Is saving 3.9% a year worth it?

solidpro

Any Ideas?

Thrugelmir

Is it possible to make overpayments to the BTL mortgage without incurring penalties? 

thegentleway

Not sure about your maths?
£140k @ 3.8% is £5,320 in interest, not £4500? (although title suggest it's 3.9%)

with £140k in savings earning £1500 a year then you are effectively throwing away £3,820 per year.
Over 3.5 years, that's £13,370. So if you pay it off now you will be £7,370 better off once you take into account the £6k early repayment charge. Seems like a no brainer to me.

I'm not in a dissimilar position to you: BTL £130k @ 3.12% fixed for 2 years. The money is invested though (currently up 7.26%), not (effectively) depreciating in savings. If you are not confortable with risk involved with investing over 8 year timeframe then you should pay off your BTL mortgage and save £7,370. If you're considering investing then it might be worth talking to your mortgage provider as they may be willing to move you to another product if you are thinking of settling early (3.8% interest is high for B2L at current interest rates).

Another_Saver

I think the point of BTL is to get an interest only mortgage and see the interest as an expense off the rent.
Say you bought at £200k with 30% equity, 70% mortgage @ 3.8%, that's £5,320 pa interest. 3% stamp duty brings your outlay to £66k, round it up to £70k for some home improvements before the tenants move in.
Say the rent is £830 a month £10k pa. Your profit (before landlords insurance, void allowance, maintenance and repairs, agent's fees etc.) is £4,680, a 6.7% yield.
If you pay it off, your outlay goes upto £212k as you add on the redemption charge, to the price + stamp duty, you keep all the rent, £10k of £212k is a 4.7% yield.
The point of gearing up on a BTL mortgage is it ups the net % yield you get, and allows you to own more properties with the same deposit (you could maybe buy two more similar with those savings).

NottinghamKnight

The other thing to check is pension provision. Assuming there is suitable relevant earnings then any pension contributions will immediately benefit from immediate tax relief, at least 20% and potentially up to maybe 50% ore  more with salary sacrifice. Money is then obviously locked away until mid or probably late fifties. 

ZeroSum

thegentleway said:

Not sure about your maths?
£140k @ 3.8% is £5,320 in interest, not £4500? (although title suggest it's 3.9%)

with £140k in savings earning £1500 a year then you are effectively throwing away £3,820 per year.
Over 3.5 years, that's £13,370. So if you pay it off now you will be £7,370 better off once you take into account the £6k early repayment charge. Seems like a no brainer to me.

I'm not in a dissimilar position to you: BTL £130k @ 3.12% fixed for 2 years. The money is invested though (currently up 7.26%), not (effectively) depreciating in savings. If you are not confortable with risk involved with investing over 8 year timeframe then you should pay off your BTL mortgage and save £7,370. If you're considering investing then it might be worth talking to your mortgage provider as they may be willing to move you to another product if you are thinking of settling early (3.8% interest is high for B2L at current interest rates).

Tax deduct able? 

thegentleway

ZeroSum said:

thegentleway said:

Not sure about your maths?
£140k @ 3.8% is £5,320 in interest, not £4500? (although title suggest it's 3.9%)

Tax deduct able? 

OP implies his BTL is in a Ltd company so the mortgage interest would be tax deductable. (also explains the relatively high interest rate)
19% corp tax does save him £1,011 so only effectively losing £4,309 a year which is lot closer to £4,500.
Over 3.5 years, that's £9,832 saved from repaying mortgage. So £3,832 better off once you take into account the £6k early repayment charge.

DireEmblem

Would be good if OP shared if there was an overpayment free amount on the mortgage.  6k on 140k is essentially 4.2% so they could save a lot of interest, and then remortgage to access funds if/when needed.  Assuming emergency funds and such are in place is probably where I would go.

steampowered

You could consider investing in stocks and shares.

Much lower risk than leveraged buy-to-let, and likely to generate a higher return than 3.8%.

The average return generated by the stock markets over the long term is 7-8% per year. Or you might expect to get an average return of 5-6% from a bog standard medium risk investment fund which holds a mixture of stocks with lower risk assets such as commercial property and corporate bonds.

When the time comes, you would just sell your shares - without a redemption charge, and with it being significantly more likely than not, that you will have equalled or exceeded the 3.8% pa interest charge.

Completely tax free if done through a stocks & shares ISA. The company can invest but obviously can't use an ISA.

CharllieSays

A bit left-field, but I've been investing in property indirectly via LendInvest for the last 3 1/2 years. Interest is between 5.5-7% most of the time (you can pick and choose your investments). Only had 2 in arrears so far and they paid everything back eventually. It just meant that I got a few extra months of profit.

Another_Saver

CharllieSays said:

A bit left-field, but I've been investing in property indirectly via LendInvest for the last 3 1/2 years. Interest is between 5.5-7% most of the time (you can pick and choose your investments). Only had 2 in arrears so far and they paid everything back eventually. It just meant that I got a few extra months of profit.

Isn't that P2P?