Sell or Rent - mortgage free dilemma

IanJohnston

Hi all,

Mortgage on our main property = 80k
Property value = 250k

We also have a 1-bed flat we rent out. Rental income = £375pm
Property value = 100k (no mortgage)

Property prices are rising fairly good in our area.

My opinion was that we should continue to rent and that although the tax man gets a fair chunk of the rental income, the long term appreciation in value would see us good in later years. Aged early 40's right now, thought we might sell the flat when aged 55.

However, would also love to be mortgage free......but that's only a good feeling and probably not the financially best thing to do. Have I answered my own question......or is there more/better way to do things.

Ian.

Dithering_Dad

You're not running the rental business as tax efficiently as possible. With a rental property you can offset the income from your tenants against the mortgage interest you pay. As you don't have a mortgage on the rental property you are missing out on this very important tax break.

If I were you, I would remortgage the rental property so that it has 20k equity and remove 80k to pay off the mortgage on your home. You can now live mortgage free, have your tenants pay off your mortgage and pay a lot less tax to the government! A complete win-win arrangement!

IanJohnston

Help ma boab!.......I gotta look into this one.
A big THANKS!!!

Update:
I have a leaflet I obtained from a local chartered accountants which reads as follows (I don't quite understand it yet!).....

Th emost common error is about deductions for mortgage repayments. Only interest is deductable. Landlords cannot claim deductions for mortgage repayments that pay off some of the capital borrowed. Borrowers are sometimes unaware that mortgage payments may include a capital repayment element.

PS. If it makes any difference we are in Scotland.

Kaz2904

What that means is that when you take out your repayment mortgage you need to know how much interest you pay each month as that is all you can gain tax relief on.
If you were to take an interest only mortgage then you would gain tax relief on all repayments but would then need to find savings/investments to earn you £80k over the term of the mortgage.

A_Nice_Englishman

You don't say whether you have other assets besides your home and the flat. If not, consider whether it is a good idea to have all your eggs in the residential property market.

You will probably have Capital Gains Tax to pay when you sell the flat and there may be more tax-efficient ways of saving for the future like pensions and ISAs.

IanJohnston

Hi all,

We have the flat purely by default.....it was the wife's place before we met. We have no other properties. She bought it for 19k (ex-council & with discount) 3 years ago, it's now been valued at 100k.

We are in Aberdeen, Scotland.....and the prices of property in the past few years has been sky-rocketing......and under Scottish law it's always a sellers market.......so I don't have any fear of the price of the property in the future.

I understand more now.....thanks for all your posts......

Ian.