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Buy To Let Mortgage (Interest Only) - Overpaying and Tax Implications?
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# 1
big leon
Old 15-03-2010, 10:47 AM
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Question 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
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# 2
Senior Paper Monitor
Old 15-03-2010, 11:10 AM
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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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# 3
VIGILANT22
Old 15-03-2010, 11:55 AM
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Property Income Manual from HMRC

http://www.hmrc.gov.uk/manuals/pimmanual/index.htm
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# 4
Gorgeous George
Old 15-03-2010, 2:33 PM
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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.

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# 5
big leon
Old 16-03-2010, 4:53 PM
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Firstly thank you all for taking the time to reply.

Quote:
Originally Posted by Gorgeous George View Post
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%."

Last edited by big leon; 16-03-2010 at 4:55 PM.
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# 6
dimbo61
Old 16-03-2010, 5:11 PM
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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
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# 7
big leon
Old 16-03-2010, 5:22 PM
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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.
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dimbo61
Old 16-03-2010, 5:30 PM
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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
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# 9
Gorgeous George
Old 16-03-2010, 5:38 PM
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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
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# 10
big leon
Old 16-03-2010, 5:39 PM
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Quote:
Originally Posted by dimbo61 View Post
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!

Quote:
Originally Posted by dimbo61 View Post
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.
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# 11
big leon
Old 16-03-2010, 5:43 PM
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Quote:
Originally Posted by Gorgeous George View Post
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.

Last edited by big leon; 16-03-2010 at 5:49 PM.
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# 12
Gorgeous George
Old 16-03-2010, 5:52 PM
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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
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Last edited by Gorgeous George; 16-03-2010 at 5:59 PM.
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# 13
big leon
Old 16-03-2010, 6:42 PM
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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.
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# 14
Gorgeous George
Old 16-03-2010, 8:22 PM
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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
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# 15
big leon
Old 16-03-2010, 9:50 PM
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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.
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# 16
NorthLondonChick
Old 08-09-2011, 5:00 PM
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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!!
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# 17
unmissable
Old 08-09-2011, 11:46 PM
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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?
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# 18
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Old 09-09-2011, 12:00 AM
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Quote:
Originally Posted by unmissable View Post
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.
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# 19
Meeper
Old 09-09-2011, 8:35 AM
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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.
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# 20
getmore4less
Old 09-09-2011, 9:24 AM
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Quote:
Originally Posted by big leon View Post
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.
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