Buy To Let - Do I pay off mortgage?

Henri5565

Hi, I'm new to posting but have tried to find answers to my questions so I hope I'm not repeating someone?

I have a BTL interest only mortgage. 20 yrs left and I've just come out of a great fixed rate into 6.75% variable. I have a mortage of £57,000, about 70% of the original purchase price. My income (rent) and charges (mort, fees etc.) now are just below the break even level so I'm not making any money so don't get any tax breaks on the mortgage interest.

I have other savings/investments which make me approx. a 20% tax payer. Do I pay off this mortgage or part of it to increase my rent earnings, which offset on tax. Or do I stay as is?

I'm also aware that if I pay the mortgage off, when I come to sell, which I will do at some point (it's a retirement investment) - will the Capital gains tax be too much and make it not worth it?

dunstonh

You are going to face the same capital gains tax bill whether you clear the mortgage or not. Its only your income tax that is going to be different.

You say you are a basic rate taxpayer. However will it remain that way after the rent is added to it?

What mortgage deals are available to you with this deal ending? e.g. if you get say 6.5% as a mortgage deal then you may find that because of tax you get get better than that in a savings account with the saving/investment.

getmore4less

Henri5565 wrote: »

My income (rent) and charges (mort, fees etc.) now are just below the break even level so I'm not making any money so don't get any tax breaks on the mortgage interest.

I have other savings/investments which make me approx. a 20% tax payer. Do I pay off this mortgage or part of it to increase my rent earnings, which offset on tax. Or do I stay as is?

You are offsetting the mortgage interest against potentialy taxable income(rent) if you make a profit you need to pay tax, you should have been paying tax before if you were making a profit on the rental.

You pay tax on the net earnings so that would be rent(after offsetting costs including the mortgage interest) and interest from your savings.

You are using you full ISA allowances thats the first thing to do with your savings

Paying off some of the loan so you break even on the rental will reduce your tax but that is done by reducing your income less interest.

If the rent goes up you then pay tax again on the surplus rent, you also lose acccess to the funds should you need them.

Henri5565

Thanks for your replies.

dunstonh - On the CGT. Not sure why I'd have the same bill at the end as I thought if you still had a mortgage, that would be deducted from your gain - sorry but I have probably missed something here so your view would be appreciated.

I don't think that I'll hit a higher tax bracket as the rent is not great. The mortgage deals aren't that great at the moment and once I pay my tax on my cash investments, then the interest rate is not really much more than 5%.

getmore4less - I am paying tax on any income from rent that's not offset against costs (allowed) and the mortgage interest. It all goes on my tax return. I'm using my full ISA facility.

I'm sort of clear on the income/outgoing of now. My main issue is by paying off all or some of the mortgage, then I'll save on mortgage interest (high / 20 yrs), lose savings int (med). I'm not sure what other costs I may not be factoring in?

I don't have worries about fund access in this instance.

Gorgeous_George

When you complete a tax return (for income tax), you fill in the Land & Property pages to declare the income from the BTL.

On one hand you have income - just the rent (A). On the other you have costs including some or all of the following (there'll be others):
> Mortgage interest
> Letting Agent fees
> Buildings Insurance
> Wear and Tear (10% of the rent)
> Repairs
> 40p per mile for anything that you do solely for the rental(s)

These expenses we will call B.

Your profit is therefore A - B and it is this number that is added to your other income(s) for tax purposes. If it is neagtive, you can carry it forward to furture years (for a limited number of years) to offset future profits.

Remember, your tax return needs to be in by the end of October if you want the Revenue to calculate your tax or by the end of January if you will be completing your return online.

GG

Henri5565

Hi GG,

Thank you but I'm not asking about my tax return etc. as I'm quite comfortable with how it works and what I need to do. It's the should I pay off my mortgage, CGT stuff I'm interested in responses to.