Pay off mortgage early or buy another house?

dazbear

Just need a bit of advice.....

I am currently over paying on my mortgage to the point it will be paid off in about 7 years - some 13 years early

Should I be doing this, or accruing this money to buy a 2nd property??

I am getting mixed advice - some say yes as this 2nd property will EARN me money, while others are saying pay off my existing mortgage first then take out another to buy more properties (as this is then tax deductible)

What are people's thoughts?

Thanks

D

kingstreet

Totally up to you what you feel your priorities should be but this;-

others are saying pay off my existing mortgage first then take out another to buy more properties (as this is then tax deductible)

isn't accurate. However you borrow to fund a buy to let property, whether you raise the money on your own home, or on the let property itself, or both, the mortgage interest can be offset against the rental income for tax purposes upto the full cost of the property.

ie If you remortgage your own home for an extra £50k and raise £50k on the let to raise the full price of £100k, you get to offset the interest on the whole £100k you borrowed, however you chose to raise it.

You simply need to demonstrate to HMRC that's how you bought the asset to use for your business, if they ask.

holly_hobby

Yes, you may remortgage your residential property to fund the purchase of a buy to let.

If you fully redeem your residential borrowings before seeking the equity release, you will be looking at an unencumbered remortgage (if moving to an alternative lender), and you won't qualify for free legals .... so my suggestion is don't repay it right down to zero BEFORE your move. Of course if you intend to stay with the current lender (having retained a small balance), it would be classed as a further advance - remember in all cases that your income shall have to be sufficinet to service the reqd loan, and you must meet the normal status checks.

Raising capital on a residential property to invest into a BTL, is classed as capital injection, and there must be a clear audit trail between the 2 transactions. If so, you are duly permitted to offset the mortgage interest on your residential remortgage against rental income on the commerical unit, for tax purposes.

NB - Obv if you raise say 60K on your own home, and only use 40k of it to pch the BTL, then only interest on the 40K used would be a permitted deduction).

FYI - You may also in the future, remortgage the BTL (albeit an unencumbered remortgage which may narrow providers).

If so you may also offset mge interest on the BTL mortgage against rental income, the only thing to be aware of here is that you can only offset mge interest on the mortgage (subject to lenders max LTV), on a sum equal to or less than 100% of the purchase price, or its value when it became let (in the case of peeps who move out of their home and subsequently let it).

You MAY raise in excess of the orig pch price, if your property has obviously risen in value, and again subject to lenders max LTVs, with the main issue being that the interest on anything in excess of the orig pch price, is NOT tax deductable, so you would just have to absorb it.

Please remember that investing into property is not the best place, if you feel you may want to release your investment capital speedily, as property can be a pretty ill-liquid asset in times of stagnant markets, and of course you are also exposing your capital to a possible loss when the market is depressed.

As a landlord, you obv will have various tenant obligations, will also need to submit an annual self assessment in respect of rental income, and will be exposed to CGT on any gain on disposal, if the property remains as anythng other than your primary residence at the point of sale.

Hope this helps get the ball rolling ..

Holly

Wh05apk

holly_hobby wrote: »

Yes, you may remortgage your residential property to fund the purchase of a buy to let.

If you fully redeem your residential borrowings before seeking the equity release, you will be looking at an unencumbered remortgage (if moving to an alternative lender), and you won't qualify for free legals .... so my suggestion is don't repay it right down to zero BEFORE your move. Of course if you intend to stay with the current lender (having retained a small balance), it would be classed as a further advance - remember in all cases that your income shall have to be sufficinet to service the reqd loan, and you must meet the normal status checks.

I do these regularly, and have never had a problem with free legals?

Raising capital on a residential property to invest into a BTL, is classed as capital injection, and there must be a clear audit trail between the 2 transactions. Again not necessary, provided you can show the value of the property at the time of rental is the same or greater than the mortgage on which you are claiming interest relief you should have no problem.

If so, you are duly permitted to offset the mortgage interest on your residential remortgage against rental income on the commerical unit, for tax purposes.

NB - Obv if you raise say 60K on your own home, and only use 40k of it to pch the BTL, then only interest on the 40K used would be a permitted deduction).

Please remember that investing into property is not the best place, if you feel you may want to release your investment capital speedily, as property can be a pretty ill-liquid asset in times of stagnant markets, and of course you are also exposing your capital to a possible loss when the market is depressed.

As a landlord, you obv will have various tenant obligations, will also need to submit an annual self assessment in respect of rental income, and will be exposed to CGT on any gain on disposal, if the property remains as anythng other than your primary residence at the point of sale.

Hope this helps get the ball rolling ..

Holly

See comments above.

holly_hobby

So your clients qualify for fee free remortgage packages, when remortgaging an unencumbered (mortgage free) property ? Really ??

Mge interest on a residential mge, where the equity (interest subject) has been released to invest into a BTL property is a permitted deduction under HMRC regs, and there should be a clear audit trail for HMRC inspection if reqd. It is permitted as it is classed as capital injection into the business in this case he is buying an investment/semi-commercial property.

