which mortgage to overpay?

lilac_dawn

I have an interest-only mortgage for approx 109K which is coming to the end of its fixed rate. The low interest rate now means my monthly payment will be almost halved, so I could start to overpay and put the overpayment to paying of the capital. The property is rented so I'd like to keep it as IO, to avoid any problems with the rent not covering the mortgage in future months. However, in an ideal world I would like to have it on repayment so that I can profit from the rent with the thought that one day I will actually own the place.
Meanwhile, I have an offset mortgage for my temporary residence with 56k left to pay. I regularly overpay this am trying to finish this as early as possible. It has approx 21 years left.
So, should I try to reduce the capital on IO mortgage? Or, put that to a bigger overpayment on the offset mortgage? What's the main advantage in reducing the capital of the IO mortgage?
Thanks in advance for any help.

Thrugelmir

Interest on the rental property mortgage is deductible against the income. So this needs to be considered when weighing up the options.

What rate of interest do you pay on the 2 mortgages?

lilac_dawn

Yes, that I understand as originally buy-to-let was fixed so that there was no profit to be taxed on. IO will now go to SVR at 2.5%. The other, I don't know exactly, which I know isn't helpful but the monthly payment is around £500.

dimbo61

You have to look at the LTV of both properties and what rates you are paying!
A LTV of 75/60% gets the best deals and most BTL mortgages now require 25% equity

lilac_dawn

The BTL has 75% LTV at SVR 2.5
Offset has 40% LTV, and I think at 3.5
but I do not want a 'best deal' as have no intention of attempting to switch lenders. I was asking advice about the longer term benefits of reducing the capital on the IO BTL mortgage, as otherwise I will continue to overpay the lower offset repayment, in order to pay it off early. Ideally, at some point in the future, I would like to change the BTL mortgage to repayment, being aware that I will be tax on the profit made by rental income and was wondering then as my monthly payment has just been halved, whether to put the extra cash towards paying off the capital and if it's worth doing so.

CLAPTON

in simple financial terms overpay the mortgage with the highest interest rate...it's just that simple

you can offset interest against your BTL income for tax purposes, up to the interest on the value of the property when first let; it doesn't make any difference whether it's interest only or repayment and it doesn't make any difference which mortgage you are offsetting...

CLAPTON

Thrugelmir wrote: »

Interest on the rental property mortgage is deductible against the income. So this needs to be considered when weighing up the options.

What rate of interest do you pay on the 2 mortgages?

you can offset, for tax purposes, the interest on mortgages to the value of the rental property when first let.. the mortgage doesn't have to be on the rental property as such

lilac_dawn

Thank you: the tax implications for me are minimal anyway, so it's really just knowing whether it would be a good idea to reduce the capital on the BTL while I have the chance (doubt it will come again for a while!) or whether to overpay the offset mortgage as priority. As this has the higher interest rate, I understand your advice is to overpay that and not the IO one.

CLAPTON

lilac_dawn wrote: »

Thank you: the tax implications for me are minimal anyway, so it's really just knowing whether it would be a good idea to reduce the capital on the BTL while I have the chance (doubt it will come again for a while!) or whether to overpay the offset mortgage as priority. As this has the higher interest rate, I understand your advice is to overpay that and not the IO one.

I gave no advice

simply that the way with the greatest interest saving is to overpay the debt with the highest interest

however, personally I would also consider the LTV ratio for the BLT; although you have no present plans for changing mortgage provider it may be a possibility in the future; so I would be more comfortable with a 70% LTV than say a 75% one

ACG

Id be inclined to pay off the BTL.

1 - it will get the LTV down, so when interest rates do rise in the future you will be able to get a better deal.
2 - should you go through a period with no tennent it wont be as big an issue
3 - btl interest rates are generally higher, so you may find that once you do remortgage, your monthly repayments may be higher than what they were previously - and you might not be getting an income of 125% of the mortgage repayments.

However, the other interest rate is higher so it could be a better option to clear the highest interest rate first.

ViolaLass

ACG wrote: »

However, the other interest rate is higher so it could be a better option to clear the highest interest rate first.

Especially since it's an offset so the money could always be transferred if need be.