BTL Property, to repay or not repay?

Jimb095

Hi all

I hope this thread is in the right group as I'm certain I'm sure it'd work being placed it in the cutting tax/property threads.  Apologies for any naivety and thank any contributors in advance for any advice.  I'm just confused at to whether I'm making bad choices in terms of our very modest BTL properties (4) and residential one.  Myself and my wife currently work busy/stressy full time, overtime when possible and over pay on our residential property.  It has the highest amount of outstanding balance as invariably we've robbed Peter to pay Paul in terms of deposits etc.  We also repay 3 of our BTL properties thus reducing the capital whilst the interest is obviously also reducing increasing our tax liability.  Also, we are both higher rate tax payers, therefore after this final transition year (of the 4 year landlord tax changes) we will have to pay 40% on rental income after all costs have been deducted.  I have a modest pension to which I maximise AVC contributions but my wife has a negligible group of pensions that amount to very little, she's currently enrolled on a workplace pension.  We've always had in mind that two of out BTL's would be her 'pension pot', hence overpaying the capital as once they are paid off it would hopefully coincide with her retiring at maybe 60, she'll no doubt get a part time job/voluntary work as she enjoys keeping busy.  However, that is not likely for another 9 years or so, during that time we are going to be hit hard with tax so should we be doing this a little differently?  Thanks in advance, approximate property details below, all properties in both our names, tenants in common I believe is the term?

RESIDENTIAL PROPERTY - VALUE £500,000 - OUTSTANDING MORTGAGE £245,000, currently paying £2,000 p/m repayment mortgage with over payment (Interest £7,000 p.a)

BTL 1 - VALUE £355,000 - OUTSTANDING MORTGAGE £115,000, currently paying £1,000 p/m repayment mortgage with over payment (Interest £2,800 p.a.and reducing)

BTL 2 - VALUE £225,000 -  OUTSTANDING MORTGAGE £66,000, currently paying £800 p/m repayment mortgage (Interest £2,300 p.a.and reducing)

BTL 3 - VALUE £155,000 - OUTSTANDING MORTGAGE £97,000, currently paying £500, p/m interest only with over-payment (Interest £2,400 p.a. and reducing)

BTL 3 - VALUE £420,000 - OUTSTANDING MORTGAGE £210,000, currently paying £205 p/m interest only (Interest £2,460 p.a.)

My wife is aged 51, myself 46. Two children aged 15 and 16.

Obviously over the next 8 years where, barring any unforeseen changes we'll be in the higher rate tax bracket just through PAYE.  Many thanks is advance peeps, a great forum! 

Jimb095

Forgot to add rental income! 

BTL 1 - VALUE £355,000 - OUTSTANDING MORTGAGE £115,000, currently paying £1,000 p/m repayment mortgage with over payment (Interest £2,800 p.a.and reducing) RENT £15,000 p.a.

BTL 2 - VALUE £225,000 -  OUTSTANDING MORTGAGE £66,000, currently paying £800 p/m repayment mortgage (Interest £2,300 p.a.and reducing) RENT £11,000 p.a.

BTL 3 - VALUE £155,000 - OUTSTANDING MORTGAGE £97,000, currently paying £500, p/m interest only with over-payment (Interest £2,400 p.a. and reducing) RENT £10,200 p.a

BTL 4 - VALUE £420,000 - OUTSTANDING MORTGAGE £210,000, currently paying £205 p/m interest only (Interest £2,460 p.a.)

Rent £15,000 p.a

Guess the rental income would be great when we are not working and in the lower tax bracket, it's just what to do in the meantime!

Cheers

atush

What kind of pensions/amt do you both have?

steampowered

As you are higher rate tax payers, you are probably going to much better off increasing your pension contributions to get the 40% tax relief, than you are overpaying any of your mortgages. Especially if you are not going to be higher rate tax payers in retirement.

You can put up to £40k into each of your pensions each year. It may be worth selling one of the BTL properties to top up your pension to benefit from the relief.

As you are higher rate tax payers, £40k could instantly become £56k when you put it into your pension, if you can get 40% tax relief on it. Plus you would continue to accrue returns on the higher amount (stocks and shares generate around 7% per year on average over the long term). Albeit, you can only get 25% of that back-out from the pension as a tax free lump sum and the rest you would pay income tax when drawing down on it during retirement.

A healthy pension pot will also offset the risk you are taking by relying on a small number of properties to find your retirement - unlike tenants, pensions won't ever stop paying the rent or need to be evicted.

Your post doesn't say the interest rate you are paying on these BTL mortgages. I suspect that is far higher than the interest rate you are paying on your residential mortgage. You can calculate whether you are better off clearing the BTL mortgages as they are on higher interest rates, or the residential mortgage to keep the tax credits generated by the interest you are paying on the BTL.

Jimb095

atush said:

What kind of pensions/amt do you both have?

Mine is a final salary pension, not been in it too long and I maximise AVC contributions. When I'm 60 according to projections it may pay circa £28-30k p.a. and a tax free lump sum around £150k.   I could invest in an AVC plus, different terms but I believe the deductions are still pre-tax?  Not sure what an amt is, sorry?!  My wife has negligible pensions from numerous jobs throughout her career, currently a workplace auto enrolled pension paying minimum contributions.

Jimb095

steampowered said:

As you are higher rate tax payers, you are probably going to much better off increasing your pension contributions to get the 40% tax relief, than you are overpaying any of your mortgages. Especially if you are not going to be higher rate tax payers in retirement.

You can put up to £40k into each of your pensions each year. It may be worth selling one of the BTL properties to top up your pension to benefit from the relief.

As you are higher rate tax payers, £40k could instantly become £56k when you put it into your pension, if you can get 40% tax relief on it. Plus you would continue to accrue returns on the higher amount (stocks and shares generate around 7% per year on average over the long term). Albeit, you can only get 25% of that back-out from the pension as a tax free lump sum and the rest you would pay income tax when drawing down on it during retirement.

A healthy pension pot will also offset the risk you are taking by relying on a small number of properties to find your retirement - unlike tenants, pensions won't ever stop paying the rent or need to be evicted.

Your post doesn't say the interest rate you are paying on these BTL mortgages. I suspect that is far higher than the interest rate you are paying on your residential mortgage. You can calculate whether you are better off clearing the BTL mortgages as they are on higher interest rates, or the residential mortgage to keep the tax credits generated by the interest you are paying on the BTL.

Thanks for the info.  Interest rates are all between 1-3%, the residential sits in the middle, 1.69%.  I guess we need to increase my wife's pension contributions for the next 9 years or so and perhaps stop over paying off the BTL's.  Totally hear you regarding tenant issues/reliability, there should be lump sum's/savings that cater for such events of course.