Advice on paying off mortgage

five_o

Hi everyone

This is my first post. Have browsed this forum for a while now and finally have a reason to post a first question. I need some advice if you don't mind.

Some details first:

1) I contract in the IT industry which means that my work is never guaranteed. However, I have only ever been out of work for 3 months max.

2) I have an emergency/rainy day fund set aside to last me 6 months if I am out of work. I'm not married and have no dependents.

3) I have maxed out my ISA for the last few years and have also made this year's (2013/2014) full contribution.

4) I own a few stocks and shares which I have drip fed over several years.

5) I have an outstanding mortgage of £108,000 on my residential property, the value of the property is £230,000. SVR is currently fixed at 3.49% and is ending in July. I have no other debts.

6) I own "outright" a buy to let property with a value of about £175,000 which is rented out and brings in about £700 per month. This is a property I inherited from my parents a few years after I had bought my residential property.

My uncle is getting on a bit and has decided to try and reduce his inheritance tax liability by gfiting me some money. He has offered to gift me enough cash to pay off my residential mortgage.

I'm in a dilemma as to what to do. Do I pay off the mortgage and save on mortgage payments each month, or do I try to buy another property.

The problem is that I was thinking of moving to a house and letting out my current property in a couple of years. However, if I pay off my mortgage, then I would have to start saving from scratch for a deposit. In addition, I don't really want to end up in a position where I have 2 BTL properties fully paid off and a mortgage on my residential property as from what I believe I would not be able to benefit from tax deductible mortgage interest payments.

TrickyDicky101

Should you decide to buy a further property after you have paid off your current residential mortgage, you could do so by raising a Buy To Let mortgage on either of your existing properties and use this as a deposit for your new residential property. This would enable you to benefit from tax relief on the interest costs.

I believe there are certain restrictions in tax law that may limit what relief you can claim going this route.

Also, dependent on the mortgage deal you could get on a new residential place, the cheaper residential interest costs may outweigh the after tax costs of a Buy To Let.

jamesd

How about asking him if he is instead willing to help you accumulate a few more BTL properties to provide you a future retirement income?

For the place you are in now, you'll benefit from personal private residence relief on capital gains. Because you lived in it you'll also benefit from letting relief if you later let it out.

You could consider moving into the place that came from your parents for a while. Then it too would get some PPR relief (time there plus three years) and then later letting relief if you sell. When you own more than one place be sure to tell HMRC which you want to get the PPR on as soon as you move in. It's possible to try to establish this later but doing it with a letter at the time is much neater and less hassle.

Repeat this move into a place approach and you can quite rapidly accumulate quite a nice selection of properties that will provide you with nice ongoing income.

The place you live in can be mortgaged with a residential mortgage and those are cheaper than BTL mortgages.

Discuss what you want to do with your uncle and see what he thinks. He's trying to help you be secure financially with the him you live in but you can make yourself secure in both home and income if you use a different approach.

You are wrong about the tax treatment when a loan for BTL purchase is secured on residential property that you live in. Provided the purpose is to buy or refinance a BTL the interest is deductible from rent. It's the purpose that matters, not the property used as security. Discuss with an accountant to be sure that you get all of the appropriate requirements fulfilled, those are just a lack of ambiguity about the purpose. The accountant will be useful in making sure that you also get all of the other deductions that you're entitled to.

In this case one way to make purpose more clear might be to switch to a residential mortgage that allows overpayment and then drawdown. You could overpay from your uncle then draw down again when you purchase a BTL property. This drawing down would then have a clear purpose in the BTL purchase.

If your parents' property is more valuable the ability to get a larger mortgage on it may be very useful in helping you to increase the number of BTL properties you purchase.

With BTL do note that a fair bit of the potential money is made by purchasing at a good low price. don't be tempted by pretty places that are expensive. One that needs work is a nice way to get a quick increase in value. You might then be able to secure a BTL mortgage on it for 100% of your outlay, while still at 60% or 75% LTV after the refurb. Also remember that BTL is a business. Different bank accounts for each property will help your accounting. You can do things like adding capital (to fund a purchase) or withdrawing capital (mortgaging a property and using the cash for something) and an accountant can help you to get this done properly.

Your uncle might also have useful experience or interest in this area that could be helpful.

five_o

Thanks for that chaps!!

Just to clarify what the 2 of you have said:

1) If I were to pay off my residential mortgage in full now, I could then remortgage it at a later date on a BTL basis and use the funds to buy a house to move to.

2) I would still get BTL mortgage interest tax relief even though the sole purpose of the remortgage was to buy the house to live in.

@jamesd, the advice about building a portfolio is sound but as my uncle is also making gifts to other family members I will have to make do with what he is giving me.

In this case I think I will just pay off the mortgage come July and then take some time to think about my next step and my remortgaging options.

jamesd

Your point 1 is puzzling. Why pay off the mortgage then take out a BTL mortgage instead? Why not just keep the residential mortgage and port it to the new property?

When you move, you would be transferring the existing place into your BTL business at its market value. You could then increase the residential mortgage secured on your new home and use that to withdraw capital from the letting business. The interest on amount of the mortgage used for releasing the capital is an allowable deduction from rental income, for borrowing up to the value of the property at the time it was transferred to the BTL business.

You might find the examples in BIM4570 of interest if you're not accustomed to thinking of BTL as a business with capital being added to and withdrawn from the business.

I wasn't suggesting asking him for more money, just being sure that he is comfortable with your plans and perhaps getting any advice he has to offer. Maybe he'd like to help out. (shrug) Either way, it's better to be fully up front with him about your intentions and possible uses in case he's hurt if you do then move.

Your point 2 is entirely wrong about the sole point. It's not to buy the house to live in, it's to release capital from the BTL business. If you hadn't transferred the property to the BTL business you wouldn't need the loan and you're fully entitled to take out a residential mortgage secured on your new home to release capital from the letting business. If the sole point really was to get capital for the new place to live in, the interest would not be deductible whether the mortgage type used was BTL or residential.

It is not the fact of a loan being residential or BTL that decides whether the interest is deductible. It's also not which property or properties its secured on. It's the purpose. Releasing capital is one of the acceptable purposes.

If you have any doubts about any of the points in that last paragraph you should take professional advice from an accountant with experience of BTL property before acting. And do it anyway, since part of the job of the accountant is to ensure that things are correctly arranged to meet HMRC's requirements.