buyt to let - interest only?

Tonton

Hello
We have decent equity in our home and minimal pensions. We are thinking of using our savings towards a buy-to-let deposit for a flat in london. We'll borrow some more to top it up to a decent level. My question is around whether to go interest only or repayment on the buy to let mortgage.
Of course we will consider the rental available and what that will cover. But we have heard some people say that it is most tax efficient best to go for interest only. We will certain find it harder to do repayment at least for the first few years. We are hoping to keep this property for 20 years or so. Long term we'd like to to top up our retirement income.
I'd love to hear your thoughts.

anselld

There is little or no difference in the tax position.

You would be best to focus on getting the lowest overall cost of the finance. This might be by taking a further advance on your residential mortgage. Interest on the additional advance can still be tax deductible provided there is a clear link between taking the advance and purchasing the BTL.

Halle71

The tax recommendation will be because interest payments on BTL properties are tax deductible - they are a cost to the business of letting. Repayments above interest however are not, as they are contributing towards the capital investment. By repaying your mortgage you are increasing the amount of capital you own.

We looked into remortgaging our property to release equity for our BTL but soon realised that it was financially prudent to borrow as much as we could (subject to salary, mortgage/monthly rent ratio) for the BTL while enjoying our low residential mortgage.

We are relatively new to this (only completed on the BTL on Friday), so I'm sure others can add more.

anselld

Halle71 wrote: »

realised that it was financially prudent to borrow as much as we could (subject to salary, mortgage/monthly rent ratio) for the BTL while enjoying our low residential mortgage.

It is not financially prudent to borrow more than you need simply to reduce your tax bill, unless you can invest the additional capital raised at a higher net return than it cost you to borrow.

For every extra £1 of loan interest you only reduce your tax bill by 20p/40p depending on your tax status.

Conrad

Interest only every time as this means minimal outgoings in case you hit a void. You can always repay lump sums of capital now and then anyway on most mortgages or let the rental profits accrue for a further purchase.

Earls Court seems quite a good place to buy if it's capital growth you want.

McXtravert

Related to this, is it possible to remortgage to a BTL, pay interest only, any 'profits' are then used to repay the mortgage on the BTL AND take out a new mortgage on a family home?

Essentially, I'm looking to move from my 1-bed flat to a family home and keep the flat as a BTL. The flat only has a small mortgage remaining.