Advice on Buy to Let mortgage tax relief

vanbel

Dear All.

I have just got £48k additional borrowing from the bank to either pay off my main home morgage of £255k (£1300pm) or to reduce my 2 buy-to-let morgages which sit at £35k (£135pm) and £95k (£280pm). On the face of it reducing my buy to let morgages would seem preferable as they are on variable higher rates than my main home which is fixed for 4 years at 3.69%.

However, i am worried that paying off the buy-to let morgages will affect the tax relief i can claim on the interest i pay on the two mortgages - £135pm and £280pm.My income is £40k and my wife's income is £30k. The rent I get on both properties is £425 pm and £525pm after management expenses. Is there a minimum mortgage I should keep on both or one to be most tax efficient

Any advice would be gratefully recieved. Thanks. Tom

holly_hobby

BTL mge tax relief is only on the interest under the mge, basic maths means that if you reduce your BTL borrowings, less interest accumulation and therefore less interest tax relief to be claimed.

However, this would have to be considered alongside your tax status - ie liability between you, with poss further tax benefits on net rental liability via election of income via use of HMRC Form 17.

Personally, in view of your liability to tax, I would reduce my residential borrowing - which attracts no tax relief. Any lump sum reduction may be subject to ERCs etc, which I would expect on a fixed product (but you may consider the monthy financial saving outweights the penalty), or could stagger op's to fall in line with permitted annual overpayments over the remaining term of your 4 yr deal. Unless you are able to achieve an alternative net investment return in excess of 3.69% over the same product term and in excess of what rate you are being charged by the bank for the 48k advance .... reducing your primary mge at the end of that period and when out of any ERPs.

But without being privvy to your financial status, the above is a very broad evalutation .... but I do wonder why you have borrowed finance to repay finance ... financial utter madness !! (unless 48k is at a super duper low rate that is at least equal to or beats your current 3.69% fixed )

Holly

The_J

I would get specific tax advice from a professional accountant.

No point in tax relief if you end up giving it to the banks in interest. Although at least the banks will spend it better than the Government.

vanbel

Holly

Thanks for that. My wife and i are both basic rate tax payers.
Joint yearly income = £70k per year
Rental income = £9k per year after management expenses
Mortgage interest = 5k per year.

Tom

holly_hobby

Reduce the resi borrowings in my opinon due to your liability to tax on net rental income ... if you were below PA rates then the answer may be different.

But can I ask a question ...

WHY on earth have you borrowed to simply replace borrowings (as I can not see the interest rate onthe 48k being less than 3.69% but maybe I'm wrong).

H

holly_hobby

Oh Mr J .... just spotted I'm on your list of rogues .. :blushing: :T
I'm in good company ...

H x

The_J

I even created space for you.

I have the same question, where has the 48k come from?

vanbel

Thanks Holly and The J.

The £46k is additional borrowing on my residential mortgage at a variable rate of 3.49%. My reasoning for borrowing this seemed simple at the time.

It was initially to pay off in full buy to let mortage A which is currently £35k at an SVR of 4.7% (£135pm). I was also going to pay £13k off buy to let mortage B which is currently £95k at an SVR of 3.5% (£275pm).

I reasoned that:
- this will reduce my total mortgage interest by £35 per month
- paying off buy to let mortgage A will mean I wont have to remortgage this property in a few years with the always higher buy-to-let interest rates and £2k fees
- reducing morgage B will mean I have a better chance of remortgaging this property at a better rate in the future due to a lower loan to value (it is currently worth only £110k and my morgage is currently £95k).

Hope this explains it. Still not sure what is best to do with the £48k due to the potentail tax implications and would welcome any further advice you may have. My financial circumstances are as follows:

Income
- Joint income of £70k per year gross - both basic rate tax payers
- rental income of £9k a year

Outgoings
- £1300pm on £255k residential morgage (inc the £48k borrowing)
- £135pm interest on £35k buy to let A (4.7% variable)
- £280pm interest on £95k buy to let B (3.5% variable)
- £50pm management expenses.

Thanks

Tom

The_J

I don't think that would be worth it Tom. Without knowing the whole situation with regards the let properties (there's an awful lot you can get tax relief for) I wouldn't like to say for certain.

I would instead not borrow the extra amount and overpay/save the amount you would have been paying. The LTV ratio on the second BTL is only relevant when you need to remortgage, having a pot of savings to go to if you need to improve that ratio would be the preference. 4.7% is relatively high but on a tiny loan like that it's pretty irrelevant.

holly_hobby

Ok - in my opinion what you have done was a little nieve, with your current plan you won't have repaid any debt, just shifted sand, and will effecitvely be taking higher tax deductable interest to a lower tax deductable debt if used to repay the BTLs (even though you are both basic rate tax payers).

You say you are going to save £35 a month on your mges (presume all interest) by switching and reducing your lending from BTL to residential rates instead.

Although your residential mge payments will go up instead with the extra borrowings ... is the £35 net of the total increase to all mge outgoings, or just the BTL aspect ?

Anyhoo, putting that one side, and going with the flow, as J says you do not have to retain your BTL LTV ratio whilst the mge is active with the lender, its only when moving to another BTL lender that obv BTL and rental income ratios are relevant and need to be met. In fact exactly the same way in which your own residential mge arrangement operates.

BLT A- with such a low mge I assume the LTV is healthy if you wanted to switch lenders for whatever reason - and I don't believe much is to be gained in reducing the loan, or making it unencumbered (apart from the fact that some lenders will take rental income from an unencumbered property and inc with you own for residential mge affordability purposes).

Your 2nd BTL is on the high LTV side wise ..... if you can't repay the 48k residential finance without issue, and if you were FORCING me to give an answer, I would reduce BTL B mortgage - but ONLY on the basis that you personally wish to have a lower LTV on it.

The higher the insterest rate on your BTLs the higher the equivilent interest which may be offset, although on the flip side by effectively reducing the chargeable debt at the highest rate , you will of course have more net profit from your rental income at your disposal = albeit it will be taxed at your highest rate.

As I say, IF you or your wife were non-taxpayers (ie annual income under PA), then repaying the BTL finances being charged at a high pay rate, would make more financial sense - as you would not pay tax on the rental income anyway, so although the desire to mitigate tax wise wouldn't be as pressing, the maximising of (net of management charges) gain would.

In an ideal world though, I would go back in time and not have advanced the 48k - but we are where we are.

There will be other points of view from other posters, you must elect which is best for you, having taking suitable advice from your accountant & financial adviser.

Hope this helps

Holly

vanbel

Thanks Holly

I'll consider what you have said carefully. I have since been advised that even if i use the £48k to clear debt off my BTLs (and thus cant claim tax relief on the approx £175 interest I am paying currently) this doesn't matter, as I will still be eligable to claim the same tax relief on the £139 per month interest I will be paying on the new £48k additional borrowing as it has been used to clear the BTLs - even though not secured on them with the bank. What do you think. Thanks. Tom