Overpaying dilemma

saundyc

Hi, me and my husband took out a mortgage on a house in 2019 £122,945 for 30 years at 2.27% fixed for 5 years. We now rent out the house and we are living in my home house which I owned outright but we have remortgaged it for £80,000 over 15 years at 1.77% fixed for 5 years until March 2027, this is to consolidate debts and to buy a new car. I understand the risk of this but we will be in a better position financially and I want to save and overpay our mortgage(s). My dilemma is which one should be my main focus or should I try and overpay on both mortgages? Or is it best to tackle the £80k one and pay it off sooner and then use the mortgage payments towards overpaying the big one? Any guidance would be appreciated. 

Thrugelmir

saundyc said:

Hi, me and my husband took out a mortgage on a house in 2019 £122,945 for 30 years at 2.27%.

I'd be suprised if you obtained a fixed rate mortgage for 30 years. When does the fixed product period period actually end? Will your lender add a surcharge or will you need to remortgage elsewhere? 

As you are letting a property you are able to claim mortgage interest relief against the rental income of 20%. If the interest rate were to rise then maybe beneficial to overpay this mortgage in the future. At the moment appears marginal. 

saundyc

I wish! 5 years fixed so it's up in March 2024. I don't know about what will happen at that stage, we used a financial advisor. I do know that we had to go with Natwest as my husband works in the south of Ireland and Natwest are one of a few that accept euro incomes. 

K_S

@saundyc There are a couple of different ways to think about it given that property 1 (2.27%) is a rental property and property 2 (1.77%) is the one you live in.

One is to simply attack the mortgage with the higher rate.

Another is to attack the mortgage for the property that you live in (prioritising the roof over your head rather than the rental property) and once that's at a size/LTV you are happy with, then reassess.

Another approach that some (not everyone) take when comparing interest rates - (Assuming you're a UK taxpayer) when you do your annual tax return for the rental property income, you get 'tax relief' at 20% of the finance costs (primarily mortgage interest) so the rate you're effectively paying could be seen to be 80% of 2.27%, so about 1.82%. 

I want to stress here that the last paragraph above may or may not apply to your personal circumstances and tax situation, it's only a very rough illustration with a lot of standard assumptions.

saundyc

Another approach that some (not everyone) take when comparing interest rates - (Assuming you're a UK taxpayer) when you do your annual tax return for the rental property income, you get 'tax relief' at 20% of the finance costs (primarily mortgage interest) so the rate you're effectively paying could be seen to be 80% of 2.27%, so about 1.82%.

I'm only aware of the tax relief that you mention. I don't earn enough to pay tax and my husband pays tax in Ireland so I'm not sure how that works in relation to paying tax on the rental income.

Thanks for your advice. 

dimbo61

So you are doing a Tax return for your rental income ?
Have you changed from Joint tenants so 50/50 to Tenants in common ?
You have a Tax free allowance of £12,500 before you pay any Tax.
You did get permission to Let from your mortgage lender 

saundyc

So you are doing a Tax return for your rental income ?

Have you changed from Joint tenants so 50/50 to Tenants in common ?
You have a Tax free allowance of £12,500 before you pay any Tax.
You did get permission to Let from your mortgage lender 

We are only renting the property from September 2021 so we haven't had to do a tax return yet. I'm currently on career break so no income until I'm back at work in February 2024. We haven't changed anything from buying the property but we have a consent to let in place. 

saundyc

Have you changed from Joint tenants so 50/50 to Tenants in common ?

Me and my husband are joint tenants on both houses.