Buy-to-let repayment mortgage?

gwernybwch

HappyMJ wrote: »

I thought the point of an interest only BTL mortgage was to maximize the deductions against the rental income so that there would be no tax to pay on the investment. The rent covers 125% of the interest and the extra 25% can easily be spent on maintenance, fees and charges. Once you start paying off the mortgage the interest becomes less and then you start paying tax on the profit. Am I wrong?

There are many situations where the cost of not paying tax outweighs the additional amount that it costs to eventually buy the property (i.e. pay off the mortgage) through having an interest only mortgage together with another method to pay off the cost of purchase i.e. endowment, saving etc. However there are other situations where it is better to have a repayment mortgage.

It really depends on your tax payer status, the net profit that you make from the property, current interest & inflation rates as to whether it is better to have an interest only or repayment mortgage.

Nooj

I think we got properly done over by the estate agent. On his suggestion we remortgaged the rented house (which we were living in at the time) to release funds to put down on the house we were moving to. We don't make any money on the rented property, we actually make a loss, but look at it as our pension scheme rather than as a money pit (house prices will go up again eventually). So all we're doing is paying interest, never decreasing the mortgage.

Because of the last budget, the Missus is £500 a month worse off now, and because I'm struggling to get my own company off the ground in a recession (made redundant last spring) I rarely get paid at all, so we're trying to decrease our debts a bit. We're selling the car and a motorbike, but really want to get the mortgages down a bit as well if we can.

Gorgeous_George

Do you have other debt? If so, it is probably wiser to repay this than to change a BTL mortgage to repayment. It all depends on the maths of course but it may be better to save in cash-ISA, regular saver accounts (first direct pays 8%), NSandI RPI tracker or any of the other tax efficient savings schemes.

As pointed out above, keeping you BTL on IO basis maximises the expenses that you can offset against tax. IO is the way to go with BTL mortgages but you need to have a plan to repay the capital when the mortgage expires (or plan to take another mortgage at that time).

The key question is, 'What does your current deal revert to at the end of the fixed term?' Do you really believe interest rates will rise significantly in the short to medium term? I don't.

GG

Nooj

I don't have any other debt, I don't know about the Missus, she's pretty stupid when it comes to finances, always does the wrong thing despite (or to spite) my advice.

I'm a sole trader for work, so will hopefully be able to offset the BTL against my earnings. I need to have a look at what the mortgage will revert to once the fixed rate is up, it's possible it'll actually go down which would be nice. I'll check.

ViolaLass

Have you looked into overpaying? It would save you having to switch deals and give you the flexibility to overpay when you want to rather than having to pay a fixed amount each month.

Thrugelmir

Nooj wrote: »

I'm a sole trader for work, so will hopefully be able to offset the BTL against my earnings.

Unfortunately not. Losses incurred in property letting can only be offset against income from a similar source. So the losses will be rolled over and then be used against future profits.

Nooj

We can't afford to over pay, with my redundancy last spring and the Missus pay being hammered after the last budget, we're about £1700 a month worse off than we were when we bought the place. Bit of a !!!!!! about not being able to offset the house against my earnings. Not too much of a problem at the moment as I'm not earning enough to pay tax.

ViolaLass

Nooj wrote: »

We can't afford to over pay, with my redundancy last spring and the Missus pay being hammered after the last budget...

Then how would you pay a repayment mortgage?