Which do I overpay??

AnotherJoe

My back of a fag packet calculation.
You've borrowed £17.5k at 5%
You've increased the existing mortage on an unknown amount on A by 3% (BTL increase) ill guess £30k.
You've borrowed an extra amount of about £30k (the equity in house A) to buy house B at 2% over 25 years
You'll spend an extra £5k on stamp duty.

That's going to be around £40k in total I'd guesstimate.

All those are the costs of retaining house A, offset by the incoming rent.

So, you'll break even roughly 8 years in.(£40k divided by £5k rent)

There's also the opportunity cost of what you could have done with the money. For example if you are higher rate taxpayers, paying into a pension provides a huge payback, every pound in your pension costs roughly 60p plus you have the growth from investments. If you don't think investments will grow as much as property, the investments could be property related.

However, if you are determined to go ahead, I'd say just pay down the BTL mortgage since tax relief on interest is being reduced and the BTL mortgage is costing you more money in interest than the residential one, and once that's paid off, then either pay down the residential or put more money into pensions.

This is the problem with questions like yours, without knowing your other finances such as pensions, people are only dealing with half the facts. i think it would be worth your while to spend a couple of hours with an IFA to look at the whole picture. It may be for example that simply saving more into a pension would pay back more money than this house will. But no way to know without the full details.

It looks like you just said to yourselves "after ten years ihouse A is paid off then it's free money" but you haven't calculated the cost of getting to that point and what else you could do with that money instead and if that would show a better return.