I need help on Rental V Mortgage Overpay calculations

jaffab

All,

I need help with some calculations I am doing regarding a property we have been left - whether to rent it out for 4 years, or sell it and repay a big chunk of our main house mortgage.

Note - before going into the pros and cons of Rentals, we have other properties we rent out through a Ltd company, so we know what we are doing here in this respect - its the maths of rent V mort repayment.

So the property is in Scotland (in case that makes a difference) and has a value of £120,000. We will eventually sell it - so when we do, I guess there is no way around paying the CGT at the higher rate of 28% (both higher rate tax payers) - so thats £33.6k CGT, leaving £86,400.

Now comes the complex part - we could either...
1) Pay the £86400 into our 13 years to go existing £140,000 main house mortgage and thus for the next 4 years (until the remainder is paid off) save the interest of 2.44% - but this would be compounded as whilst the mortgage payments would reduce, we would opt to still pay the balance off faster. If we did this, the Halifax mortgage calculator (see below) would save £20,303 on the lump sum, or £21,794 if we took the roughly saved £1000 a month mortgage payment and overpaid each month.
2) Defer selling it, and rent it instead - we would get £450 a month (assuming no void months), of this we would pay 40% tax - which is a reduction to £270, then 12 months for 4 years = £12,960. After this, then sell it, pay the CGT (see above) and the maths of the sale are the same.

So it would seem that the Rental is £7k worse off, but...
1) Assumes no voids
2) Assumes CGT does not rise
3) Assumes property prices does not fall (which is likely)
4) We would be spending £1k a month extra on mort overpayments

But this is where it all gets tricky because according to the Halifax mortgage overpayment calculator (https://www.halifax.co.uk/mortgages/mortgage-calculator/overpayment-calculator/), on our existing £140k mortgage, the balances with the overpayment of £86k and an extra £1k per month means the balances are as follows:

Year Zero = £140,000
Year One = £30,247
Year Two = £6,139
Year Three = £0

Which means actually, we would (in our 4 year plan) have 1.5 years with no mortgage, so saving the £1k mortgage payment and £1k overpayment adds another £36,000 saving onto the mortgage side, thus making the total saving:

1) Paying off the mortgage = £20,303 interest saving, plus £36,000 non-morgadge payment time, MINUS (£48,000) of £1k a month overpayments for 4 years = £9794 EXTRA
2) Rental @ £450 minus tax and no overpayment = £12,960 EXTRA

Or, if I simplify it by taking out the £1k overpayment per month:

1) Paying off the mortgage = £20,303 interest saving = £20,303 EXTRA
2) Rental @ £450 minus tax and no overpayment = £12,960 EXTRA

Do these numbers look correct?

MaxiRobriguez

Can you actually pay £86k off your mortgage in one go? Most mortgages are limited to overpayments of 10% of outstanding a year.

You're also making a big leap of judgement that house prices will be lower in five years than they are today. Whilst there's no guarantee, history would say you're likely to be wrong.

If a Brexit-led recession causes chaos then there's every possibility that central bank rates head back towards zero, at which point you could remortgage your 2.44% and it would make servicing your mortgage much cheaper.

You could also remortgage your Scotland property if as it sounds you have 100% equity in it to free up cash to buy more property whilst house prices are down in such a scenario if that's your game.

Lots of options - not just a mathematical what's best but also need to consider your needs. If you're needing this money to pay off mortgage for retirement soon then it may be better to forfeit any potential gains and just have the cash locked in.

jaffab

>>Can you actually pay £86k off your mortgage in one go? Most mortgages are limited to overpayments of 10% of outstanding a year.
A: Correct - we cant.. This year. But next year when our existing mortgage deal ends we can. Whether we could then pay the £1000 a month extra is a good point - most likley this would then break the 10% overpayment payment.

>>You're also making a big leap of judgement that house prices will be lower in five years than they are today.
I think I said it was a factor in Rental. Didnt base any maths on the property going up or down

As for the re-mortgage for another purchase, there is the extra stamp duty issue - already thought about that.

System

jaffab wrote: »

So the property is in Scotland (in case that makes a difference) and has a value of £120,000. We will eventually sell it - so when we do, I guess there is no way around paying the CGT at the higher rate of 28% (both higher rate tax payers) - so thats £33.6k CGT, leaving £86,400.

You are calculating the gain as current market value. If you have inherited the property then your gain is the increase in the market value from the date of death so unless there has been a sharp rise in house prices then the gain will probably be covered by your CGT allowance.

TCA

jaffab wrote: »

So the property is in Scotland (in case that makes a difference) and has a value of £120,000. We will eventually sell it - so when we do, I guess there is no way around paying the CGT at the higher rate of 28% (both higher rate tax payers) - so thats £33.6k CGT, leaving £86,400.

I haven't double checked this, but is the capital gain not calculated only on the difference in value between when you inherited the property and when you sold it?

jaffab

TCA/Economic...

Its a little bit more complex than that - just before my Father In Law died, he was given the Right TO Buy his council house but didnt want to - se we gave him the money and the house was transferred over to my Wife - so she owns it, and has done for the last 7/8+ years.

So the CGT would still apply (we paid £17k on the £120k property) - so yes, CGT would be £120k - £17k minus costs.

jaffab

And yes, just to cover a previous point, I have just spoken to the Halifax (current Mortgage provider) and when the current 'deal' ends, just before moving onto a new 'deal' - we can throw as much as we want into the mortgage without penalty.

edgex

jaffab wrote: »

TCA/Economic...

Its a little bit more complex than that - just before my Father In Law died, he was given the Right TO Buy his council house but didnt want to - se we gave him the money and the house was transferred over to my Wife - so she owns it, and has done for the last 7/8+ years.

So the CGT would still apply (we paid £17k on the £120k property) - so yes, CGT would be £120k - £17k minus costs.

Are you sure about that?

Right To Buy is for the person in the property to buy it for themselves, & there is then usually restrictions on what they can do with the property, ie. cant sell on for x years, cant rent it out etc.

jaffab

edgex wrote: »

Are you sure about that?

Right To Buy is for the person in the property to buy it for themselves, & there is then usually restrictions on what they can do with the property, ie. cant sell on for x years, cant rent it out etc.

Yes - getting off topic. Was all covered and above board - we gave him the money, he purchased it, then after the clauses had expired, it was transferred. All signed off, legally checked, done, dusted, off topic.

edgex

So there's CGT due anyway, which means it's not really a concern.
(allowing for the allowance)


Where does the 4 years come from?
Are your business properties in Scotland? (as in, would this property be different & a hassle to manage)

jaffab

edgex wrote: »

Where does the 4 years come from?
Are your business properties in Scotland? (as in, would this property be different & a hassle to manage)

4 years is an arbitrary duration as we are looking to retire and liquidate our business and other properties in the next 4-7 years.

No, this is the only Scottish property - the others are in England. We thought about moving them over to the Business, but that makes the maths worse as we would have the bizz buy it at fair value (so still CGT to pay) but then also company tax on disposal (in this case, via ER) should the property increase.