One off mortgage overpayment - to include interest?

Cameron1983

Hi, I'm hoping for a bit of advice as I'm a little confused:

I have a single flat that I let out. All done by the book, and tax declared etc.

However - I now want to make a single overpayment each year in March in order that the mortgage interest repaid each year is greater than the rental income, so that effectively the rental is run at a loss (I'm currently fortunate enough to have some spare cash) and no tax will be liable.

Is this possible? Or can it only be done by increasing the monthly payments? (I could do that from April, but too late for 12/13 tax year).

Thanks for any advice.

PS. the rate is only 2.5%, hence why I'm not looking to make a simple repayment on the capital.

dimbo61

This is very confusing !!!
You have a rental property which you rent out? now the interest you pay on the mortgage can be offset against the tax you pay on the profit from renting.
So why are you paying down the mortgage ?
Your rate is 2.5% would you not be better off saving money into cash ISA,s tax free?

Annisele

I'm afraid I'm confused too.

How is making an overpayment going to increase the mortgage interest? If you make an overpayment, you'll owe the mortgage lender less money, and so you'll pay less interest.

Cameron1983

Sorry, I'll try to clarify:

Total annual taxable income from the property is approx £4k. I'm lucky enough to be a higher rate tax payer, so tax would be £1600.

On the repayment mortgage at 2.5% (residential with permission to let), the proportion of each monthly payment is 33% interest and 66% capital.

My thinking was that if I made an annual overpayment of £12k, then the extra £4k interest repaid would cancel out the rental income, and also reduce the term or total amount on the mortgate.

Or am I completely confused?:idea:

Morgage_Confused

But the overpayment would be 100% capital and no interest ????

Annisele

Sorry - you're completely confused.

It might well be that at the moment the split of your monthly payments is 33% interest and 66% capital - but that's a split that will change over time.

You're already paying all of the interest due. So if you make any overpayments, those overpayments will go entirely towards capital.

Cameron1983

So if I increase the monthly payments, and therefore reduce the term, then will the annual interest payments increase in order to offset the taxable rental income?

getmore4less

NO the interest is based on the amount owing and the interest rate term has nothing to do with it.

how much is outstanding on the mortgage multiply by 0.025 thats the max you can claim in a year.

It will be lower than this as you have a rpayment mortgage.

bigadaj

This is why most landlords have interest only mortgages. To minimise tax you would borrow as much as you can, then interest payments would be deducted fRom your rental income and tax would only be payable on the net difference at your marginal rate.

Many people in your situation might consider remortgaging onto an interest only and extracting capital, which they could then use to purchase another property and let that out. This process is obviously risky in terms of concentration of risk in a single illiquid asset.

To reduce tax liability then people may invest into isas, tax free on the way out only, or ina pension, tax free in the way in only.

Barbeduk

You really need to speak to your accountant about minimising your tax liability.