Tax relief on mortgage

Katrock

Can anyone add to a conversation I had recently where I was advised not to pay my mortgage off in full for a couple of reasons: 1) its good to keep a line of credit open and this will also help keep my credit rating up but also 2) we get tax relief on outstanding mortgage balance up to a certain amount and so if I drop below that amount, my tax payments would go up. The suggested amount was we get tax relief on the first £30,000 of a mortgage. I've had mine for so long now I can bearly remember!;)

Any ideas?

Thanks! Kat

WestonDave

Mortgage tax relief is long dead so that's not a factor. There used also to be an argument that if you kept £1 on the mortgage the lender would have to keep the deeds for you rather than you paying for secure storage. However if the ownership is registered then this isn't relevant either.

Tigsteroonie

The MIRAS scheme (tax relief for interest payments) was abolished in 2000 (as ^^ said).

Katrock

Thanks Both. I'd better crack on with some overpayments then!

Gary123456790

The only benefit i've heard of keeping it is to pay it down to a nominal sum, for example £10, and hoping the lender wants to clear this off its books to save the administration. They then might waive the mortgage exit administration fee, which is probably around £250.

Gary.

jamesd

Katrock wrote: »

Thanks Both. I'd better crack on with some overpayments then!

MIRAS is gone but you can still get tax relief on mortgage equity payments by using a pension tax free lump sum to do the paying off. This money is available from age 55 onwards. What are your retirement plans like? How does the end of your mortgage compare to when you reach 55?

Thrugelmir

Gary123456790 wrote: »

The only benefit i've heard of keeping it is to pay it down to a nominal sum, for example £10, and hoping the lender wants to clear this off its books to save the administration. They then might waive the mortgage exit administration fee, which is probably around £250.

Gary.

The mortgage will come to a contractual end at the end of the term. So the lender is within their rights to seek recovery of the balance along with the exit fee. Playing games simply isn't worth the trouble nor the resulting damage to ones credit profile.

fiesta04

jamesd wrote: »

MIRAS is gone but you can still get tax relief on mortgage equity payments by using a pension tax free lump sum to do the paying off. This money is available from age 55 onwards. What are your retirement plans like? How does the end of your mortgage compare to when you reach 55?

Hi jamesd, Have you a link to this?


F4

jamesd

There's no particular link to it, it's just knowing how things work:

1. Pension tax relief. You get it when you pay into a pension at whatever the applicable income tax rate is, from 20% to 45% depending on income.
2. A pension tax free lump sum, which is available from personal pensions from age 55. 25% of the pension pot value can be taken and for a basic rate tax payer that ends up being about the same as the tax relief received on the way in.

Say you pay basic rate income tax and pay £800 into a pension. The pension provider will add 25% to that to give you the 20% basic rate income tax, leaving you with £1,000 in the pension. Ignoring growth, at 55 you can take out £250 as a tax free lump sum, leaving £750 in the pension to provide retirement income sometime.

That example also shows you one thing to watch out for: you paid £800 in but could only take out £250. Which means that this works well for those who have a need for both a pension and a mortgage to clear, because £550 of the £800 stays in the pension pot.

At higher rate the numbers are £800 in, £1,000 into the pension, £200 refunded by HMRC, for a net £600 paid in. Then the lump sum of the same £250 means that the £750 left in the pension pot is only £350.

If salary sacrifice used or if there's employer matching it's possible to get out in a lump sum an amount very close to the amount you paid in yourself. Say a 100% employer match, you'd pay in £800 that's grossed up to £1,000 and the employer matches the £1,000. Now you have £2,000 in the pension pot. Take 25% of that as a lump sum and it's £500 so only £300 of your own money is left in the pot. At higher rate that drops to just £100 of your own money still in the £1,500 pension pot.

So think of it as a really efficient method for people who want both to clear a mortgage and to provide a pension for themselves. Which hopefully means most of us.

CLAPTON

jamesd wrote: »

There's no particular link to it, it's just knowing how things work:

1. Pension tax relief. You get it when you pay into a pension at whatever the applicable income tax rate is, from 20% to 45% depending on income.
2. A pension tax free lump sum, which is available from personal pensions from age 55. 25% of the pension pot value can be taken and for a basic rate tax payer that ends up being about the same as the tax relief received on the way in.

Say you pay basic rate income tax and pay £800 into a pension. The pension provider will add 25% to that to give you the 20% basic rate income tax, leaving you with £1,000 in the pension. Ignoring growth, at 55 you can take out £250 as a tax free lump sum, leaving £750 in the pension to provide retirement income sometime.

That example also shows you one thing to watch out for: you paid £800 in but could only take out £250. Which means that this works well for those who have a need for both a pension and a mortgage to clear, because £550 of the £800 stays in the pension pot.

At higher rate the numbers are £800 in, £1,000 into the pension, £200 refunded by HMRC, for a net £600 paid in. Then the lump sum of the same £250 means that the £750 left in the pension pot is only £350.

If salary sacrifice used or if there's employer matching it's possible to get out in a lump sum an amount very close to the amount you paid in yourself. Say a 100% employer match, you'd pay in £800 that's grossed up to £1,000 and the employer matches the £1,000. Now you have £2,000 in the pension pot. Take 25% of that as a lump sum and it's £500 so only £300 of your own money is left in the pot. At higher rate that drops to just £100 of your own money still in the £1,500 pension pot.

So think of it as a really efficient method for people who want both to clear a mortgage and to provide a pension for themselves. Which hopefully means most of us.

the tax relief is because it is paid into a pension

it has nothing to do with paying the mortgage

if you did this and bought a car / took a holiday etc you could say you got tax relief on the car but most people won't say that

jamesd

Whatever is being paid for the redirection of at least some capital payments into the pension to get the tax relief is a key part of this and when those payments would have been used to overpay on a mortgage there is a mortgage link. That's why we have the terms "pension mortgage", complete with some places offering pension mortgage calculators, and "ISA mortgage".

You're right that the same approach can be used with other purchases if desired, though it's likely to be impractical to do it with at least annual holidays. Might be worthwhile for a round the world cruise, though.