxman.

    Obviously there are sliding scales inbetween.

    Of course, you can gain savings interest if you don't overpay. This would reduce the £5000 by whatever NET interest you get. I suggest it is difficult to get a NET interest rate equal to or above your mortgage rate.

    I look at it in that at the end of the year I wish to have 'given' away as little as possible by whatever means.

    Any flaws in my theory?
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Name Dropper Photogenic First Anniversary First Post
    unmissable wrote: »
    Any flaws in my theory?

    Yes. If you aren't paying tax then the business isn't profitable.

    Interest is a tax deductible expense in any business. So not unique to BTL.

    From 2000 onwards BTL boom was driven by capital gain not trading profit. Hence interest only mortgages were the fad. Leveraging up by equity release being the driver of funding.

    Alas those days have passed. So profit on letting is as important as capital gain on property value.

    Personally I feel that there's going to be a lot of disappointed people in the next decade.
  • Meeper
    Meeper Posts: 1,394 Forumite
    In addition, even if you pay off the mortgage on the BTL property, you can still offset interest from your residential mortgage against the rental income if you so desire. Interest being offset against the rental income doesn't necessarily need to come from a mortgage secured on the rental property.
    I am an Independent Financial Adviser
    You should note that this site doesn't check my status as an Independent Financial Adviser, so you need to take my word for it. This signature is here as I follow MSE's Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • getmore4less
    getmore4less Posts: 46,882 Forumite
    Name Dropper First Anniversary First Post I've helped Parliament
    big_leon wrote: »
    It is a 5 year tracker (expires in October 2012) that has a premium of 0.74% on top of the Bank of England base rate.

    On October 2012 it reverts to the Bank of England base rate plus a premium of 0.99% for the rest of the 20 years.

    This would lead me to believe that if the base rate rises too far I will sell off the property as the rent (£350 per month) will not cover this.

    NO brainer just keep saving in the best rate(after tax) you can get.

    If base rates go up savings will tend to do the same, with a max of base+0.99% most likely saving will keep ahead of the mortgage rate.


    £80k property £350pm gross yield 5.25% so on the low side but ok while rates are very low. keep an eye on costs and rent should be ok for some time.
  • unmissable
    unmissable Posts: 62 Forumite
    First Anniversary 
    Quote:
 	 	 		 			 				 					Originally Posted by unmissable 					[URL="http://forums.moneysavingexpert.com/showthread.php?p=46758179#post46758179"][IMG]http://images2.moneysavingexpert.com/images/forum_style_2/buttons/viewpost.gif[/IMG][/URL] 				
 				[I]Any flaws in my theory?[/I]
 			 		 	 	 
Yes. If you aren't paying tax then the business isn't profitable.
    Thrug***..

    I think we are on the same song sheet.

    I would rather be profitable and pay tax, than pay interest and 'beat' the tax man by pretending I am operating at a loss.

    There are several 'advisors' who are obsessed with not paying tax,what they forget is that paying interest to the bank is worse, in terms of wasted money. At leat there are circumstances when tax liabilities can be back-dated or forward projected that help.


    unmissable
This discussion has been closed.
★ ★ ★ Meet your Ambassadors

Categories

  • All Categories
  • 343.1K Banking & Borrowing
  • 250.1K Reduce Debt & Boost Income
  • 449.7K Spending & Discounts
  • 235.2K Work, Benefits & Business
  • 607.8K Mortgages, Homes & Bills
  • 173K Life & Family
  • 247.8K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.9K Discuss & Feedback
  • 15.1K Coronavirus Support Boards