Again not necessary, provided you can show the value of the property at the time of rental is the same or greater than the mortgage on which you are claiming interest relief you should have no problem.

What ??

If the value of the property being let, is equal or greater than any residential mortgage held by the indvidual under which they are claiming MIR, its ok and perfectly acceptable !

That would mean, if what you claim is correct, that even if the resi mge has nothing to do with the BTL, you assert it can still be offset against BTL rental income for tax purposes, as the sums sort of work !.

That is what you're saying isn't it ??

Good grief ....

If so. that is PRECISELY why HMRC advise that an audit trail between and linking the 2 events be available for inspection. As the mge on the resi property may have nothing to do and no connection with the pch of tihe BTL - if this is the case, to claim anything other by using the above suggested scenerio would be improper.

I wouldn't want anyone not experienced to be caught out by not retaining and being able to demonstrate a tie between the 2.

Holly

kingstreet

I thought lenders weren't too keen on doing free legals on a remortgage on an unencumbered property too. Saying which, I haven't had one to do for ages, so I've no recent knowledge...

Wh05apk

kingstreet wrote: »

I thought lenders weren't too keen on doing free legals on a remortgage on an unencumbered property too. Saying which, I haven't had one to do for ages, so I've no recent knowledge...

I can only talk from experience, and have never had a problem.

With regards "audit trails" provided you can show the value of the property At the start of the rental there should be no issue.

Holly we have "argued" this many times, so rather than carry on, will let it go, people can make their own minds up.

dazbear

:OS

Thanks for everyone's response. I thought I was pretty money savvy, but I didn't understand much of that - he he

Sorry for being dense.

I think people are saying it would be better to get mortgage free first then take out a new mortgage for a buy-to-let....is that the jist???

Basically I am self employed and am currently not paying into a pension - this was my alternative plan.

If I save my over payments now I could buy a property to rent out cash within 5 years.....is this not a better option?

holly_hobby

Yes Kings ... never heard of it ... the main issue re free legals and this has been since they were first introduced, is checking title and charge suriety, on an unencumbered property. Free legals on a remortgage, have only ever been in relation to the basics i.e a switch of mortgagee and transfer of charge registration. Happy that W has apparently now found alternatives to this, which will save those normally affected quite a few pennies, perhaps he will share his new sources with you so all can benefit ?

Whilst, Wh05. yes true, I've disagreed with you several times on several subjects, but this is your first venture into tax with me.

Lets top and tail this ...

To be clear there must be a clear audit trail between the 2 transactions for HMRC review (upon request), end of .... and barmy to suggest otherwise .... especially the example you gave in your first earlier post ....

Indeed if the individual can't link the 2 transactions for the purposes of a permitted deduction under HMRC regs, OR HMRC are not happy with the clarity/quality of evidence provided if/when requested, then they can and do refuse the permissions for a resi offset. Thats why its important to get it right at inception, and it really shouldn't be too hard at all to retain docs supporting the claim for any future HMRC inspection, indeed the remortgage & pch docs themselves will perform this task.

In closing, its not for peeps to "make up their own minds", esp on tax related issues, they need to validate all comments given, as their inaccuracy will only affect those who act upon it.

Hope this helps

Holly

kingstreet

dazbear wrote: »

I think people are saying it would be better to get mortgage free first then take out a new mortgage for a buy-to-let....is that the jist???

Possibly. I don't think it's true and it certainly doesn't have any impact on the tax relief you'll get when renting out a property.

Basically I am self employed and am currently not paying into a pension - this was my alternative plan.

And it's a more than reasonable plan, provided the figures stack up and you want the hassle and responsibilities of being a landlord.

If I save my over payments now I could buy a property to rent out cash within 5 years.....is this not a better option?

You could, yes. Better than what? Overpaying your mortgage?

If you're going to borrow money on your own home to finance the BTL in five years, there's a strong argument for the overpayment route.

However, if you think you can raise a 25% cash deposit in that time, you may feel it's better to save instead. Then you only need to mortgage the let, rather than your own home. If you save enough to pay cash, there's no mortgage on which to claim the interest offset against the rental income. That is something to be considered carefully.

Money-wise, you also need to compare the rate you're paying for your mortgage against the rate you get on your savings. If you are paying 6% and only getting a net 1%, you're losing 5% a year going the savings route.

A lot for you to consider and most of it hard thinking and decision making on your part.

dazbear

Thanks - it is a big decision.

I am paying 4.79% on my mortgage - cant escape from NRAM until I get more years accounts under my belt! grrr

I wouldn't consider re-mortgaging my main home, just buying another when I have paid of my current mortgage and have enough for a deposit on a buy to let.

I have just worked out that if I carried out paying the same into a savings account AFTER paying off my mortgage I would then have the deposit for buy to let in 1 year.....seems like a good idea!