Simply pay off mortgage?

nlamont

We are in the fortunate position of having over 30000 in various savings vehicles such as ISAs and savings accounts. At the same time we have a 58000 interest only mortgage on our main home (valued at about 130.000) and an inherited rental property worth about 60,000 for which we have an interest only mortgage of 16,000.

It looks to me as though it would be best to use some of our savings to pay off the 16,000 one. It's variable at the Nationwide's basic mortgage rate, and there are no early repayment penalties. That would still leave us about 15,000 in savings which seems healthy.

This looks simple to me, are there any other considerations?

Ian_W

Tax!! On your rental property the interest on your loan is an allowable business expense for tax purposes against rental income - on your residential mortgage it's not. Pay a similar amount off your main mortgage and keep the £16K BTL one going.

EDIT: I've made the assumption that the £16K owed against the rental prop was for a business purpose. If it is then above holds good, if it was for a private purpose then it shouldn't be offset against rental income so it makes no difference.

nlamont

Yes, I suppose it is 'for business purposes' althought I didn't think of it that way. It was my mother's house, on which she had interest only payments on the mortgage of 16k. There wasn't enough in her estate to pay it off, so I got Nationwide to transfer the mortgage to my name. I didn't start a specific new buy-to-let mortgage. But you're right it appears as an expense on my tax form.

I find these matters quite hard to understand so I'll spell out what I take from this. If the payments I make to this mortgage total £945 a year (as they did last year), and I pay it off, I'll pay tax on an extra £945 a year from now on, for as long as I am receiving rent? On the other hand the mortgage still has 16 years to run so I'll end up paying a lot more than 16,000. Would I be better to keep it and convert it to a repayment basis? Then I still lose out on the tax benefit you describe!

Confused? I'm making myself so!

Ian_W

The interest you pay, whether it's an IO or repayment mortgage, is allowable for tax but not the repayment element. If you pay the same amount off your residential mortgage you'll save the same amount [or thereabouts] over a similar period but won't lose the tax relief on the £945pa against your rental property. So converting the second mortgage to repayment won't really affect the tax situation.

However, I would personally be more concerned that the residential mortgage on my main dwelling was being paid off [unless it's covered by some form of investment vehicle] because you can always sell the rental prop to pay off that mortgage but you still need somewhere to live that eventually is yours mortgage free.
HTH.

Cocoa_3

I am 46 and have just extended my mortgage to 40 yrs with Nationwide which I believe is the max term