Should I pay off buy-to-let mortgage?

thriftybabe

This is a bit early thinking about this but I have only just bought a buy-to-let property with a mortgage on it. We have put quite a bit of deposit it on it. We paid off our own mortgage and wondered if it is worthwhile doing the same with this. Obviously there are the income tax implications on this but I think surely we would still gain from it. We are looking to pay this off in the next 3 years and would be grateful for any advice on this matter.

dimbo61

yes yes yes
save into isa,s and regular savers accounts ( emergency fund if property unlet)
overpay if allowed
is the mortgage interest only ? tax relief
if you can clear debt in 3 years you will then own 2 propertys and get a regular income from one
good luck

Jonbvn

Hi,

I see you have started another thread on the same subject.

Anyway, I would repost my initial response as follows:

Generally, it is not considered a good idea to completely pay off a BTL mortgage, since you get tax relief on the interest payments.

Overall, I believe it would be better to invest/save the money you would overpay into tax free vehicles such as ISA's and pensions.

Of course this is only general advice, and it would be necessary to check the actual numbers and your financial situation to give specific advice.

In the other thread, you then advised that you had maxed out both pensions and ISA's.

Therefore, since you already seem to be well diversified, paying off this debt would seem to be prudent.

thriftybabe

It is repayment mortgage. My only thing was that we would pay 40% tax on income and wondered if it was such a good idea?

silvercar

Its all an interest rate / tax rate comparison.

If you've maxed out your ISAs etc, then you would pay tax on the saving money. So a good interest rate of say 6.5% on your savings and you will receive net only 3.9% (assuming 40% tax payer). But then you won't pay tax on your rental income upto the value of the interest on the BTL mortgage.

On the other hand if you paid off the mortgage you would pay 40% tax on the rental income.

Lets say a £100k BTL mortgage. interest only would be £542 per month at 6.5%. So tax relief on £542 of rental income. Your gain = £542 per month. Plus the £100k goes in a high interest savings account (say 6.5%) you will receive income of £325 net. Monthly income = 542+325=867-542 mortgage payment=325.

If you paid off the mortgage, you would lose the tax relief on that £542 and so only keep 60% of it ie £325.

So if the interest rates are the same, it makes no difference; look at the difference in the rates.

Jonbvn

silvercar wrote: »

Its all an interest rate / tax rate comparison.

If you've maxed out your ISAs etc, then you would pay tax on the saving money. So a good interest rate of say 6.5% on your savings and you will receive net only 3.9% (assuming 40% tax payer). But then you won't pay tax on your rental income upto the value of the interest on the BTL mortgage.

On the other hand if you paid off the mortgage you would pay 40% tax on the rental income.

Lets say a £100k BTL mortgage. interest only would be £542 per month at 6.5%. So tax relief on £542 of rental income. Your gain = £542 per month. Plus the £100k goes in a high interest savings account (say 6.5%) you will receive income of £325 net. Monthly income = 542+325=867-542 mortgage payment=325.

If you paid off the mortgage, you would lose the tax relief on that £542 and so only keep 60% of it ie £325.

So if the interest rates are the same, it makes no difference; look at the difference in the rates.

Assuming it is a typical BTL mortgage the rate is likely to be higher than a savings IR. As another poster stated, consider remortgaging your own house to pay of the borrowing on the BTL property, since you should get a better rate.

thriftybabe

Apologies i should have said that i have remortgaged my own home rather than buy to let mortgage. It is also a repayment mortgage that i have opted for. Does that make the difference?

missile

Maybe not the best time to get into BTL? I wish you luck.

jamesd

It's an investment choice:

• invest in paying off the mortgage and get an annual return equal to the mortgage interest
• invest in unit trusts/OEICs and get their annual return (likely two or more times as high a return)
• invest in other BTL property

You've chosen a risk-based investment via the property so it seems unlikely to be appropriate to switch to a very low return option of just repaying a mortgage because that's contrary to the risk profile you've demonstrated by doing the BTL. More appropriate would be increasing the mortgage to the BTL purchase price (less whatever safety margin you want for reduced equity possibility) and investing that extra capital in something else.

Repayment BTL isn't usually appropriate for the same reason: you're paying down the mortgage capital and getting a low return on the money you're paying, when you've already chosen a higher risk investment.

Do watch out for CGT. One of the problem points for BTL can be the case where the CGT on a sale exceeds the sale price - mortgage so you can't pay the CGT bill from the sale profit. This can happen if you remortgage the BTL to raise capital, borrowing some of the capital value growth. Never get into this situation because it can trap you in a debt spiral you can't get out of if you're forced to sell. You avoid it by making sure that you have sufficient equity in all of your property combined to pay the CGT bill of whatever property you think you might need to sell.