Two mortgages: which to repay?

DecisionsDecisions

I have both a repayment mortgage and a buy to let mortgage (currently paying interest only on the latter). I will be receiving an inheritance shortly that will enable me to pay off around 40% of the total combined outstanding mortgage debt, but I'm not sure how to best apportion the money. I've had a quick trot through the repaying your mortgage guide so I'm aware that if I were to pay a lump sum off the buy to let mortgage, it would be used to pay off the interest and not the capital, but that aside, I'm not sure what to do. By the end of Feb I won't be restricted on the amount I can pay off the BTL mortgage and I have the 10% overpayment facility on the repayment mortgage. I've previously been advised to minimise the risk on the property I live in, and on that basis I would be inclined to make maximum use of the overpayment facility on the repayment mortgage over the next few years but I'm also keen to move from interest only to repayment on my BTL property.. perhaps via a remortgage.. but I'd need to do my sums on that one! Any advice, including advice on which factors to consider and which are not so important to consider, would be most appreciated! :mad:

theoretica

What are the interest rates on the two mortgages?
What is the tax situation on the BTL? I think you may get mortgage interest counted against income tax which will need to be taken into account when comparing the interest rates.

diable

Pay off the repayment mortgage.

Jonbvn

Pay off the mortgage with the highest interest rate. However, for the BTL mortgage the rate you should consider for comparison should be taken as 80% of the actual BTL mtg rate, due to tax relief.

Note that the above assumes you are a basic rate tax-payer. If you are a high rate tax-payer you should take 60%.

CLAPTON

overpayments ALWAYS pay off the capital; it makes no sense to say they pay off the interest as the interest is paid in full each month by the monthly payment

dimbo61

What you also need to look at is the LTV on both properties as the better the LTV then you get the best rates.
As others have said the interest you pay on the BTL mortgage can be used to offset the tax bill so really you should have an accountant who can tell you the best way to use this inheritance!
Most BTL mortgage deals require you to have at least 25% deposit/equity

DecisionsDecisions

Thanks everyone for your replies: much appreciated. This stuff is not my hot point but I will persevere until I'm confident I can make a reasonably robust decision: even if it's just a decision to consult an accountant/tax advisor!

The interest rates are BTL: 3.79% and repayment: 2.94%
LTV is BTL: 73% and repayment: 75%

I'm a lower rate tax payer and I do get tax relief on the mortgage interest.

According to the latest, HMRC owe me 0.44p! :T

dimbo61

How you spend the money is upto you as you have good LTV on both properties.
Have you got a good emergency pot? to cover if the BTL is empty or needs a makeover?
How long have the current deals got left on the BTL and your home ?
Have a look at offset mortgages as you have a good offset pot !! and think long term perhaps a 5 year fix

DecisionsDecisions

dimbo61 wrote: »

How you spend the money is upto you as you have good LTV on both properties.
Have you got a good emergency pot? to cover if the BTL is empty or needs a makeover?
How long have the current deals got left on the BTL and your home ?
Have a look at offset mortgages as you have a good offset pot !! and think long term perhaps a 5 year fix

Thanks Dimbo61: it's really helpful to chat this stuff over with people.

I have a small emergency pot for the BTL which I'll top up with some of the inheritance money so it covers a 6 month void period/works. I did some works during the last void period so it's in good order and I'm clear in my mind that the next lot of renewals will be storage heaters and/or kitchen which I'll leave until the next void period unless the tenants need either to be addressed in the meantime.

Current deals are due to expire as follows: BTL - Feb 2011 and repayment - July 2012. Frustratingly I've been advised today that the inheritance won't be forthcoming just yet as the sale of the property behind the inheritance has fallen through: 2 days from exchange! Such is life :mad:. I was hoping it would fall in my favour regards the Feb expiry on the BTL but I'm not reliant on it coming through by then fortunately.

I'll check out the offset mortgages and 5 year fixes in the meantime.

Several other factors are coming into play: I'm a slightly nervous public sector worker for starters, although I've missed the initial round of redundancies announced this month! I prefer not to increase the rental charge on my property as it could knock me into a higher rate tax bracket quite easily. Plus I'd prefer to keep the rental charge at the same level to help my young married tenants save for their own deposit. I'd like to get the BTL on a repayment basis but would need to reduce the LTV to achieve a generous gap between the monthly rental income and the mortgage repayments. The gap is generous at the moment because the payments are interest only.

In respect of the fact I'm in public sector at a difficult time, I'm already planning to use some of the inheritance money top up the emergency pot on my home to cover 6 months. But doing that quickly relies on the sale of the inherited house so I'll top up that pot best I can in the meantime.

More views would be very welcome!

dimbo61

I would leave the BTL on IO until you have cleared the mortgage on your own home!
You dont get tax relief on the home mortgage and you can always sell the BTL but you dont want to have to sell your own home do you ?
What does the BTL go onto in Feb ? and can you afford to sit on that as its IO ?
When you do get the money check how much you are allowed to overpay and do that ( say 10%?) and fill cash ISA,s in both names (other half).
Consider when you are looking to remortgage next July 2012 to go onto an offset deal and only put £16K in the offset with the rest paid off the home mortgage! GOOD LUCK

DecisionsDecisions

dimbo61 wrote: »

I would leave the BTL on IO until you have cleared the mortgage on your own home!
You dont get tax relief on the home mortgage and you can always sell the BTL but you dont want to have to sell your own home do you ?
What does the BTL go onto in Feb ? and can you afford to sit on that as its IO ?
When you do get the money check how much you are allowed to overpay and do that ( say 10%?) and fill cash ISA,s in both names (other half).
Consider when you are looking to remortgage next July 2012 to go onto an offset deal and only put £16K in the offset with the rest paid off the home mortgage! GOOD LUCK

*******
Makes sense: thank you again.

In Feb the BTL goes to 4.99% and feel I can absorb that (it'll equate to 72% of the rental income net of managing agents fees; service charges are reasonable: no lift maintence contract for starters! :T). I'm wondering whether to look for a better deal but my initial thoughts are that the costs tend to be much higher for a BTL mortgage so, again, I'd need to do my sums first!

I've already checked the overpayments on the repayment and they are 10%; and I'm already planning to fill cash up cash ISAs. Both the BTL and repayment have 19 years left.

Thanks for your suggestions: it's bringing me back to the original advice from a financial advisor about minimising the risk on my home but this time it's making more sense as to why that's the way to go!