Should I pay off my buy to let mortgage?

Furry66

I have an interst only buy to let mortgage of 34K which is due to be paid in 2015. We are currently pay an extra £100 a month on the mortgage,monthly savings & an endowment which should mean we are able to pay off the money owed. My question is should we pay all the debt or just pay some of it as we understand we will then be liable to pay more tax each month.

Typhoon2000

If you have a mortgage on your main home pay that off first (to benift from interst relief on the BTL). If you have no home mortgage then paying off your BTL by £1200 a year will result in more income tax but but less than the extra interest on the loan you would otherwise have to pay.

jamesd

Furry66, if you have a home of your own that has a mortgage the first and easy step to take is to remortgage your own home for an extra 34k and pay off the BTL mortgage with that money. Normal home mortgages are usually cheaper than BTL mortgages so that will save you money and you can still deduct the interest on the 34k from your rental income. If for some reason your home mortgage isn't cheaper, don't do this.

What is the interest rate of the mortgage and what tax rate do you pay? That'll make it possible to work out whether you can get more in savings account interest than the after tax benefit from paying off the mortgage. If you're a higher rate tax payer every £100 in reduced interest costs you £40 more in tax.

Raggs_2

Surely, from a purely numerical viewpoint, depending on return on value and mortgage rate, you may be better off highly mortgaged.

I.e. Assuming 80% mortgage
Mortgage rate 5%.
House value 100,000
Return 10,000 (after expenses etc).
Mortgage 4,000

So you make 6000 on 20,000 monetary investment. (30% return on investment)

40% mortgage.
Return still 10,000
Mortgage 2000.

So you make 8000 on a 60,000 investment. (13% return on investment)

You will take home more money for your investment, the smaller your investment is (this only works when the return % is higher than the mortgage rate).

This also holds true with any increase in value the property may have (all increase is money in your pocket). Whilst decrease may eat your deposit, but will increase your % return (which is why as small a deposit as pos is also good).

So you may be better off saving the cash in a more accessible place (or offset buy to let if possible...) and then investing in another profitable property.

Of course, this is all what I've come up with in my own head (i'm not a landlord, not even a home owner), so if someone can point out the probably blindingly obvious issue, I'd appreciate it .

jamesd

Raggs, yes, you get a higher return on capital invested with less equity put into the property. It's one reason why a common BTL approach is to buy a place that needs work, refurbish, remortgage with the higher valuation at the same LTV and reduce the money you have tied up in the property. Takes some careful checking of the likely value after refurbishment so you do get out both the refurb costs and at least some of the deposit.

The extra leverage increases risk if you are forced to sell at a bad time for the market.

Raggs_2

Thanks for confirming that. I'd realised that there could be risk if you are required to sell up, but was just looking at what you could call the Optimum .

Engeroosi

How can you still offset tax against the btl interest mortgage if you pay it off by remortgaging your home mortgage? I have 50grand mortgage on a BTL and 140 grand on my home. What are suggestions in my case?

real1314

Engeroosi wrote: »

How can you still offset tax against the btl interest mortgage if you pay it off by remortgaging your home mortgage? I have 50grand mortgage on a BTL and 140 grand on my home. What are suggestions in my case?

All of this applies to the INTEREST only - no capital repayments can be claimed against tax

Let's assume your BTL was purchased for £100k and your home is valued at £280k
You were sat in your home with a £140k mortgage, £140k equity and £50k in the bank.

You decided to buy a BTL for £100k using £50k savings and £50k mortgage.
However you could have decided to pay £50k off your home mortgage and raise £100k to get the BTL.
The BTL lending rules would not let you use a 100% mortgage, but you could raise £50k against the BTL and £50k against your own property. You would be raising business (BTL) capital of £50k secured against your own home. The fact that this £50k is secured against your home and not the BTL does not matter. It can be claimed as a business expense.

If your BTL is worth anything up to £190k you should be claiming mortgage costs up to the full value of the BTL.

jamesd

Engeroosi, if you have equity in your home you could reduce the BTL mortgage and perhaps save yourself some money. Depends on the interest rates on the two mortgages and whether there's any penalty on paying off some or all of the BTL loan. The identity of the property that is the security for the loan is completely irrelevant.

You are limited to deducting interest on no more than 100% of the value of the BTL property at the time it was acquired by the BTL business. If the property value increases this doesn't also increase.

getmore4less

Raggs wrote: »

Surely, from a purely numerical viewpoint, depending on return on value and mortgage rate, you may be better off highly mortgaged.

I.e. Assuming 80% mortgage
Mortgage rate 5%.
House value 100,000
Return 10,000 (after expenses etc).
Mortgage 4,000
..................
so if someone can point out the probably blindingly obvious issue, I'd appreciate it .

If you can find a place today that will return 10% net then great go for it.

Gross yields around 5%-6% are much more likely so less after the expenses and potential voids.

Then stick a BTL 5% mortgage with 2% fees up front and it does not look so rosy.