Reduce the mortgage or stash the rent? 30 September 2008 at 11:15PM in Mortgage-free wannabe 2 replies 643 views

SQONK

Hello im a first time poster so please be gentle with me!I bought a house one year ago with the view of doing it up and selling to make a profit.
The house is finished but the market is going into freefall and ive rented the property.I have a 35k interest only mortgage with HSBC currently at 5.79%[tracks BOE base rate]Im in two minds as to whether i should make overpayments to reduce the mortgage debt or invest the rent in an ISA paying 6%.I have savings of 19k so would hope to clear the debt in 2 to 3 years.
So the question is :do i try to clear a debt on a property that could potentially lose 30% of its value or continue to pay the mortgage and save the rent until the financial picture improves!!! Any thoughts would be most enlightening

shirlgirl2004

Hi and welcome. I am far from knowledgable but I'll give you my thoughts and wait for someone to correct me .

Generally the advice is to save if you get a higher rate of interest than your mortgage (allowing for any tax that has to be paid). Bearing in mind that you are renting this property then I think I'm correct in saying that the mortgage can be used to reduce your profit and therefore the amount of tax you pay on the rental income. If you end up mortgage free then you will pay tax on a lot more of the rental income.

I don't see the fact that the property may lose 30% of its value as relevant. Whatever the value you have to pay the mortgage back at some point

dimbo61

shirlgirl2004 is correct you can set the interest only mortgage payments against your tax bill you will have to pay the nice taxman.
So save into ISA,s and save your rental income( after paying the mortgage ) into a high interest account to pay the tax due.
Some ISA,s paying 6.5/6.95% TAX free so better to save than overpay at the moment.