Should I pay off my mortgage discussion

jamesd

You don't get the tax break for having a BTL mortgage. You get the tax break for interest on borrowing to fund the BTL business, however you borrow. So you can increase your own home's mortgage and lend that money to the BTL business and the interest on it will be deductible from the rental income. Maximum is the interest on borrowing up to the purchase price of the BTL property.

Worth considering tracker deals on your own place since rates look more likely to drop than increase, though 5.63 isn't too bad for a two year fix. That rate would save 310 per year or 26pcm for each hundred thousand of BTL mortgage you cleared. But what is the early repayment penalty for the BTL mortgage? Knowing how much it is and the valuation/LTV on your own place should help a bit in working out if it's worth doing. The penalty may be more than the potential saving - usually they are set up that way.

Going to 100% would probably increase the interest rate on your residential mortgage, maybe eliminating the interest rate gain potential. You could consider going to say 90% LTV on your own place and paying off most of the BTL mortgage, but not all of it. Maybe there are allowed amounts of capital repayment without penalty?

Many stock markets are back where they were two or three years ago. Mostly means that now and for perhaps the next year or two is likely to be a good time for regular investing while prices are lower for a while.

Have you ever used the BTL property as your address for communication with HMRC or been registered to vote there? Either helps with a primary residence argument. When you owned only that one were you also renting somewhere else? First read Where do You Live? CGT Main Residence Relief on More Than One Home and How to use the PPR Exemption to legitimately avoid property capital gains tax and see if those two articles answer your questions.

jamesd

I see Cumberland BS and Yorkshire BS offering two year fixes at 5.08 and 5.09% with 995 fee, cumberland with no HLC at up to 95% LTV. Using 5.09% the saving from using the owner-occupier mortgage would be 850 a year or 71 pcm per hundred thousand of BTL mortgage. But a 2% early repayment charge on the current BTL deal would eliminate the potential gain of two years of this.

Whattodo?_9

Hi, sorry if I'm being dense but do you mean that it's worth me considering taking out a larger mortgage on my current home and ploughing this money (and maybe my cash savings) into paying off the BTL mortgage. Then I could consider this money a loan for tax purposes and claim back the tax on any interest I might have to pay. Does that mean that I could offset the tax against any profit from the rental income or would I be able to offset from my personal tax? The early repayment penalty on the BTL at present is £4700.

By the way, thanks for taking the time to reply, it's certainly given me a lot to think about and is much appreciated.

jamesd

Whattodo?, yes, that's right, you can increase the mortgage on your own home and use that instead of a BTL mortgage on the BTL property and then the interest of that extra borrowing can be deducted from rental income, just as the BTL mortgage interest is today.

One optional way of doing this is to do a split interest only and repayment mortgage, with the interest only part being the purchase price of the BTL property. The purchase price because that is the maximum you can deduct interest for and it maximises the tax benefit by delaying the point at which rent exceeds costs for as long as possible. Then you pay off the repayment part first and maybe never pay off the interest only part until you sell the BTL place.

The 4700 early repayment charge suggests that this would only be profitable over two years if the BTL property mortgage is over 276,000, using the 5.09% mortgage rate. With a 5.63% rate it'd have to be over 760,000. So waiting for the ERC to end then increasing the mortgage on your own place seems likely to be best course.

What you can do today, even without remortgaging either property, is have your BTL business repay you the BTL deposit and any capital repayments that you made. You do this by lending the BTL business the money from your own home's mortgage. No money needs to move around, it's simply entries in the BTL business accounts, which would have said that you were funding it initially with the deposit and will now say that it is repaying that deposit. Then you can start deducting the interest you're paying on this amount from rent as well. Just means a bigger monthly BTL cost at the moment (but less on your own mortgage cost) but later as rents increase or you switch away from the BTL mortgage it'll delay the point at which you start paying tax on the rent. No money needs to actually move around to do this, just make sure that the total amount that the BTL is paying interest on is no more than the original purchase place of the BTL property.

dwigg

Hi all,

This is my first post - I registered specifically to see if I could get an answer, so please help if you can !!

I'm looking at paying a lump sum off my mortgage, but even with the calculators I can't work out if it's better to pay off some, or invest the money.

Here goes:
Repayment mortgage is £125k at 4.99% over 25 years.
Rate is fixed for 10 yrs and I'm 4 years into it.
I can repay 10k per year without penalty.

My sums say if I pay off 10k then the repayments reduce by £60 per month.

Alternatively my wife could invest this (doesn't pay tax) at approx 6% which gives £50 pm income.

So today, it looks better to pay off some mortgage.

