pay off mortgage using interest free loan?

lljdc

We are looking at increasing our mortgage repayment to try to repay early.

I have the option off getting a £5000 interest free loan from work which would be £104/month for 4 years.

I'm thinking get the loan, pay the 5k off the mortgage straight away and repay the loan interest free over the next four years....

Is that better than just increasing the mortgage payments by £104/month?

Thanks,

kingstreet

Yes. If the loan is interest free, you'll benefit from a reduction in your mortgage balance which will immediately result in an interest saving.

This assumes your interest calculation basis is daily/monthly and not on the old annual rest.

Ensure your lender understands you wish to see the term reduced and not to reduce your monthly payments.

Thrugelmir

Check the HMRC ruling on the topic. As it may be taxed as a benefit.

M0ney

I didn't think of that point but you could argue that, as the base rate is 0.5% they could only tax you on that hence your interest rate would be 0.5% * 0.2 = 0.1%. Or do the good old HMRC find another way of bleeding us dry?

kingstreet

HMRC guide says there's no need to report loans of £5k and under, on a cursory glance, admittedly;-

http://www.hmrc.gov.uk/guidance/480.pdf

Exemptions for small loans17.16
No tax is chargeable if the total balance outstanding on all beneficial loans does not exceed £5,000 throughout the year of assessment in question.

http://www.hmrc.gov.uk/ebu/p11dws4.pdf

Dave_the_Ginger_Cat

kingstreet wrote: »

HMRC guide says there's no need to report loans of £5k and under, on a cursory glance, admittedly;-

http://www.hmrc.gov.uk/guidance/480.pdf



http://www.hmrc.gov.uk/ebu/p11dws4.pdf

That's typically to take account of season ticket loans I believe, though agree, it does look like this may qualify. Chances are your employer will offer info on this.

Do be careful, the tax is high if it is liable. You'd be taxed at the difference between the official rate and the rate you pay. As the official rate is currently 4% you'd be charged at your highest tax rate on 4% for an interest free loan. I'd encourage you to do the sums if your loan would be a taxable benefit in kind, as it may be only a tiny difference.

http://www.hmrc.gov.uk/rates/interest-beneficial.htm

The link above sets it out, hope this helps

jaybeetoo

What would happen with the loan if you left the company before it was paid off (e.g. redundancy)? Would it have to be paid off immediately or would it be allowed to run for the remaining term at the same rate?

Dave_the_Ginger_Cat

Different firms have different schemes- each should read their own Ts & Cs.