HELP - 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

antrobus

In principle, there's no reason why the interest payable on the "£48k additional borrowing" can't be claimed as an expense against rental income, if that £48k has just been used to repay BTL mortgages that were used to fund the purchases in the first place.

CLAPTON

I find it amazing that bank borrowing is cheaper than your mortgages ; what interest rate are you paying on the bank 48K?

however, in simple money terms:
you reduce your tax bill by whatever you tax rate is; lets say you pay 20%

so if you residential mortgage rate is A%
and you rental mortage is B%

then because of tax your effective rental rate is 80% of B%

so if A is great than 80% of B pay off the residential mortgage if not then pay off the rental mortgage

so in your case if your rental rates is greater than 3.69%/.8 = 4.61% then pay off the rental mortgage


the effect of variable versa fixed is a personal choice

vanbel

Thanks Clapton and antrobus

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

00ec25

vanbel wrote: »

Still not sure what is best to do with the £48k due to the potentail tax implications

you've been given the answer - the 48K borrowing will be eligible for tax relief provided that the money is used to pay off the BTLs - it is no different to remortgaging the BTL secured on the BTL themselves. All you have done is used a different security (your residential house) for the underlying rental business purpose (purchase of the BTL property)

so the rest is basic maths...

paying off mortgage A saves 135pm and paying off (46 -35) of mortgage B saves ? per month
deduct the amounts saved above from the 46K @3.49% per month you will be paying on the new loan and if the difference is an overall saving then its worth doing

simples!

vanbel

Great advice. Thanks everyone.

So just to be abslutely clear 00ec25 and antrobus.

I will use the £48k to clear my £35k mortgage on buy to let property A. I will pay also pay £13k off buy to let property B. As a result I wont be eligible to claim tax relief on the approx £175 interest I was paying on them a month.

However, I will be eligable to claim the same tax relief on the £139 per month interest I will be paying on the new £48k repayment loan on my main residence as it has been used to clear the BTLs - even though not secured on them with the bank. Thanks. Tom

00ec25

your choice of wording does not convince me you haver really understood it but you have the right end result!

in renting you are NOT claiming tax "relief", you are deducting the costs the business incurred so as to calculate the net profit of the business. Tax relief is a specific term meaning you get back the tax you paid on the underlying amount , eg tax relief @ 20% on £60 gives you £12 repayment

the mortgage interest is an elegible cost not a "tax relief"

vanbel wrote: »

. As a result I wont be eligible to claim tax relief on the approx £175 interest I was paying on them a month.

However, I will be eligable to claim the same tax relief on the £139 per month interest I will be paying on the new £48k repayment loan on my main residence as it has been used to clear the BTLs - even though not secured on them with the bank. Thanks. Tom

what do you mean by same???

you are not paying out £175 per month becuase those loans are paid off and that payment is no longer a cost of your rental busienss becuase it does not exist

instead you are paying out £139 per month on a differnent laon and you deduct 139 from your rental income to get your monthly net profit, you can't deduct £175 ("the same") as that is not the correct figure