Is it worth moving from interest only to repayment?

debs3693

Is there anyway of calculating if i would be better off moving from an interest only mortgage to repayment? It's a house i rent out and is on a fixed rate until July next year.
Payment is £634 a month on interest only and would be £929.67 on repayment. Interest rate is 5.58% and balance o/s is £135,152.
I'm sure there must be a calculation i do but i'm a sleep deprived new mum and can't think it through - can anyone help point me in the right direction?
There is also a £100 admin charge to put it on to repayment!!!

dimbo61

Hi Debs,
You have an IO mortgage on a property you let out !
Why not speak to your accountant ? you can claim the IO payments against the TAX you pay on the profit you get from renting out your property

kingstreet

Only the interest element of a mortgage payment can be offset against the rental income for tax purposes. If you change to repayment, your costs go up but the capital repayments don't count as an expense. As each month passes, the interest amount drops too.

Professional landlords use interest-only for this purpose. You have to decide whether it's important to you to repay some of the mortgage capital each month or to maximise the tax relief.

debs3693

oh gosh, i'm confused! i didn't become a landlord for investment reasons - i kept on the house i used to live in and bought a new one with my (now) husband. Both mortgages are IO and I pay the max i can each month into an investment ISA for the purpose of going towards repayment. I am about to land myself a sum of money and i'm thinking about repaying the whole mortgage (or as near as I can) on the rental property so that whilst i'm out of work (having just had a baby) i have some income but the fixed rate doesn't finish until July next year so was wondering if it was worth moving to repayment now until July. I just called the mortgage co and on this rented house i can make monthly overpayments of £500 per month PLUS 10% of capital so from what i have read above, i should consider doing both of these?
sorry if i am asking dumb questions, just trying to work out the best use of money i have in the bank...

HappyMJ

debs3693 wrote: »

oh gosh, i'm confused! i didn't become a landlord for investment reasons - i kept on the house i used to live in and bought a new one with my (now) husband. Both mortgages are IO and I pay the max i can each month into an investment ISA for the purpose of going towards repayment. I am about to land myself a sum of money and i'm thinking about repaying the whole mortgage (or as near as I can) on the rental property so that whilst i'm out of work (having just had a baby) i have some income but the fixed rate doesn't finish until July next year so was wondering if it was worth moving to repayment now until July. I just called the mortgage co and on this rented house i can make monthly overpayments of £500 per month PLUS 10% of capital so from what i have read above, i should consider doing both of these?
sorry if i am asking dumb questions, just trying to work out the best use of money i have in the bank...

I'd stay as you are make the minimum interest only repayments only and save in the ISA's. That will make the best use of your money. No tax to pay on the property and no tax to pay on your ISA investments whilst still being able to access the ISA money at any time if needed.

With the big sum of money you are getting invest it elsewhere I still wouldn't pay off an investment mortgage with anything other than the sale of the property itself. The main reason being if you did pay it off you would then have to pay tax on the profit.

kingstreet

Given a choice, I'd repay the mortgage on my own home faster than that on the rental property. The equity you build up in your home is free of potential CGT on sale and doesn't affect the tax you'll pay on the rental income.

debs - I have a sneaking suspicion you're going to tell us you aren't accounting to HMRC for your rental income?

debs3693

oh no i definitely am! i do a tax return every year - honest! I can only make an overpayment of £500 a month on my own home and i'm tied in for another couple of years (bad decision!) so wasn't sure it was worth doing.....

dimbo61

But Debs can you reduce the term ? now many leneders wont tell you this but just ask the question " Can I reduce the term on my mortgage please" to the mortgage centre that deals with your mortgage ( on your home)
I had to pay £50 to reduce my term from 22 years down to 10 years now this increased my payments by £500 a month but it knocked £50,000 off the interest I would have paid over the 22 year term.
So give them a call GOOD LUCK

CLAPTON

kingstreet wrote: »

Only the interest element of a mortgage payment can be offset against the rental income for tax purposes. If you change to repayment, your costs go up but the capital repayments don't count as an expense. As each month passes, the interest amount drops too.

Professional landlords use interest-only for this purpose. You have to decide whether it's important to you to repay some of the mortgage capital each month or to maximise the tax relief.

well, for standard rate tax payers tax is 20%

so if you are paying 5.58% interest rate then the tax relief reduces that to 5.55% x .8 = 4.46%

so unless your savings are making more than 4.46% after tax then it's more cost effective to pay off the mortgage than to save it.