which mortgage should I overpay?

popey89

I have two properties. One is a buy to let property with £135k left on the interest only mortgage at 5.3%. The second is the house I live in, it has £212k left on the mortgage, 3.6%. Both are 25 year mortgages.
I was planning on beginning to overpay the rental property as it has the higher interest rate, however I'm not sure if this is the best approach, should I begin to pay off the larger debt? The higher interst debt? Or split my overpayments across both?

Thrugelmir

I assume that the profit on the rental property is being declared. What impact would declaring higher profits have on your personal tax position?

If you overpaid the residential mortgage could you remortgage using a better LTV, thereby securing a lower interest rate.

jamesd

Do you have enough equity in our own property to replace the BTL mortgage with a higher mortgage secured on your own home at a lower interest rate? The interest will still be deductible for the BTL financing portion,and for any borrowing to withdraw profits from the BTL up to the value of the BTL property at the time it entered your BTL business.

The BTL interest rate is higher but it's deductible from rental income as an expense. That means that it is probably cheaper after tax then your residential mortgage.

Another aspect is why you'd overpay on either when P2P is around that pays 10%+, better than the saving from either.

popey89

Thrugelmir wrote: »

I assume that the profit on the rental property is being declared. What impact would declaring higher profits have on your personal tax position?

If you overpaid the residential mortgage could you remortgage using a better LTV, thereby securing a lower interest rate.

Thanks for your reply.
Yes, earnings on it are declared, I'm a higher rate tax payer already so earnings on the rental property won't affect that.
And both mortgages have only been fairly recently taken out, so not in a position to remortgage at the moment.

popey89

jamesd wrote: »

Do you have enough equity in our own property to replace the BTL mortgage with a higher mortgage secured on your own home at a lower interest rate? The interest will still be deductible for the BTL financing portion,and for any borrowing to withdraw profits from the BTL up to the value of the BTL property at the time it entered your BTL business.

The BTL interest rate is higher but it's deductible from rental income as an expense. That means that it is probably cheaper after tax then your residential mortgage.

Another aspect is why you'd overpay on either when P2P is around that pays 10%+, better than the saving from either.

Thanks for the reply.

Only recently bought the house I live in. Approx 15% equity, so dont think Im in a position to do as you suggest.
P2P is an interesting suggestion. To be honest its not something I have really considered or know much about. I'll do some research!

TrickyDicky101

Assuming your BTL makes profits and that no other mortgage options are available, then paying off your residential mortgage first results in a greater post tax cash saving for you. Incidentally, I personally would not go the p2p route as I would consider it too risky.

jamesd

Agreed about not viable to adjust the mortgages. Agre with TrickyDicky101 that the residential one is what gains you most for overpaying after allowing for tax effects. Net interest on the BTL mortgage is 3.18%.

For P2P you might look at Ablrate. Relatively new, loans secured on physical plant or aircraft.

Thrugelmir

popey89 wrote: »

Thanks for your reply.
Yes, earnings on it are declared, I'm a higher rate tax payer already so earnings on the rental property won't affect that.
And both mortgages have only been fairly recently taken out, so not in a position to remortgage at the moment.

By overpaying the BTL mortgage you'll increase the taxable profit. Overpaying the residential mortgage is your better option. With the added benefit that LTV will improve over time.

JethroUK

jamesd wrote: »

Another aspect is why you'd overpay on either when P2P is around that pays 10%+, better than the saving from either.

What's P2P because I want one if it pays 10%

jamesd

P2P is peer to peer lending. MSE has an article on it though that only mentions the older players. As with all investment there's some risk to capital that has to be considered when making decisions about it. For a person already involved in the high risk BTL game it's at least within their investment risk tolerance. Maybe not so for those who prefer savings accounts and don't like investing.

Thrugelmir

JethroUK wrote: »

What's P2P because I want one if it pays 10%

How much of your money are you prepared to lose?