Pay a lump sum off buy to let mortgage?

Sue2002

Hello all,

I have a house that we have been letting out for the last 5 years - when I got together with my other half, we both had mortgages, and so moved into his house, and we decided to rent my house out, as otherwise I would have made a big loss, as I bought in the boom, and house prices dropped sharply soon after. My question is around paying off a lump sum of my mortgage on the house that is let out - I have savings of about £15k that I could put towards the mortgage of the let house, or I could save it elsewhere. The let house has a mortgage of about £59k on it now. We would like to sell the house when we can, probably when the current tenants move out, and if we can get a decent price on it. I know I will have to pay 40% capital gains tax on the profits when we sell, so is it unwise to put in a lump sum at this stage? On the other hand we might end up having the house for many more years. Just for info the house we live in now has mortgage paid off, so no need to put the money in there. This might make us sound wealthy but really not, we live in the East Midlands where houses are quite cheap, and we don't go out much and live frugally, also had some help from parents.

As far as I'm aware I'm allowed to make overpayments to the mortgage, and it's recently gone on to a variable interest rate, which is quite low, around 2%, I was locked into a fixed rate of 6% for three years which has recently ended...

Thanks for your help, and let me know if you need more info,

Sue

POPPYOSCAR

That is a very low rate, is it a tracker? especially for a BTL.


At that rate you would be better off not paying it off as you can open interest paying bank accounts and get more interest than that.


You also get tax relief on the interest part only of the mortgage to set off against the rent received.

getmore4less

Capital gains 40%

Depending on how long you lived there it could be very low even zero.

Thrugelmir

POPPYOSCAR wrote: »

You also get tax relief on the interest part only of the mortgage to set off against the rent received.

That's if the rental profit is being declared.

Sue2002

Thanks for your replies so far. Yes, I do declare the rental income to the inland revenue, and get tax relief on the interest on the mortgage payments. I lived in the property for just over three years. Does that effect the capital gains tax a lot? I need to check the interest rate, will do that, but know it dropped down lower recently to a variable rate it might be nor than 2%, guess that's quite a crucial detail! It is on a buy to let mortgage now but after the fixed rate deal it reverted to a variable rate.

getmore4less

Get onto HMRC web site for CGT you need to familiarise yourself with that.

google HMRC CGT

Thrugelmir

Sue2002 wrote: »

Thanks for your replies so far. Yes, I do declare the rental income to the inland revenue, and get tax relief on the interest on the mortgage payments. I lived in the property for just over three years. Does that effect the capital gains tax a lot? I need to check the interest rate, will do that, but know it dropped down lower recently to a variable rate it might be nor than 2%, guess that's quite a crucial detail! It is on a buy to let mortgage now but after the fixed rate deal it reverted to a variable rate.

Also consider the impact of the incoming rules regarding interest relief against profit. Reducing your interest charges increases your rental profit. I.E. Will this push you into another tax band?

Sue2002

Thanks this has been really helpful. Having learnt a little more about CGT, I think I understand it better now, but haven't found any information on the question of how living In the house for a certain amount of time affects the calculation, does anyone know? I can understand it must do, as if it's been your home for a period of time, then you let it, it must come under different rules, but is there a calculation to work out the years? Thank you.

Sue

swindiff

Hi Sue

I went through the same thing of working out what my capital gains would be a few weeks back regarding my BTL property

I created this spreadsheet to do the calculations, just replace my figures with yours.

https://docs.google.com/spreadsheets/d/1pGN_gyF9s6R5aDCuhZVIknM9A9DpWE17TBw5-xRTgyA/edit?usp=sharing

Providing your net taxable gain is less than £11,100 which is the annual exempt amount, then you should not have any CGT to pay.

LittleMax

Thank you for the spreadsheet that was really useful. Just to note that the final 18 months qualifies for private residence relief and not lettings relief. In this example it doesn't make a financial difference, but where there's a vacant period at the end it could.

swindiff

Yes in my case I will be moving into my BTL and wanted to know how long I would need to live there to make sure I did not have any CGT to pay.