Which one should I overpay on?

gazfocus

Hi all,

Back in January, my wife and I decided to move house as we were in a position to buy a home that could be our forever home. As we had the cash in the bank for a deposit, we decided to keep our previous house and rent it out.

Mortgages are as follows:

Rental House
House Value: £62,500
Residential Mortgage with Consent to Let from Leeds Building Society
Interest Rate: 5.69% SVR
Original Mortgage Amount: £ 55,800
Current Balance: £53,595
Remaining Term: 22 years and 10 months

Current House
House Value: £180,000
Residential Mortgage from Halifax
Interest Rate: 2.79% Fixed til March 2016
Original Mortgage Amount: £133,500
Current Balance: £131,579
Remaining Term: 24 years and 5 months

At present, the mortgage on the rental house is only reducing by £79 each month, however, the mortgage is being covered (just) by the rent received from the tenants.

The mortgage on our current house is reducing by £310 each month.

What I would like to know is which of the two would be better to overpay on? Usually, it would be the one with the highest interest rate but is this still true even though the rent covers the mortgage and therefore, the house isn't costing us at the moment?

The other thing to bear in mind is that when the fixed term of our Halifax mortgage expires, we would like to go on another fixed rate, so one thought is to get the LTV as low as possible on that house. We're currently at about 73.1% LTV so should be at least 70% by March 2016.

We can't change mortgage products on the rental house because it's being rented out and we don't have enough equity in the house to convert the mortgage to a buy to let.

ViolaLass

gazfocus wrote: »

We can't change mortgage products on the rental house because it's being rented out and we don't have enough equity in the house to convert the mortgage to a buy to let.

That and the higher rate, why wouldn't you overpay on this one?

TBagpuss

Overpay on the rental, as it has the higher interest rate. The fact that the rent covers the mortgage isn't really relevant, what you need to look at is the over all financial position.

if you are applying to re-mortgage in 2016 then while your LTV will be relevant, so to will your financial position and affordability generally, the equity you have in the rental house is part of your assets

gazfocus

Thanks to the both of you.

ViolaLass wrote: »

That and the higher rate, why wouldn't you overpay on this one?

That's why I was asking

TBagpuss wrote: »

Overpay on the rental, as it has the higher interest rate. The fact that the rent covers the mortgage isn't really relevant, what you need to look at is the over all financial position.

if you are applying to re-mortgage in 2016 then while your LTV will be relevant, so to will your financial position and affordability generally, the equity you have in the rental house is part of your assets

Yeah, I understand what you are both saying but I just wasn't sure whether it would be better to reduce the LTD of our current house to get the LTV down to maybe 65% by March 2016. We won't be remortgaging but will be asking Halifax to move us to a new fixed rate deal (my credit report has taken a bit hit recently so I don't envisage being able to remortgage).

When we applied to Halifax, they classed the rental house as 'self financing' and so they cancelled the outgoing out with the income, so it didn't effect affordability either way. I guess if the monthly cost goes down, our income figure will increase slightly.

Thrugelmir

gazfocus wrote: »

At present, the mortgage on the rental house is only reducing by £79 each month, however, the mortgage is being covered (just) by the rent received from the tenants.

Are you declaring the rental income for tax purposes. As doesn't sound as if you are.

gazfocus

Thrugelmir wrote: »

Are you declaring the rental income for tax purposes. As doesn't sound as if you are.

I am, yes. I already do a self assessment being the director of a LTD company so it will be added onto that.

smifffy1989

I would overpay the rental mortgage until you can remortgage onto a lower rate or the rent covers the mortgage comfortably.

Then I would concentrate on your own house as the tax efficiency is with the rental property.

gazfocus

smifffy1989 wrote: »

I would overpay the rental mortgage until you can remortgage onto a lower rate or the rent covers the mortgage comfortably.

Then I would concentrate on your own house as the tax efficiency is with the rental property.

Thanks for your post, however, it has raised something I'd not even thought of.

At the moment the mortgage on the rental property is £390 and the rent is £395 per month. So with the £79 per month being paid off the capital plus the extra £5, I am effectively making £84 profit per month (and therefore paying tax on this).

If I overpay the mortgage on the rental property and the minimum monthly payment reduces, that will increase the amount of profit and therefore increase the amount of tax I will have to pay.

SillySod

gazfocus wrote: »

If I overpay the mortgage on the rental property and the minimum monthly payment reduces, that will increase the amount of profit and therefore increase the amount of tax I will have to pay.

Yes but the profits will increase more than the tax so you will have a net gain. And don't forget to deduct agency fees and maintenance to calculate your taxable profit.

Something else to consider is to what extent you are permitted to make overpayments on each mortgage, whether this will reduce your monthly payment or your term (or whether you can choose), and whether the overpayment is taken into account immediately rather than e.g. at the end of the year.

gazfocus

SillySod wrote: »

Yes but the profits will increase more than the tax so you will have a net gain. And don't forget to deduct agency fees and maintenance to calculate your taxable profit.

Something else to consider is to what extent you are permitted to make overpayments on each mortgage, whether this will reduce your monthly payment or your term (or whether you can choose), and whether the overpayment is taken into account immediately rather than e.g. at the end of the year.

Thanks. So far we've not had agency fees to worry about as we found our tenants through a private ad.

I would need to make enquiries regarding overpaying the rental house mortgagr but with our current house, the interest is calculated daily and we can choose whether to reduce minimum payments or term.

From what I've read, it's better to reduce the minimum payment because then tou have a bit more control over it (if I reduce the term, it might be difficult to increase it again should I need to).