Pay off Mortgage Debt - Is it a Good Idea?

CC64

I have just made the final payment on the mortgage for our family home. We rent out the house my wife lived in before marriage. She paid £145k for it with a 15k deposit in 2007. Mortgage payments are£540pm. Rates, insurance, fees, maintainence bring the monthly total to approx £600pm. The rental income is £460 meaning £2080pa loss (for 5 years now). I hope to be in a position to be able to pay off the £130k interest only loan soon. The lender (Santander/Alliance &Leicester) told me there will be no early repayment charge. It's an interst only mortgage at 4.99%. There is no savings plan/endowment to cover the debt at the end of the term. The house is in significant negative equity, similar properties are selling for £70k at the moment. £10.4k (5 years rental loss) plus £15k (deposit) lost so far. If we can pay off the mortgage we can still rent out the house and make approximately £300pm profit from the £460pm rent. Hang on until prices go up a little and sell it. It will never make what she paid for it so I don't anticipate capital gains tax but I do anticipate paying tax on the £300pm rental profit. Paying off the mortgage and having a clean slate appears tempting but I am suspicious that it seems a little too easy. I am missing something?

Thrugelmir

If you are making a taxable loss. I would suggest reducing the mortgage balance anyway with overpayments. As the available historic losses can be offset future rental profits.

Hanging onto a bad investment in the hope of a recovery is never a good idea. Cut the emotion and weigh up if there are better opportunities elsewhere.

owitemisermusa

Thrugelmir wrote: »

If you are making a taxable loss. I would suggest reducing the mortgage balance anyway with overpayments. As the available historic losses can be offset future rental profits.

Hanging onto a bad investment in the hope of a recovery is never a good idea. Cut the emotion and weigh up if there are better opportunities elsewhere.

Sorry to butt in OP, but Thrugelmir, can you please explain? Thanks.

Thrugelmir

Trading losses can be carried forward from one year to the next.
The OP has made taxable losses of £10.4k so far. Therefore could make £10.4k of taxable profits. Before paying any tax on the income.

Interest is an allowable expense. So by repaying the mortgage less interest is charged. Thereby reducing the loss or potentially turning the activity into a profitable one.

This would enable the OP to exit the venture less painfully.

owitemisermusa

Thrugelmir wrote: »

Trading losses can be carried forward from one year to the next.
The OP has made taxable losses of £10.4k so far. Therefore could make £10.4k of taxable profits. Before paying any tax on the income.

Interest is an allowable expense. So by repaying the mortgage less interest is charged. Thereby reducing the loss or potentially turning the activity into a profitable one.

This would enable the OP to exit the venture less painfully.

Thanks but still hazy.

Wrt to trading losses carried forward, if the OP does a self assessment every year, how do the losses count against profit in the future? I've not noticed this as in my experience, paid tax the minute "profit" was made.

Regarding interest, if you repay the mortgage to the point where interest falls significantly, aren't you doing yourself a disservice as you would now pay tax liable? Profitability offset by increased tax due?

I know the OP wants to sell up but I would like some clarity in the scenario of keeping it as a going concern.

Thanks Thrugelmir and the OP.

CC64

If the £130k debt is paid then it is cleared and we will not have £540pm mortgage costs. The property will have expenses of rates, home insurance and advertising fees for rental, possible rental voids and maintainence. Rental income of £460pm minus £160pm for the aforementioned expenses means £300pm profit. Does Thrugelmir mean I can collect rent tax free for approx 3 years until we come level with the £10.4k loss? If so then we may as well pay off the debt and keep the house for 3 years. It's unlikely that the backside will fall out of the housing market again so quickly. We will already have taken the big hit by paying of the £130k mortgage........I think.

owitemisermusa

bumpity bump

(apologies OP)

CC64

Bumpity Bump???

Jhoney_2

The poster is apologising for bumping your thread up the list. They are waiting for a reply to this from Thrugelmir:

owitemisermusa wrote: »

Thanks but still hazy.

Wrt to trading losses carried forward, if the OP does a self assessment every year, how do the losses count against profit in the future? I've not noticed this as in my experience, paid tax the minute "profit" was made.

Regarding interest, if you repay the mortgage to the point where interest falls significantly, aren't you doing yourself a disservice as you would now pay tax liable? Profitability offset by increased tax due?

I know the OP wants to sell up but I would like some clarity in the scenario of keeping it as a going concern.

Thanks Thrugelmir and the OP.