Should I pay off my BUY-to-let mortgage or leave it as an interest only mortgage...

dcattani1

Dear Money Saving Expert.com,

My wife and I are in the process of purchasing our first Buy to let investment property.

We remortgaged our home to release some equity in order to acquire the deposit.

We currently owe £53,000, and took out an extra £70,000 to use as the deposit on the BTL property.

The investment property was purchased for £200,000, and we will be renting it to university students for £1,200 per calendar months, for 11 months of the year (not 12 as this was agreed with the students before we purchased the property - next year we hope to rent it for the full 12 months).

We have remortgaged our property on a 5 year fixed mortgage of 4.09%. We have got a 2 year buy to let mortgage at 4.19%. Currently, the Buy to let mortgage is an interest only mortgage, while the remortgage of 4.09% is a full repayment. We can overpay each mortgage by £500 a month if we wish on the 4.09% mortgage, but not on the BTL mortgage.

My wife works full time, while I have taken this past year off, and next year as well, and I am staying at home and taking care of our daughter.

Both mortgages will cost approx. 1,090£ per month, while we will earn 1,200£ from the rental income (for only 11 months).

With the students paying our mortgage and the BTL interest mortgage, we will have approx £1,000 of money left over after all of our bills are paid. We were thinking of our possible options:

a) putting an overpayment of up to £500 in the repayment remortgage to finish it faster, but leave the BTL interest mortgage go on indefinitely. The leftover £500 we would put in an cash ISA and then lock it for 4-5 years in April, 2012 in order to get a high interest rate.

b) or we could put the entire £1000 in an ISA every month, to try to reach our 10K limit by april, 2012,

My question to you is, what would the best thing for us to do?

I understand that many people who have done well in the BTL market have never paid off their BTL investment property, as the interest offsets the possible taxes that one would pay on the rental income they make on the property, but would this idea work for us?

Ok. I'll let you go. Thanks very much for any help/advice that you have for us.

Kind regards,

Derek

diadeb

No contest in my book. If the interest on the BTL can be offset for the taxman, then you maximise that and don't pay it down.

I have one BTL and a second on its way, both holiday rental places. I have used cash for the purchases, but my accountant made me offset the full amounts against our existing home mortgage. The argument was that I would have used the cash to pay off our home mortgage (which was true) and therefore the mortgage debt should be offset against the BTL. Just try and make sure the "paper trail" can be understood, if the taxman ever decided to investigate! Hope you can understand me but you might need some specific advice for your situation. In my case it truly was money well spent with my accountant and she saved me her fees in one year.

The_Deep

As far as I am aware, it is perfectly acceptable to raise money on one's PPR to finance a BTL. I can find no case law of The Revenue having challenged it, and suspect that they would be reluctant so to do lest a ruling against them opened the floodgates.

I have owned BTLs for several years, and all have had interest only mortgages throughout. I suppose it really comes down to one's attitude to debt.