Does overpaying your Buy To Let Mortgage affect your tax return?

CarmenB

I wondered if anybody could help me. I know that you can overpay your Buy to Let mortgage but does this effect the amount of tax that you pay?
I spoke to an accountant a few years ago and he told me that it isn't worth overpaying by too much as you will end up paying out more tax when you do your self assessment. He said you should only overpay it by so much. I've forgotten what percentage he said.
I would appreciate any help. Thanks

Typhoon2000

Yes if you over pay you will be charged less interest, so you will pay more tax. But the interest saved outweighs the extra income tax.


So if you save £100 interest a year by over paying you will need to pay £20/40/45 extra tax depending on your tax band.

CarmenB

Typhoon2000 wrote: »

Yes if you over pay you will be charged less interest, so you will pay more tax. But the interest saved outweighs the extra income tax.


So if you save £100 interest a year by over paying you will need to pay £20/40/45 extra tax depending on your tax band.

Thank you. I think I understand now. So if I overpay I get interest minus the tax. But if I was to pay into a savings account then there wouldn't be any tax. Is this correct?

Bob_Bank_Spanker_2

CarmenB wrote: »

Thank you. I think I understand now. So if I overpay I get interest minus the tax. But if I was to pay into a savings account then there wouldn't be any tax. Is this correct?

Correct, although the interest rates on cash savings will be much lower than on a BTL mortgage (probably) so to maximise your overall wealth it is normally better to overpay the mortgage.

Miss_Samantha

CarmenB wrote: »

I spoke to an accountant a few years ago and he told me that it isn't worth overpaying by too much as you will end up paying out more tax when you do your self assessment. He said you should only overpay it by so much. I've forgotten what percentage he said.

The saving on interests will be much more than the extra tax, so this advice is not very good in my view.

The consideration is really about cash flow and investment: Is paying off the mortgage's capital the best use of that cash?
For example, instead of paying off the capital you could save up the cash in order to expand and buy another property, or you could invest the cash in whatever else that yields more than the mortgage's interest rate.

CarmenB

Miss_Samantha wrote: »

The saving on interests will be much more than the extra tax, so this advice is not very good in my view.

The consideration is really about cash flow and investment: Is paying off the mortgage's capital the best use of that cash?
For example, instead of paying off the capital you could save up the cash in order to expand and buy another property, or you could invest the cash in whatever else that yields more than the mortgage's interest rate.

My Mortgage rates are: Property 1: 2.42% Property 2: 3.24%

CarmenB

Bob_Bank_Spanker wrote: »

Correct, although the interest rates on cash savings will be much lower than on a BTL mortgage (probably) so to maximise your overall wealth it is normally better to overpay the mortgage.

My interest rates are: Property 1: 2.42% Property 2: 3.24%

kingstreet

Presumably you have interest-only mortgages, or claim only the interest element of a capital & interest mortgage payment as a trading/allowable expense?

booksurr

CarmenB wrote: »

My Mortgage rates are: Property 1: 2.42% Property 2: 3.24%

£1,000 of mortgage = £24.20 per year interest
at basic rate tax that means you pay 24.20 x 20% = £4.84 less tax per year
so in cash terms you will pay £24.20 and "save" 4.84 so a net cash outflow of 19.36 per year per £1,000, (which means the effective rate is 1.936%)

do not forget the crucial importance of finding an investment which carries the same level of risk as shown by your capital tied up in a house. Only then will you be comparing like with like in terms of financial performance - there is no point gaining a few £ of income if you lose the capital to bad investment performance!

Bearing in mind that savings interest is now taxed very differently from when you spoke to that accountant a long time ago, whether it is financially better to reduce the mortgage interest charge is a simple numbers game based upon what you actual real life income is. Do the maths to see if you make more from that than paying off the mortgage. The first £1000 (basic rate) or £500 (higher rate taxpayer) of savings interest is now tax free.

so keep £1,000 of mortgage and put that £1,000 into a pure savings account would mean....

• mortgage cost £24.20 pa (no tax saving) paid out giving an effective rate 2.42%. (Note I have ignored the fact that £1,000 of mortgage paid off will reduce the interest cost to below £24.20 if your lender recalculates the charge as soon as you reduce the loan)
  
• savings interest needs to be more than 2.42% (and not subject to income tax) for you to be better off.

It can be done, but only if you currently have very low cash savings and are willing to play around with the bank current account incentives to get the tiered interest rates available to those staying within the maximum amounts allowed in those sorts of account. If you are already doing them then your ability to find more than 2.42% in an investment class with similar capital security to the house is down to you.....

CarmenB

kingstreet wrote: »

Presumably you have interest-only mortgages, or claim only the interest element of a capital & interest mortgage payment as a trading/allowable expense

Yes interest only

AdrianC

You pay tax on your profit from your letting. That profit is after mortgage interest has been paid, but does not take mortgage repayments into account.

So, if you get £10,000/year rent after all expenses bar mortgage, and pay £5,000/year mortgage interest, you pay tax on £5,000.

If you pay £3,000 interest and £2,000 repayment, you pay tax on £7,000.