Which Mortgage to Overpay?

Brighty

Hi guys

Touched on this in a previous thread, but think this could use it’s own.

Need some help to decide which of my 2 mortgages to overpay,I’ve tried to crunch the numbers a couple of times, but seem to end up with a different answer each time, plus there’s other factors that you can’t calculate, such as risk of BofE rate rises.

My brother and I have inherited 2 rental properties, which along with another we already own, give us an income after tax etc of £600 a month each. The plan is to use most of this to overpay our mortgages in the hope of being mortgage free asap. I’ve just used all my savings/inheritance cash to paydown my residential mortgage at remortgage time, to get into a lower LTV bracket to get better rates, so need to build that back up first, but hope to start overpaying next year.

Mortgage 1: On a rental property owned 50/50 with my brother.£67k outstanding with 12.5 yrs left to run, currently on Nationwide BMR of BofE+2%+ consent to let fee of 1.5% = 4%. Property worth £230k, so under 30%LTV. We could overpay this by £1k per month, which could clear this in just 4 years.

Mortgage 2: Our separate residential mortgages, I’ll just use my figures to keep things simpler. £94k outstanding with 25 yrs left to run, having just remortgaged to a Nationwide 4yr fix at 2.99%. Property worth £136k, so under 70%LTV. We could overpay these by £500 each per month, which could clear them in 10 years

So, which is the best one to overpay? Points I have been considering are as follows.

Rental has the higher rate, so overpaying this will save us interest

But, overpaying the rental will increase our taxable profits= bigger tax bill (standard rate tax payers)

Rental is exposed to BofE rises and if that forced us to remortgage in the future, we could be hit with high fees, so it could be best to get rid of this one quickest, to remove that risk and only be left with much lower fee residential mortgages

Overpaying the residential would reduce our LTV, getting us into much better rates when our 4 year fix ends.

An additional point, we still have the facility on the rental mortgage to get back our overpayment pot at any time, so if we overpayed that and it turned out to be the wrong choice, or we needed the money for someother reason, we could get it back. We don’t have that facility on our residential.

Thanks all

Brighty

Imma_Number

I'd say overpay on Mortgage 1 for the following reasons:
1) It's higher interest rate
2) Your tax bill will increase over the 12.5yrs anyway as there is only relief on the the interest portion (which if my maths is correct the interest portion of this month's ~£570 is ~£220). So instead of paying the bank £570, and saving ~£44 from HMRC you are saving ~£526 between you.
3) Ability to drawdown the overpayments: It reads like you've put every last penny into the remortgage and don't have an emergency fund. Emergency funds are important.
4) From what I've seen the interest rates don't drop much when LTV is below 70% so not much saving from overpaying on Mortgage 2 to get a lower LTV
5) In 4 years time Mort 2 (without overpayments) would be ~83000 so with your half of the Mort 1 payment you are no-longer paying you could overpay ~750pcm and Mort 2 should be free 7-8 years later.
6) It's smaller and there'll be a psychological boost from paying it off.

Remember things can and will change over the next 10 years. So though it's nice to have a plan, try to be flexible.

dimbo61

With property 1 you are running a business and should see an accountant to make best use of Tax relief !
Paying off you home should be number one priorty!
Get yourself an accountant ( You can claim the cost of using an accountant!!!)