IF you could pay off your MTG from savings - would you?

mini_cooper

We have just had a nice savings policy mature and I have been looking at our debts/savings.

The only debts we have are 2 mortgages (1 fixed BTL @ £74,000, other offset residential although using property for rental at present).

We cannot pay off the BTL as that is fixed @ 5.25% until 2012, but the other is 0.74 above BOE base and could be paid off at anytime without any penalty.

Should we:-
1. pay off the mortgage in total.
2. put savings in offset account so that no interst is charged.
3. keep our savings and spend some having some more holidays and perhaps a new car.

What would all you MFW do?

chirpchirp

Personally, I would put the money in a savings account - there are plenty around paying more than 1.24% until interest rates rise. Once your mortgage intererest rate is higher than your savings then I would pay the mortgage. Be careful if you do this to ensure you can get at the money quickly should interest rates rise rapidly. Not sure if this is possible with your offset mortgage so out of your scenarios I would take number 2.

DJ_Mike

You say you can't pay off the BTL as it is fixed - but are you allowed to make overpayments? Some providers won't let you pay off a mortgage outright, but they will let you make overpayments, sometimes limited to a value per month, sometimes to a percentage (usually 10%) of the loan each year.

Even if you can't pay off the BTL outright, you could save yourself a LOT of interest by overpaying that mortgage.

As for the other loan, chirpchirp is right that you are currently much better off sticking the money in ISAs and high-paying savings accounts - although I would stick to instant-access, especially if you are allowed to overpay on the BTL. If the Bank of England rate jumps significantly, be prepared to shift your money from savings to mortgage, as your mortgage is going to jump immediately - your savings account, however, will likely stick for a while! Gotta love banks!

mini_cooper

Thanks chirpchirp & DJ,

I have just been on the savings boad and seen Egg are doing an instant access @ 3.25%, so I think I will put £50,000 into this over the next week or so.

With regards to overpaying the 5.25% fixed, I think I am happy to keep this as it offsets aginst the income. If I overpay my properties will give me a profit which I don't really want whilst I am still working.

DJ_Mike

I'm not into letting right now so I can't really comment I'll presume you write off your mortgage payment as an expense, but if you're overpaying then surely you have an even bigger expense write-off? Up to you really.

I'm hoping in the longer term that I'll be able to start letting out properties and actually using them to generate income rather than simply absorb it, but we'll see!

DJ_Mike

I would guess the only time repayment becomes a problem is when the interest is less than the rent you're receiving.

Although... I'm not convinced how much sense it makes to have a mortgage on a rental property. If you had a rental yield of 6% (i.e. 6% of the property value comes back as rent each year), but a mortgage at 5% - you end up with an income of only 1% on the property.

However, if you are mortgage free, you end up being taxed 20% (or 40%) on your rental yield, but even at 40% this still only reduces it to 3.6% - a lot more than what you have left over when you have a mortgage!

This is, of course, making massive assumptions about how interest relief works in the first place! There must be some kind of optimal solution where you keep the mortgage to a degree, and pay the rest in tax, and it gives you maximum income, but I was never much good with simultaneous equations...

Seems to me like you'd be best off paying off at least some of the mortgage anyway, but depends on your figures!

Pee

My instinct is to put six months emergency savings one side, take out enough for a holiday and then overpay the rest. I wouldn't waste money on a new car, but if that would bring you pleasure, consider it carefully. Now might be a good time to buy.

The downside to this is that repaying your mortgage may affect you for income tax purposes due to the rental income..

DVardysShadow

mini_cooper wrote: »

Thanks chirpchirp & DJ,

I have just been on the savings boad and seen Egg are doing an instant access @ 3.25%, so I think I will put £50,000 into this over the next week or so.

With regards to overpaying the 5.25% fixed, I think I am happy to keep this as it offsets aginst the income. If I overpay my properties will give me a profit which I don't really want whilst I am still working.

Crazy. You realise to put the money in a 3.25% account rather than pay off a 1.24% mortgage, but you don't take the opportunity to reduce a 5.24% mortgage. Max out on reducing the 5.24% mortgage first???

DJ_Mike

DVardysShadow wrote: »

Crazy. You realise to put the money in a 3.25% account rather than pay off a 1.24% mortgage, but you don't take the opportunity to reduce a 5.24% mortgage. Max out on reducing the 5.24% mortgage first???

I think you need to read the thread more carefully! The OP has said that the 5.24% mortgage gives him interest relief which he'd otherwise have to pay in tax, hence my big post above! But it's not quite as simple as just reducing the 5.24% mortgage!

SuzieSue

DJ_Mike wrote: »

I think you need to read the thread more carefully! The OP has said that the 5.24% mortgage gives him interest relief which he'd otherwise have to pay in tax, hence my big post above! But it's not quite as simple as just reducing the 5.24% mortgage!

I would have thought that as long as your mortgage rate is higher than the gross rate you get on your savings, then it is worth paying off the mortgage even when you take account of the income tax relief on mortage interest on BTLs (assuming of course that you have enough emergency funds etc).

SuzieSue

SuzieSue wrote: »

I would have thought that as long as your mortgage rate is higher than the gross rate you get on your savings, then it is worth paying off the mortgage even when you take account of the income tax relief on mortage interest on BTLs (assuming of course that you have enough emergency funds etc).

If you are a 40% tax payer and had savings of £10,000 and could earn interest at 3% in a savings account, the net interest you would earn would be £180 per year.

If your mortgage was £100,000 and your mortgage rate was 5%, you would pay interest of £5,000 per year. If the rental income from your BTL was £15,000 in the year, you could get tax relief of £5,000 so you would pay tax on £10,000 income at 40%, so your net income would be £6,000.

Therefore, your total income from BTL and savings would be £6,180.

If you used the £10,000 you have in savings to reduce your mortgage to £90,000, you would pay interest of £4,500 a year.
Your rental income is still £15,000, but this time you only get tax relief on £4,500 so you would pay tax on £10,500. So your net income would be £6,300.

Therefore, you would receive an extra £120 by paying off your mortgage.