Buy to let or pay off mortgage

Phil_b_4

Hi,

I’m currently renting out my house as I live with my partner in her house.

I’m able to pay the mortgage myself and save the money from the tenants rent.
My original plan was to use that money to pay off the mortgage as quickly as I can.
However the adviser in my bank suggested that I should instead save the money until I have enough for a deposit to get a buy to let mortgage on another property.

I’m self employed and don’t have a pension so this seems like a good idea, giving me more income when I’m older.

Should I do this?

Friends have recommended getting a financial adviser. How would I find a good one?

Thanks,
Phil

steampowered

There are lots of options which enable you to save for retirement.

BTL is only one option. BTL is a poor option for most people because it is tax inefficient. You would pay higher rate stamp duty; income tax on the rent; and capital gains tax if you sell. It is also high risk since you are putting all of your investment into a single asset.

The best thing to do is probably to start a personal pension as you would get tax relief.

You could also invest into a stocks & shares ISA.

It is a good idea to see an independent financial adviser. You can find one here: https://www.unbiased.co.uk/

Don't go to to your bank. Your bank's financial adviser can only recommend the bank's products which will be a small slice of the market.

00ec25

Phil_b wrote: »

I’m self employed and don’t have a pension

there is your problem

why do you think investing into a class of asset (property) that the government is looking to make increasingly unattractive as possible from a tax perspective for amateur/small scale landlords is better than a pension?

Phil_b_4

00ec25- Because it was recommended to me, so I thought I'd check out the options?
It's not something I'd previously thought about.
Paying off the mortgage seemed to be the best thing to do to me. It's charging me much higher interest than I'd get on a savings account.
You don't hear great things about pensions and less than 20 years paying in (I'm in my mid 40's now) probably won't give me much return? If you had employer contributions I'd think it would be worth it, but not so much in my situation?

steampowered- Thanks, I'll try that website

theartfullodger

Live a little:


Instead of using the money for such boring purposes, get a new car, a new boat, a mistress or toy-boy (or both..) or go on a cruise. You remember them later much more than some bank transfer.....

bouicca21

Much as I like artful's suggestions I feel bound to be boringly mundane. For various reasons I contributed to a pension for less than 25 years. Nevertheless the pension is plenty for a comfortable life. I don't spend recklessly but I don't have to stint either.

So that's another one saying start a pension.

steampowered

Phil_b wrote: »

Paying off the mortgage seemed to be the best thing to do to me. It's charging me much higher interest than I'd get on a savings account.

The average return historically generated by the main stock markets like the FTSE 100 and S&P 500 over the long term is about 10% per year (before inflation).

Over the long term, that is what you might expect from a pension in which you hold a balanced portfolio of stocks and shares.

You don't hear great things about pensions and less than 20 years paying in (I'm in my mid 40's now) probably won't give me much return? If you had employer contributions I'd think it would be worth it, but not so much in my situation?

The critical thing to understand is that a 'pension' is not an investment. It is just a wrapper for holding investments.

The performance of your pension is determined by what you put in it. Your pension could hold shares; bonds; real estate investment trusts; and all sorts of other things. Most sensible people will spread their risk by investing in investment funds which hold a balanced portfolio of shares.

As you are now in your mid 40s, you have about 20-30 years before you retire. That is plenty of time to generate investment returns - share investments are usually the best option where people are investing for at least 5-10years. It sounds like you are perfectly placed to open a pension.

While you won't get employer contributions on your pension, you would get tax relief. If you are a basic rate tax payer that means that for each £100 you put into your pension, the government adds an extra £25. And the returns your investments generate will be shielded from tax.

If you want to be able to access the money before you are 65, you could also look at saving into a stocks & shares ISA. That would shield your investment returns from tax, but you wouldn't get the extra tax relief on your initial contribution.

Compare that to BTL - where you won't get any tax relief; you will pay higher rate stamp duty when you buy the property; you will pay income tax on the rent; you will pay capital gains tax if you sell the property.

The only thing BTL has going in its favour is the fact that it is quite easy to boost your returns by taking on a big BTL mortgage to make a larger investment than you could afford in cash. But clearly the more BTL mortgage debt you take, the more risky the investment is, and a big BTL mortgage could put you into financial difficulty if interest rates increase.

People who talk badly about pensions are often talking about old fashioned 'defined benefit schemes' - these are not investments, they are employer funded schemes where the contributions of current employers pay for pensions to retired employees. Many of these schemes ran into difficulty as people started living longer, putting pressure on the arrangement. This is very different to what most people now have and what you would have - 'defined contribution' schemes which are really just tax efficient wrappers for holding investments.