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

Dear all,
I'm after some advice please.

I have a property that has just been rented out (12 month tenancy started Feb 2010) on an interest only mortgage. I am now looking to overpay this mortgage and I have confirmed with the mortgage lender that they are happy to accept overpayments.

However I understand I will need pay tax on any profits from the letting (I'm new to this!) - would me overpaying the mortgage mean I earn less profit and therefore have to pay less tax?

Thanks in advance,
Leon
«13

Comments

  • No - the exact opposite !

    You can expect tax liability offset against the interest paid (but NOT capital repayment) - in subsequent months/years (depending upon how you structure the overpayments), as a result of overpayments your interest component will drop and therefore the portion against which you can offset earnings will also drop.

    I am not an accountant or tax adviser - anyone with multiple properties should certainly be taking advice on structuring their affairs in a tax/inheritance efficient manner from a suitably qualified individual.
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  • VIGILANT22
    VIGILANT22 Posts: 2,516 Forumite
    Property Income Manual from HMRC

    http://www.hmrc.gov.uk/manuals/pimmanual/index.htm
  • Depends on the BTL mortgage rate and the rate that you can earn elsewhere (after tax). You need to do some spreadsheet work.

    For example, overpaying a mortgage with a 1.25% rate would mean that you would pay a little more in tax. However, you may be able to more than compensate for this by investing the moneys at 4%.

    On the other hand, it is unlikely that you will be able to invest the potential overpayments at a rate higher than a 5.5% mortgage rate.

    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
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    edited 16 March 2010 at 4:55PM
    Firstly thank you all for taking the time to reply.
    Depends on the BTL mortgage rate and the rate that you can earn elsewhere (after tax). You need to do some spreadsheet work.

    For example, overpaying a mortgage with a 1.25% rate would mean that you would pay a little more in tax. However, you may be able to more than compensate for this by investing the moneys at 4%.

    On the other hand, it is unlikely that you will be able to invest the potential overpayments at a rate higher than a 5.5% mortgage rate.

    GG

    George, the rate is at 1.25% so you're not far off! There's an outstanding balance of around £68,000 with 22 years and 6 months remaining on the term. I'm thinking of overpaying the mortgage by £200/month.

    I'm unsure as to what you mean by "However, you may be able to more than compensate for this by investing the moneys at 4%."
  • dimbo61
    dimbo61 Posts: 13,712
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    Simple if you can save the overpayment in savings accounts paying 3.5% tax free ( A&L/ santendar) or regular savers paying over 4% thats better than paying it off the mortgage
  • big_leon
    big_leon Posts: 47
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    Makes sense, excuse my ignorance on this it's all very new to me!

    Anyway First Direct, my bank, offer a 5% regular saver account. Obviously I will get taxed on any interest that accrues on this account.

    I now understand the reason for the spreadsheet as I need to determine which is better either overpaying the mortgage and therefore reducing the amount of interest I pay or saving the money in an account myself.
  • dimbo61
    dimbo61 Posts: 13,712
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    You can only claim the interest part of your mortgage payment ! against your TAX bill and as you have an interest only mortgage thats the full amount.
    Now if you pay off some of the mortgage with overpayments then you pay less interest and can put less against your tax bill!
    But what is the LTV of the property as most BTL lenders want you to have a 35/40% LTV before they will give you a mortgage
  • I prefer to keep my BTL mortgage as 'interest only' (the low rate helps) because it makes the tax return so much easier. All my BTL mortgage payment can be offset against rental income.

    How it could work...

    Save £200 per month into a regular saver such as First Direct or LloydsTSB who both pay 5% gross i.e., before tax - that's 4% after tax for a basic rate 20% tax payer. Put another way, it's more than three times better than overpaying AND you will have more interest to offset against tax making the return nearer 4.25%. It isn't often that a financial choice becomes a no-brainer. This is one. When the regular saver ends, stick the money in a bond or ISA or NS&I RPI tracker.

    I split my monthly savings between regular savers and Zopa (if you want to know more about Zopa and how it works for me just send me a PM).

    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
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    dimbo61 wrote: »
    You can only claim the interest part of your mortgage payment ! against your TAX bill and as you have an interest only mortgage thats the full amount.
    Now if you pay off some of the mortgage with overpayments then you pay less interest and can put less against your tax bill!
    Ah I understand the tax implications now. Thank you!
    dimbo61 wrote: »
    But what is the LTV of the property as most BTL lenders want you to have a 35/40% LTV before they will give you a mortgage

    The LTV on the property is 85% - this mortgage was setup a couple of years ago.
  • big_leon
    big_leon Posts: 47
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    edited 16 March 2010 at 5:49PM
    I prefer to keep my BTL mortgage as 'interest only' (the low rate helps) because it makes the tax return so much easier. All my BTL mortgage payment can be offset against rental income.

    How it could work...

    Save £200 per month into a regular saver such as First Direct or LloydsTSB who both pay 5% gross i.e., before tax - that's 4% after tax for a basic rate 20% tax payer. Put another way, it's more than three times better than overpaying AND you will have more interest to offset against tax making the return nearer 4.25%. It isn't often that a financial choice becomes a no-brainer. This is one. When the regular saver ends, stick the money in a bond or ISA or NS&I RPI tracker.

    I split my monthly savings between regular savers and Zopa (if you want to know more about Zopa and how it works for me just send me a PM).

    GG

    Thanks to you both that helps a great deal! I will set up the regular saver asap.

    One other question is can you re-mortgage at any point? E.g. I have 22 years 6 months remaining on the mortgage, is there anything stopping me re-mortgaging in 20 years?

    Or for that matter storing up all of this money in a savings account then simply selling the property?

    Thanks again for taking the time to answer these questions.
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