residential 2.99% mort or BTL 4.49% which to pay off first?

fivesmaster

Hi,

Tricky to work out where to put any spare cash each month...situation is as follows:

-residential mortgage 2.99% 5 yr fix, £75,000 repayment, maximum overpayments each year is 10% of mortgage
-BTL mortgage 5 yr fix 4.49%, £100,000 interest only, maximum overpayments is 10% each year, also can use offset facility in savings account.


So, my question is....if we have £1000 each month to use to overpay or offset, what does it make more sense to do? Keep it all in offset, or pay 10% off residential each month? or pay off BTL each month?

Any thoughts from others in a smilar situation do please give advice if possible....

-both mortgages are 25 yrs.
thanks

gazter

fivesmaster wrote: »

Hi,

Tricky to work out where to put any spare cash each month...situation is as follows:

-residential mortgage 2.99% 5 yr fix, £75,000 repayment, maximum overpayments each year is 10% of mortgage
-BTL mortgage 5 yr fix 4.49%, £100,000 interest only, maximum overpayments is 10% each year, also can use offset facility in savings account.


So, my question is....if we have £1000 each month to use to overpay or offset, what does it make more sense to do? Keep it all in offset, or pay 10% off residential each month? or pay off BTL each month?

Any thoughts from others in a smilar situation do please give advice if possible....

-both mortgages are 25 yrs.
thanks

Surely with the interest only, you are not actually paying anything, to overpay on? Sorry if that sounds a silly statement..

bigadaj

Is this something that you are Definite about, ie do you have savings, max isas, good pension contributions and a decent cash e regency fund, I'd fo those before touching the mortgage.

Generally over pay the resi mortgage if above is covered, btl logic is normally to retain max ltv and keep interest only as this is most tax efficient. Only other factor might be if there are particular circumstances, ie is there a need for money at a specific time in the future, are you near a break point in ltv terms on mortgages that could get Better rates etc

fivesmaster

Gazter, yes you are right of course, int only, so currently only interest being paid...
Bigadaj; yes fair point on maxing out isa's first and other investments....we have always felt though that we just want to overpay as it makes a real difference straight away, chipping away at this rather than sticking it in ISA's....thanks for your advice
However.....if it is a choice of offset on BTL, or overpaying residential....which is best????
cheers

TrickyDicky101

What's your highest marginal rate of tax?

holly_hobby

Just answering which loan to reduce, ignoring offset arrangements and emergency fund retention, whilst assuming that no part of your resi mge has funded the business ( so is non-deductable) .... I would reduce the resi borrowings, as it holds no tax breaks, unlike that relating to the interest element of your BTL borrowings (notwithstanding equity release limits & permitted deduction).

Holding the funds in ISAs or other deposit vehicles, your NET return would need to exceed your mge payrate - so you'll need to crunch sums, and when/if they meet parity, whack it (and the accrued interest) off the resi mge instead (subject to any ERC of course) - but of course you must have the discipine not to dip in the meantime for this to work !!

Some peeps may be of the opinion that you should reduce the BTL borrowings, as these borrowings have the highest payrate, however what must be considered is the lower the mge, the lower the deductable interest, and the higher net taxable yield, which would be a rather pointless exercise if your income exceeds your annual allowance (ie you're not a non taxpayer), and utter madness if you are a higher rate tax payer.

So, couple of q's ...

Are your married/in a civil partnership ?

Is the property in joint names ?


Hope this helps

Holly x

fivesmaster

Thanks Holly Hobby, some good asvice there, and you are right to ask those Q.

-am married; and have just put BTL into wife's name (99%) as she is not working. Therefore, because there is no tax payable, surely we need to consider paying off BTL as well?

holly_hobby

Right ... thats better.

Good boy on effecting a TIC set up and HMRC Form 17 (which you must submit to HMRC reflecting the split, if you haven't already done so).

So yes that changes things somewhat (good job I asked !) - as long as the net taxable yield remains below her annual PA, then yes you may want to favour paying down the BTL (as long as no ERCs), as this will maximise your profit - which is the name of the game (if you later elect to withdraw the capital, it will still be tax deductable as capital withdrawal, and subjec to status of course).

When/if her tax status changes, then revert to paying down the resi as discussed above, you could of course even remortgage BTL to reduce or completely repay the resi mge - the thing to be mindful of is that the permitted deduction will be capped at a mge sum equal to the value (if prev a private residence) or pch price (if bought as a BTL from outset) - so take account of this in your calcs.

Hope this helps

Holly

ValHaller

holly_hobby wrote: »

When/if her tax status changes, then revert to paying down the resi as discussed above,

2.99% resi, 4.49% btl

For a basic rate payer, the tax relief makes the equivalent rate 3.59% on the btl

Why pay down the residential to chase btl tax relief if leaves you still paying an extra 0.6%?

This discussion cannot be usefully had without taking into account the highest marginal tax rate as per post 5

holly_hobby

ValHaller wrote: »

Why pay down the residential to chase btl tax relief if leaves you still paying an extra 0.6%?

Because its the BTL mge interest that is fully tax deductable at its highest rate (within loan/ltv restrictions I've already discussed), and as stated earlier, the higher the net yield, the higher the exposure for taxable profit at the individuals highest rate.

So in the case of a tax payer, esp a higher rate individual, why reduce down a tax efficient loan (notwithstanding any desire to improve the free equity), and leave a non-tax efficient/beneficial loan at full strength, even if at a lower payrate - this wouldn't make financial sense, well it doesn't to me.

This is why BTLs (via equity release) are often used to partly or wholly fund a resi purchase of the indvidial, with the equity released classed by HMRC as capital withdrawal, and the associated interest is a further fully permitted tax deduction of gross rental income (essentially the business is purchasing the property for the individual), albeit the sum available for offset is capped at a mge equal to the value of the BTL upon its first entry into the business, as discussed above.

Of course, I can only give my opinion on how I would advise or indeed manage this if it were my own situ - eveyone will have their own view on how they would administer this - I would always suggest that the OP also seeks comment and guidance from their own tax practitioner

Hope this helps

Holly

ValHaller

holly_hobby wrote: »

So in the case of a tax payer, esp a higher rate individual, why reduce down a tax efficient loan (notwithstanding any desire to improve the free equity), and leave a non-tax efficient/beneficial loan at full strength, even if at a lower payrate - this wouldn't make financial sense, well it doesn't to me.

Well, exactly. For a higher rate taxpayer.

Which is what TrickyDicky was asking. And I was pointing out.

I do understand how it works. To the extent that I can see that sometimes chasing tax efficiency is foolish.

If OP is on basic rate, it makes no sense to maximise the tax efficient loan if it costs more than the other loan without the tax relief.