Something to clear...

garagemc

Hey im new to this board however have been reading for years.

I just to need to find out:

The way I figured it was that say for example, we pay £2000 on our mortgage, say if £1000 of that was interest and the other thousand as repayment and the rate was 5%. Would I would be better off putting the repayment money into my savings account which pays 5.25% or even investing it for a greater return?

However, does having an interest only mortgage make the house subject to capital gains tax?

Looking forward to hearing from you people.

UK007BullDog

Well if your mortgage amount always stayed the same and you do not repay then you will pay ten of thousands more in interest than if you had a repayment mortgage.

That is why I advocate to always if humanly possible go for a repayment mortgage and overpay if possible as well or go offset if you have at least 10% of the mortgage amount as savings you dont want to use.

garagemc

Yes but surely, rather than paying the mortgage back it would be better to put the money into investments which are likely to return a higher rate of return then the mortgages interest rate.

If you plan to sell up in the next 8 -10 years surely this is a better idea? Or am I missing something?

jamesd

You're correct that when the after tax savings rate is above the mortgage interest rate it is financially better to pay the interest only and put the money into the savings account. Even a quarter of a percent difference over 25 years will earn you enough extra savings interest over the mortgage interest to allow you to repay almost a year early. Cash ISAs are the common tax free savings account and you can get more than 6% on them at the moment. If one partner in a couple isn't earning, a normal savings account in their name only also works once they have told the bank that they are not a tax payer.

Even though it's financially better to save, many people will be more comfortable with the mortgage payment option. Some people just don't care that 10,000 in extra mortgage interest and 12,000 in savings interest means that you're 2,000 better off, they can't stop focusing on the 10,000 extra interest paid part of the pair.

garagemc

But is it true that because I have had a intrest only mortgage, when I sell my house I will have to pay capital gains tax?

herbiesjp

Not true at all, if the property is your main residence.

If it is your main residnece you do not have to pay CGT irrespective of whether the mortgage is repayment or interest only.

HTH

jamesd

Interest only or not has no effect at all on whether CGT is applicable. What affects that is whether it is your main residence or not.

You may be thinking of buy to let mortgages, which are usually interest only, though they can be repayment as well. Those are business mortgages for a business property purchase so the mortgage interest reduces the taxable income from the rent and CGT is due on sale. That CGT liability can be reduced if it has previously been your main residence. But this is not what you're asking about, it's just so you understand how the BTL side works.