Early repayment of buy to let vs tax benefit

Geraldmater

Hi,

I have a buy to let repayment mortgage, variable standard rate of 5.09%, repayment date Dec 2028. The interest is calculated monthly. In the past I was told not to make overpayments as I would lose out when it came to my self assessment tax return. Is this correct? Should I be repaying my mortgage early or putting the money elsewhere?

Thanks in advance!

Gerald

TrickyDicky101

It depends on what your marginal rate of tax is (are you a higher/top rate of taxpayer, for example) and what else you might do with the money that would fund the overpayments ie would the rate of return of alternative investments exceed the after tax cost of this mortgage?

Geraldmater

Thanks for your reply!:)

I am not a higher rate tax payer & would put extra money in an ISA if I didn't use it to repay my mortgage.

Gerald

Spidernick

Are you making a profit on the letting after allowing for expenses, including the mortgage interest? If not, and you are making a loss, then paying down the mortgage won't affect your tax position until you start making a profit after utilising and brought forward losses.

Let's look at it this way: If you pay off £100 from this mortgage then you will reduce the annual interest (and hence any profit) by around £5.09 (depending on how the interest is calculated). Assuming you are making a profit that is all liable to tax at 20% (i.e. you have used your personal allowance on a salary, for example), then you will pay an extra £2 roughly in tax (the £5.09 at 20%).

Do you think you could do better investing the £100 and are you likely to need the funds in the short term? Those would be considerations to my mind.

anselld

Spidernick wrote: »

then you will pay an extra £2 roughly in tax (the £5.09 at 20%).

20% of £5 is £1

Spidernick

Whoops - yes indeedy - brain not working!

So, the £100 will save around £4 net after allowing for the tax charge (£5 interest less £1 tax), which is a pretty good rate of return and better than most interest-earning accounts. Paying down the BTL mortgage may therefore not be a bad idea at all, unless the OP needs the cash or can get a better rate of return on a Stocks and shares ISA, for example.

jimjames

Geraldmater wrote: »

Thanks for your reply!:)

I am not a higher rate tax payer & would put extra money in an ISA if I didn't use it to repay my mortgage.

Gerald

Cash ISA or S&S ISA?

Over 14 years I wouldn't keep that amount in cash especially when cash ISA rates are 1% or so.

OneEngland

If possible I would look at remortgaging to a more competitive rate