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Does overpaying your Buy To Let Mortgage affect your tax return?
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in other words you pay off enough mortgage to change the annual interest charge from being £5,000 to only being £3,000.If you pay £3,000 interest and £2,000 repayment, you pay tax on £7,000.
At 5,000 pa (post interest) rental profit your (basic rate) tax would be £1,000
At 7,000 pa (post interest) rental profit your (basic rate) tax would be £1,400
At 2.42% that would mean reducing a mortgage from an outstanding balance of 206,611 (x 2.42% = 5,000) to 123,966 (x 2.42% = 3,000). So you would repay £82,645 of capital!0 -
Say I have £500 pm that I could save. Would you recommend overpaying the mortgage or a savings account?0
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martinsurrey wrote: »do you have a residential mortgage on the house you live in, if so whats the rate on that?
The house that I live in is a repayment Mortgage which is 1% interest0 -
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.in other words you pay off enough mortgage to change the annual interest charge from being £5,000 to only being £3,000.
At 5,000 pa (post interest) rental profit your (basic rate) tax would be £1,000
At 7,000 pa (post interest) rental profit your (basic rate) tax would be £1,400
At 2.42% that would mean reducing a mortgage from an outstanding balance of 206,611 (x 2.42% = 5,000) to 123,966 (x 2.42% = 3,000). So you would repay £82,645 of capital!
I'm sorry I'm just a tiny bit lost now with the figures?!0 -
The figures I gave were simply an example of how paying "the same amount" to your mortgage lender could result in very different amounts of tax being payable.I'm sorry I'm just a tiny bit lost now with the figures?!
booksurr took the example figures and worked them to be much more than they were intended.
Simply - the relevant "mortgage" figure for tax is ONLY the interest. Paying some of the capital borrowing off will not affect your tax, except insofar as the repaid capital will affect your interest payments.0 -
in the real world...Say I have £500 pm that I could save. Would you recommend overpaying the mortgage or a savings account?
a) will your residential mortgage lender recalculate the interest charged every time you overpay or only once per year?
b) will your BTL mortgage lender recalculate the interest charged every time you overpay ?
there is a saying, never let the tax tail wag the dog. Don't be obsessed with saving tax if by doing so you ignore other factors such as how much capital you actually pay off to save a few £ of interest and tax, compared to what that capital could earn in a different investment class.0 -
in the real world...
a) will your residential mortgage lender recalculate the interest charged every time you overpay or only once per year?
b) will your BTL mortgage lender recalculate the interest charged every time you overpay ?
there is a saying, never let the tax tail wag the dog. Don't be obsessed with saving tax if by doing so you ignore other factors such as how much capital you actually pay off to save a few £ of interest and tax, compared to what that capital could earn in a different investment class.
A) Every time you overpay.
Yes 0 -
I thought tax relief on interest on BTL mortgages is being phased out? So, maximum relief will be at 20%. not 40%. That may not affect you, but you can see where this is going in the long run.No reliance should be placed on the above! Absolutely none, do you hear?0
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If by "phased out" you mean reduced to zero (eliminated) then how good is your crystal ball because nothing of the sort has been said or suggested yet.I thought tax relief on interest on BTL mortgages is being phased out? So, maximum relief will be at 20%. not 40%. That may not affect you, but you can see where this is going in the long run.
the reduction down to basic rate tax relief was a knee jerk action to placate "the man in the street" who resents "fat cat landlords" being given a tax break if they are higher rate taxpayers.
Take it away entirely and suddenly it is not the fact cats being hit any more, it is the man in the street, a man whose pension plans resulted in him getting into BTL because he probably bought his council house under RTB and then let it whilst using the taxpayer bung ("discount") to fund buying the much nicer place he now lives in.0
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