Buy to Let

susieQ_2

I have a small flat purchased in 1999 with a buy to let mortgage (interest only) of £28,000.

I can now afford to pay it off as I have an endowment which has matured.

I can't work out if I am better off doing this and losing the 5.7% interest from Icesave and the tax relief I get on the payments of £173 per month (22%) or continuing to pay Bristol and West at 7.34%!!

I realise that if I have any void periods I continue to have to pay with no income coming in. This has not happened very often.

Can anyone (Martin perhaps??) advise me how to calculate what would be best? Thanks a lot!

mhay_3

does your current residential deal have a tie in? what is the balance on it?

susieQ_2

No the tie-in was for the first five years only, though there is a £150 discharge admin fee.
As I have been paying interest only, the full loan of £28,312 remains and the mortgage runs for another 7.5 years.
I did consider converting to a repayment mortgage and they have quoted me £416.70 per month. Thanks for your help.

mhay_3

it looks to me that you may be better keeping your BTL mortgage. not only does it have a lower rate than your residential one, but it also prevents you paying full tax on your rental income.
what i would suggest then though is building up a small reserve using your would be payments on your now paid off residential mortgage, to guard against the periods where you have no tennants.

susieQ_2

Sorry I'm a bit confused as we don't have a residential mortgage-we paid ours off 7 years ago I am paying 7.34% on the buy-to -let, plus basic tax relief versus 5.7% interest on my savings in the bank. According to my amateur calculations these seem to be virtually equal. So if I get any void periods I lose out, or so it seems, but I wanted to be sure I wasn't making an error somewhere!!

Leon_W

I'm no tax expert but there may be an argument for actually increasing your mortgage !

If you own the property outright then there is no tax relief on the rent you receive and because it is not your main residence there could be capital gains tax implications when you sell it, this would not be an issue if you had a dirty great big mortgage on it.

mhay_3

susie is actually wanting to pay off one of her mortgages, not increase them! i too am no tax expert, but CGT isnt based on the mortgage balance, big or small, but the property value!

Stick to what i mentioned in the previous post susie, unless anyone else has a different idea.

Leon_W

mhay

Susie has paid off her residential already so that just leaves the Buy to Let.

If that mortgage is repaid then the whole rent received is subject to income tax.

The area of Capital Gains Tax is where the thought is required ,and as I said, I am no expert. You incorrectly state that CGT is based on the property value. It isn't.

CGT is charged on the GAIN in an assets value for which you are allowed certain reliefs and annual allowances dependent on the time you've held that asset etc.

Landlords that I deal with on a regular basis make best use of these allowances and reliefs by continually releasing cash from their properties so that they effeciently use the annual allowance AND have a sufficiently large mortgage on the property when they sell it to practically elliminate any CGT.

All I am saying is that the tax implications are probably going to have more of an impact on susieQs' financial situation than the difference between what she is receiving on her savings rate and what she is paying on a mortgage rate.

Regards
Leon

louisdog

Whether the property is mortgaged or not has no bearing on the Capital Gain Tax bill when you come to sell. Even if the entire value of the property is mortgaged, if the value has increased by say £50000 since you bought, then that is the gain you have made from the property, irrespective of any borrowing secured against it. The chargeable gain and thus amount of tax to pay can be minimised through using taper relief and Capital Gains Allowance and offsetting buying and selling costs against the gain.

I think the question is whether it's better to have the £28k sat in a savings account earning 5.7% per annum, less 22% tax, which would be roughly 4.45%, or paying 7.34% interest on it, but because of tax relief on the income this amount is reduced by 22% I think. But still, the tax relief on the income will never take away from the fact that it's much more expensive to keep the loan than pay it off.