Overpayments on BTL

tunnel

Hi folks,
I've asked this question in a fashion before but maybe didn't explain the circumstances correctly


Firstly I have one mortgage on 4.99%,£32k outstanding, £285 per month payment. Rent £500 a month. This is a BTL on repayment


Second mortgage is 2.5%,£43k outstanding, £323 per month payment, rent £600 a month(repayment), this is a BTL BUT this is also a former home of which I eventually swapped the mortgage to a BTL and of which the money from the mortgage was used to buy my current home so the interest is not claimable against tax, essentially all the rent is taxable.


I'm only a basic rate tax payer(20%)


My question is, with that information, which is the best to pay down? Is it better to pay down the 2.5% mortgage as I'm always going to pay £120 a month in tax(basic figures not taking into account any repairs etc etc) or the 4.99%?


Tunnel

amnblog

I think you have asked in question in the question.

Would you reduce the mortgage where the interest is offset able against your tax bill (Increasing your tax cost). Or reduce the mortgage where you are getting no tax benefit.

tunnel

Yes, which would you say would be the best option?


Pay the non claimable 2.5% or the 4.99% hence increasing my exposure to tax


last time I was advised to pay the higher rate but I'm not so sure?

amnblog

Missed the rate difference in your O.P.

The BTL dealing is costing you 4% net of tax relief so is more expensive than the 2.5% rate.

Our key BTL investors never pay down any capital where the interest is tax deductible. Better to achieve capital growth with the lenders capital rather than your own.

tunnel

amnblog wrote: »

Our key BTL investors never pay down any capital where the interest is tax deductible. Better to achieve capital growth with the lenders capital rather than your own.

I understand that in a perfect world where prices can only go up, and that may well be the case in the south but up here in the north where houses are a lot cheaper its easier to pay down the capital. My payments on all my BTL's are repayment, I will eventually own the properties, something that key investors won't. Fair enough there'll be CG's tax to pay eventually, but that's not something that I will be worrying about in my lifetime


Thanks for the advice by the way, looks like the higher rate goes first

getmore4less

You need a better account both should get tax relief.

Either way the higher rate costs more so if you gave no better place for the money that's the one to tackle first.

tunnel

getmore4less wrote: »

You need a better account both should get tax relief.

Unfortunately only the higher rate gets tax relief, I took extra borrowing to buy my now home and the 2.5% mortgage is what's left of that money. Because it was used for a home purchase and not another BTL there is no tax relief, believe me I have asked and its a definite NO

anselld

tunnel wrote: »

Unfortunately only the higher rate gets tax relief, I took extra borrowing to buy my now home and the 2.5% mortgage is what's left of that money. Because it was used for a home purchase and not another BTL there is no tax relief, believe me I have asked and its a definite NO

http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm
Example 2