Rental properties and mortgages

pramsay13

Looking for a bit of advice to see what we should be doing with our mortgages and which direction we should be going in.

My wife and I have 3 rental properties and our own house.

We are in Scotland and all properties are owned 50 / 50 and we both work and are below the higher tax bracket although my wife is getting close to it.

Own home
Value around 160,000
Mortgage 1 for 85,000 @1.14% lifetime tracker with 13 years remaining.
Mortgage 2 for 29,000 @2.44% fixed rate until Dec 2020.

Rental property 1
Value around 190,000
Mortgage for 132,000 @2.49% interest only fixed until Jan 2021

Rental property 2
Value around 89,000
Mortgage for 52,000 @2.49% interest only fixed until Jan 2021

Rental property 3
Value around 130,000
No mortgage

We clear around £1000 per month after normal expenses and income tax are taken off so this can go into savings or into paying off one or more mortgages.

Should we be trying to pay off our own mortgage by overpaying monthly, especially the higher portion, or is it better to mortgage rental property 3 to pay off our own mortgage to be mortgage-free and then start to pay down the mortgages?

Any help or advice is appreciated.

Brodiebobs

I think previously the advice has always been to pay down residential because of the tax 'perks' of the using the mortgage interest as an expense on your tax return, but as this is diminishing and soon to be gone there wont be much point going forward.

Personally I wouldn't want to remortgage 3 and would throw where the most interest is accrued, probably rental 1 to get the LTV down for when you remortgage in 2021.

But psychologically it might be good to clear the home mortgage 2 as you could clear two thirds of that between now and the fixed rate expiry with £1000 per month.

We have one rental with a not very good LTV and interest only mortgage, but our residential has lots of equity so i make a token OP of £100 pm, and everything else we throw at the rental.

pramsay13

Brodiebobs:
'I think previously the advice has always been to pay down residential because of the tax 'perks' of the using the mortgage interest as an expense on your tax return, but as this is diminishing and soon to be gone there wont be much point going forward.'

Thanks for your answer Brodiebobs
My understanding is that it is only disappearing for those in higher rate tax bracket so we still get tax relief on mortgage interest.

Brodiebobs

not correct.

https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

pramsay13

But we will get 100% of mortgage interest qualifying for 20% tax credit which as a lower rate tax payer amounts to the same thing.

Brodiebobs

I stand corrected, I mis-read the OP.

All the more reason to pay down the residential then. Although personally i wouldn't want to incur another (higher rate?) BTL mortgage to do this. You have plenty of money to throw at it to clear-although check any penalties in the fixed period.

00ec25

pramsay13 wrote: »

But we will get 100% of mortgage interest qualifying for 20% tax credit which as a lower rate tax payer amounts to the same thing.

you appear to have fallen into the trap of thinking that your basic rate tax status is not altered by the change to how taxable income is calculated

that is wrong

you say your wife is near the higher rate band. Therefore very likely the interest charge will push her over

read example 2
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

pramsay13

Thanks 00ec25.
I wasn't aware of that although she is far enough away that it still shouldn't matter as the mortgage interest on the two properties is only around £3k annually so her liability is half that.

AdrianC

Tax notwithstanding, you're borrowing £184k at 2.5% (to remortgage in 18 months), £29k at 2.44% (to remortgage in 18 months), and £85k at 1.14% (long-term).

You have three properties mortgaged - 1 residential at 71% LtV, 1 BtL at 70% LtV and 1 BtL at 60%.

It seems a no-brainer that your most expensive debt is rental 1 - it's the most expensive now, and it's relatively high LtV for a BtL, so it's going to be the most expensive on remortgage. Get that down. Given that three of your four mortgages expire at the same time, it may be worth seeing nearer that time what a decent broker can do you for some kind of "package", perhaps shifting some of the equity around.