Interest saved by overpaying BTL mortgage - is this correct?

dwightctx

I have a BTL mortgage currently fixed at 1.45%. I was considering overpaying on it to save some interest and reduce monthly payments. However, when I talked this over with a mate he said that by overpaying, I'll only save 80% of the interest rate as I get 20% back as a tax-credit through my self assessment.

He says once I look at it that way, I'll be in the same/better position by sticking any excess funds in any easy-access cash-ISA which pays me 1.16%+, with the added advantage that I'll have that cash to hand in case I need to access it. FYI I don't use any of my annual ISA allowance but use all of my £500 PSA.

I think I get what he is saying. But is that 1.45% -> 1.16% calculation correct?

PensionNs

Very interesting question. The logic seems sound to me. I could be missing something obvious though!

AnotherJoe

Seems right to me. Have you considered paying some of the money into a pension? Are you maximising your employers pension contribution?

Thrugelmir

What is your longer term plan for the mortgage. Pay it off or sell the property?

dwightctx

Thanks for the confirmation!

@AnotherJoe It's the minimum but I am making the most of my employer's pension matching. Unfortunately I don't have the confidence required to lock in any additional pension contributions for the 30+ years before I can potentially access any of it!

dimbo61

Well that is a dam good BTL interest only deal you have But for how long ?
My accountant told me not to let the Tax tail wag the dog !
If you pay down the mortgage you are making more profit from the BTL business.
As long as you don't have other more expensive debts ?
Can you earn more in a regular saver ?

BoGoF

As you say your PSA is £500 then this suggests you are a higher rate taxpayer? You also say you are paying the minimum to your pension.

If you are a higher rate taxpayer then it is a no brainer to pay more into the pension than overpay a mortgage at such a low rate. I hear what you say about it being 30 years away but your future self will thank you for it. Also, who knows how long higher rate pension tax relief will be around for.

dwightctx

That's correct, I am a higher-rate taxpayer.

I completely get your logic, it's absolutely sound and my brother tells me the same. It's just a mental block I have to locking away money in an intangible asset with no access to it, even for a relatively short time period like 10 years, let alone 30+! I just can't bring myself to do it unfortunately

BoGoF wrote: »

As you say your PSA is £500 then this suggests you are a higher rate taxpayer? You also say you are paying the minimum to your pension.

If you are a higher rate taxpayer then it is a no brainer to pay more into the pension than overpay a mortgage at such a low rate. I hear what you say about it being 30 years away but your future self will thank you for it. Also, who knows how long higher rate pension tax relief will be around for.

AnotherJoe

dwightctx wrote: »

That's correct, I am a higher-rate taxpayer.

I completely get your logic, it's absolutely sound and my brother tells me the same. It's just a mental block I have to locking away money in an intangible asset with no access to it, even for a relatively short time period like 10 years, let alone 30+! I just can't bring myself to do it unfortunately

Then you will feel a right (poor) Charlie in 30 years time. Just set up something in your scheme and then forget about it. Every 50p you get in pay is probably worth £1 in your pension,

dwightctx

True that!