Buy to let-should I pay it off?

freon_warrior

I have a fixed rate motrgage with the Birmingham Midshires, the term finishes shortly and I have the cash to pay it off but should I?

Is it better to have the loan as an offset against tax on, the rental income?

Thanks

Paul

dunstonh

Is it better to have the loan as an off set against tax in the rental income?

Depends on your tax position. However, paying it off would make the whole rental income potentially subject to tax.

With most rental yields being lower than a savings account, if you then have to pay tax on it as well, it can make the property a very poor investment. If you borrow the money you reduce the tax and the borrowed money can go towards other investments.

freon_warrior

Thanks for that. I was thinking along the same lines re the tax situation. I am concerned what the rate will be when the fixed deal finishes, I took it out just before all the recent rate rises.

freon_warrior

A further thought, what ever I do with the 80k it will be subject to tax one way or the other. By paying off the mortgage I will have the income in my pocket rather than the BS coffers, or am I missing something?

dunstonh

It will only be subject to tax if you place it into an investment that generates a taxable income/capital gain. There are enough places to avoid/reduce that.

The problem you have is that for many buy to let properties if there is no mortgage then the property isnt that viable due to such low rental yields. Its the availability of cheap credit that you can use to invest to get returns above the amount you pay that makes it attractive.

If you go clean with no lending then whats your rental yield going to be? 5%. Take your costs and tax off that and you have 3%? Is 3% really worth it when the main asset is also subject to capital gains tax when you come to dispose of it.