Which Mortgage do I reduce?

dansep

Hi

Any advice would be welcome on the following:

Twelve months ago we took out a £150K repayment mortgage over 25 years when we moved home. Thankfully, we decided on a 3 year fixed rate of 4.75% with Britannia.

We also have a Buy-to-let interest-only mortgage of £45K on an apartment. The curent rate for this is 6.64%

Now, we have recently inherited £60K and I am wondering wether to:
1) Reduce the term or mortgage on the Britannia loan or
2) pay off the BTL apartment loan

I'm aware that if I go with option 2 then I will not be able to offset any interest costs when it comes to Tax Return time, but at least we have one property paid off.

Just wondering what money-wise folk on this forum would so. Feel free to add options 3,4,5,6 etc as I shall be reading with interest.

Thanks,

Dan

Mr._H_2

dansep wrote: »

We also have a Buy-to-let interest-only mortgage of £45K on an apartment. The curent rate for this is 6.64%

Fixed or variable?

dansep wrote: »

Now, we have recently inherited £60K and I am wondering wether to:
1) Reduce the term or mortgage on the Britannia loan or

What are the features of your Britannia mortgage? Could you pay off £60k of it without penalty? This is unlikely - there are usually redemption penalties with introductory offers. Presumably by "reduce the term", you mean you are allowed to overpay on a monthly basis, thereby ultimately paying off the loan sooner. How much are you allowed to overpay by?

dansep

The BTL mortgage is now variable.

Need to check up on overpayment with Britannia but I beleive it is only 10% each month.

I have read on these boards that by making a lump sum payment you can reduce the years of the mortgage (or the monthly contribution).

Kaz2904

I personally would clear the btl mortgage and keep £5000 in a high interest easy access account for unseen emergencies. The other £10000 I would filter over to my mortgage as quickly as I was allowed. I would also take into consideration the amount I was saving from paying off the btl and put the monthly payment over to my mortgage thus clearing it quicker still. HTH. It's probably not the most financially savvy way to do it but would save you from the worry of ever rising interest rates.

Moneygoes2money

When you took out the mortgages you would (should) have been given Key Facts Illustrations, which will include information on overpayments and early repayment charges (ERC). Better still, refer to your mortgage offer documents, then let the forum know what your ERCs are (if any) and the overpayment terms and conditions.

The rule of thumb is generally pay off your most expensive debt first (i.e. Buy-to-let mortgage) but check for ERCs and any other restrictions.

Also, the Britannia rate is really good at 4.75%, you can get a higher rate of interest on deposit accounts especially Individual Savings Accounts, which are tax-free but limited to deposits of £3,000 per person per tax year. If you didn't have the buy to let mortgage, it may be better to put the capital on deposit if you can obtain an interest rate higher than your mortgage rate after taking into consideration your personal tax rate.

For example, if you are a basic rate taxpayer, you will pay 20% tax on your savings so you will need to obtain a savings rate of 4.75% (your mortgage rate) divided by 80% (because your personal savings tax rate is 20%) = 5.9375%. In other words, if you can get a GROSS savings rate higher than 5.9375% then it would be better to put your capital on deposit rather than paying off the Britannia mortgage. If tax rate is 40%, obviously harder to get high enough savings rate but do the maths. Anyway, you DO have a buy-to-let mortgage at 6.64% so I think it would be better to pay this off first if terms and conditions allow without penalty.

Sorry for going on, digressed a little I know but hope it all helps. If anyone disagrees, please post.

Mr._H_2

Well said, Moneygoes2money. I agree that it is most likely that paying off the BTL is the best bet. However, it is also possible that re-financing the BTL on a better rate and investing the 60k in ISAs and ICEsave might be a better bet.

However, we need to hear back from the O/P to make properly informed suggestions.

What rate of tax do you pay? (In your post, you mentioned "we" implying a partner. Do you both pay the same rate of tax?)

Is the BTL free of any charges (apart from the smallish "exit charge" (should be around £200 - 300) that almost certainly applies) if you pay it off in full?

Do you and/or your partner have any cash ISAs? Have you invested this tax year's allowance?

ailuro2

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings#calculator is Martin's answer, and a nifty little calculator too.:money:

dansep

Mr._H wrote: »

What rate of tax do you pay? (In your post, you mentioned "we" implying a partner. Do you both pay the same rate of tax?)

Yes, we are both L code taxpayers

Mr._H wrote: »

Is the BTL free of any charges (apart from the smallish "exit charge" (should be around £200 - 300) that almost certainly applies) if you pay it off in full? ?)

Yes , there are no major exits fees other than the admin cost of £250

Mr._H wrote: »

Do you and/or your partner have any cash ISAs? Have you invested this tax year's allowance?

No we don't as we only have cash savings 'for a rainy day'. Other investments are tied in shares and property of course.

Thanks to all for the responses so far.

Mr._H_2

dansep wrote: »

Yes, we are both L code taxpayers

That doesn't tell us what rate you pay. Is it 10, 22 or 40%?

At the moment, I am thinking that it is going to be a close-run thing between paying off the BTL, or re-financing it and saving the money you have in ISAs etc.

dansep

Sorry, 22%

Mr._H_2

By my calculations, you are currently paying £2988 per year in interest on the BTL mortgage. If you pay off the mortgage, you will lose £657.36 in additional tax to pay, so you will be 2988 - 657.36 = £2330.64 per year better-off if you pay off the BTL mortgage.

If you each open a NS&I ISA and invest the maximum £3000 each this tax year, and then going forwards invest the maximum £3600 each on April 6th each year, and keep the balance of your savings in ICEsave, you will earn (on the first £45k of the savings, for comparison with the BTL):

£2264.04 per year interest until April 2008, followed by, in each tax year:
£2356.25
£2474.86
£2580.26
£2685.67
£2791.08 (at which point £42k will be in the ISAs)

The balance of your savings will earn 4.83% NET interest, which is greater than your other (current) mortgage rate.

If you pay off the BTL now, you will be better off (compared to saving the money) for the next 18 months or so, but after that you would be better off saving the money. This does of course assume interest rates on the mortgage and the savings stay the same, and at the beginning the difference is minimal.

If it was me, I would save the money and start looking to see if I could get a better rate on the BTL.