Withdrawing overpayments from mortgage account before renting out property??!!!???

Charlie_H

Hi All,


I’ve been making overpayments on my mortgage for almost 3 years and have approx £18,000 accumulated. My 5 year 5.18% fixed with Nationwide is due to end in spring 2012. I intend to fix again for either 3 or 5 years. I’m also planning to rent my flat out for at least a year next year. The projected new rate of interest will be 4.5-5% including the 1.5% Nationwide hike for renting out property. I'm not keen to remortage at this stage as too much hassle.


I am aware that in addition to paying 40% tax on any profit (if any minus deductables) gained from renting, I also have to pay 40% on the capital portion of my mortgage. I’m scratching my head as to whether to withdraw the overpayments of £18k to maximise the interest/capital ratio. It may equate to peanuts but feel I need to explore this to ensure I maximise the interest earning potential of the £18k capital.

For simplicity, I’ll base my calculations on my current interest rate of 5.18% :

£18k at 5.18% earns £932.4/annum in reduced interest payment on the interest portion of the mortgage. This equates to increasing the capital portion by £932.4 which counts as income that is taxable at 40%. This will cost 372.96. This leaves £559.44 to contribute as further capital to mortgage. (approx 3.1% equivalent interest on 18k). The amount of tax I‘m paying will increase/annum as the capital portions increases.

If I withdraw the money and aim to earn more than 3.1% net from savings, I should be better off . I would deposit the 18k into savings accounts, going for cash isas first to benefit from tax free saving. I’ll also save by not having to pay the £372.96 for the higher capital portion mentioned above . Again this looks like it will be peanuts unless I can get some really good saving rates. i'm wondering whether this would be worth bothering with?

Has anyone been faced with a similar dilemma? I’m I missing a anything?

Thanks for any advice/insight provided

Charlie:rotfl:

madeupname1

Hi Charlie

Not sure I completely follow your post but you do say "thanks for any insight provided" so I am taking you at your word!
First you are right that you will have to pay tax on your rental profits, basically rental income less allowable deductions. One allowable deduction is the interest charge on the mortgage on the rental property. Remember, if you have a repayment mortgage, you will not be able to deduct that element of your payment that equates to repayment on your capital. Also, you can only deduct interest on a loan up to the value of the property at the time it first enters the rental business. Therefore you should be able to withdraw the 18K overpayment and deduct the full interest you are paying on the full outstanding borrowing.


Withdrawing the 18K will increase your interest payments which in turn with increase the amount deductible from your rental profits. Of course, it does mean that you are paying more in interest on the loan, but, as you note, you may be able to invest that 18K elsewhere.

Please note that if you are intending to let out the property you should move to a BTL mortgage as you may not get consent to let on a residential mortgage, especially if you have only just remortgaged.

I am confused when you say that you also need to pay 40% on the capital portion of your mortgage. Are you referring to capital gains tax?

As you can probably tell I am not an expert at this and perhaps someone with more knowledge may be able to add more insight.

Charlie_H

Thanks madepname1 for your response. Yes, my thread maybe a little tricky to follow as the logic is difficult to express.

To clarify:

"I am confused when you say that you also need to pay 40% on the capital portion of your mortgage. Are you referring to capital gains tax? "

No, referring to the repayment portion of the mortgage payment i.e capital paid of mortgage balance.

It is unlikely that I will be renting out long-term as will be moving back in at some point. I've already lived in property for almost 5 years and intend to "switch and fix" with nationwide. As I've already lived in property for long term, I don't envisage any problem with obtaining consent to let. Unless, anyone has any insight into this and can advise otherwise. I also mortgaged with Nationwide 5.5 years previous to this. If it does look like I'll be renting for 2- 3+ years, I'll look in to switching BTL. It just seems premature at this point.

I should perhaps move this aspect of my query to the renting forum.

Thanks again for reading my thread
Charlie:rotfl:

Thanks again

madeupname1

Thanks for the clarification - I understand now. Yes you do have to pay tax on the part of your payments relating to capital. You can also withdraw the OPs - I did that myself and have taken tax advice and have been advised no problem with this as you can deduct the interest on the amount of the loan, which amount can be up to the value of the property at the time it entered the lettings business

I would try the mortgages and endowments forum for questions regarding consent to let. holly hobby, kingstreet and who5ank (all mortgage advisers) tend to be very good at these kinds of questions. However, be prepared for some acerbic responses because landlords and buy to letters tend not to be very popular on some forums.

good luck!