1. Are my sums correct?
2. What about over time, eg compounding interest at 6% will give £53 pm in the 2nd yr, and £56 pm in the third year etc. How can I determine how long I need to compound this before I 'catch up' the amount saved by paying off the lump sum.

I didn't stay on at school so hope someone who understands this can shed some light pls!!

Thanks.

Dithering_Dad

I guess it depends on what you do with your ISA savings. If you keep them forever and never spend them, then eventually (25 yrs) you will have paid off your house plus have a nice lump sum in your ISAs.

If you spend the ISA money on a holiday, new kitchen, extension, new car, etc. then you will still have the mortgage and no ISA savings.

I'm in the pro-mortgage payment camp (you may have noticed ). If you compare Cash ISAs and Mortgage Interest rates, the difference in %age is so small you're talking pennies. If you invest in S&S ISAs and don't know what you're doing (and sometimes even if you do know what you're doing - re: Hedge Funds going bust due to US Sub-prime debacle) then you "could end up with less money in the investment than you put in".

In these times of Credit Crunches, talk of US/UK recession, turmoil in the financial markets, record reposessions, record bankruptcy levels, house market crashes, etc, etc. I don't think you can find a safer home for your money than using it to pay down your debt levels (i.e. Mortgage).

jamesd

Your sums are probably correct but you've made a 10,000 error in your analysis of the result.

The calculation shows greater saving from paying off a loan at 4.99% than from tax free interest paid at 6% and that's impossible. The higher rate has to be a greater value than the lower rate.

The reason it's wrong is that you have a repayment mortgage, so much of the 60 reduction in monthly payment is the reduced capital repayments.

And that means that you're comparing savings that leave you with 10,000 plus interest at the end with mortgage repayment that leaves you with the monthly repayment reduction but all of the 10,000 gone at the end.

Both the mortgage and the savings interest are compounding so it's not something that you need to consider when comparing the choices.

jamesd

To avoid worrying about how much capital you still owe on the mortgage I'll calculate for the full 25 year term.

125k at 4.99% is 519.79 a month interest only, 730.01 repayment.

115k at 4.99% is 478.21 a month interest only, 671.61 repayment.

Difference in interest only is 41.58, in repayment is 58.4. So 16.82 of the monthly payment reduction is the capital repayment part and the saved interest is 41.58, which is what you should be comparing to the savings option.

A future value calculator shows that 10,000 saved at 1.01% (difference between savings and mortgage rates) for 25 years gains 2871 in interest and that's how much better off you'd be saving instead of paying off some of the mortgage for the full 25 years. That's equivalent to repaying it about 4 months early without paying any more.

You might also want to look at the regular saver accounts discussion, since use of several regular savers mean that your wife could get a significantly higher savings interest rate than 6% by using many of them.

If you're willing to take some risk of a drop to get higher returns you might consider the Blackrock UK Absolute Alpha fund, perhaps for half of the money. As with the regular saver accounts you'll need to check and perhaps change each year.

dwigg

Thanks for that analysis, it's made things much clearer.
I already have some regular saver ac's for the wife, the best being a 2yr 8% Lloyds deal.

It would be interesting if the future calculator also factored in inflation, to give an idea of how much that 2871 would be worth at the end of the term in todays values.

It now makes sense how £10k @ 4.99% came out as a better saving than £10k & 6%.

The only thing going for paying it off now, it seems, is that I get an immediate saving of £60pm which may be useful in offsetting A.Darlings budget tax hikes that I'm expecting this week.

Anyway, thanks again - very helpful post.

jamesd

Today's value is about 1,370 if inflation is 3%, 850 if inflation is 5%, both using 25 years of inflation.

The gains are far larger as the interest rate difference increases. That fund did well over 10% over the last troubled year. The gain if 5% more than the mortgage interest rate was sustained would be 24,800 before inflation, 11,850 with 3% inflation, 7,300 with 5% inflation.

The gains from larger increases over the mortgage rate are higher than simply multiplying because their margin over inflation also increases.

Something you might consider is 3,000 in the Blackrock fund now, 125 a month into Invesco Perpetual Income fund (once of the best in the UK, but putting say 1,500 into it over a year because the markets are uncertain right now), 125 a month into a global fund like Artemis Global Growth (same reason) and the rest into regular savers. Use say Hargreaves Lansdown for the investment bit. You'd end up with a nice and fairly low risk mixture of fixed interest, UK equity income, global growth and cash that should do well over many years, with annual reviews to check that the investments still look good compared to others. Between them all you might get about 9% a year of growth on 10,000, leaving you with say 95,000 after 25 years. 45k in today's money with 3% inflation, 28k with 5% inflation.

No guarantees from the investment part, of course.