Pay off small buy to let mortgage or use the money towards a new home deposit?

Peter.Siffredi

Hello,
 I've got a share in a buy to let property. The outstanding mortgage balance is £19,000 and I've got £20,000 in an offset savings account with my mortgage provider. My current 2% deal is about to expire.

The reason I haven't paid off the mortgage balance is that my partner and I are looking to buy our first home and the £20K in my savings account would add to the deposit. We've got a decent deposit without the £20K as we'd be able to put down (deposit) around 50% of the new home cost.

I'm thinking it shouldn't really make much difference whether I pay off the £19K on the existing mortgage or add it towards the deposit for a new home as:

1. If pay off the existing mortgage, I'll have £19K less to put towards a new property and therefore will have to pay off a slightly higher mortgage on our new home.

2. If put my £20K of savings towards a deposit for a new property, I'd have to pay interest on the £19K outstanding mortgage balance for the buy to let?

In theory there shouldn't be much difference in cost between options 1 and 2. Have I assessed this correctly?



 

Bluebell1000

The £19k mortgage against your BTL can (interest only portion) reduce your tax. However I suspect the BTL mortgage at new rates will be a higher interest rate than you'd pay on a residential mortgage. You might want to factor that in if possible.

El_Torro

For what it's worth I own a property I live in and a BTL property. I maximise the amount I borrow on the BTL and try to keep the residential mortgage as low as possible. The reasons:

I have an interest only mortgage on my BTL. If I want to pay off the mortgage some day I can just sell the property. Not so easy to do with a property you live in.

I get tax relief (20%) on the interest I pay on my BTL mortgage. 

Interest rates for BTL mortgages are pretty much the same as for residential mortgages. Once upon a time there was a big difference between the two. I'm not seeing that now though.

SDLT_Geek

Peter.Siffredi said:

Hello,
 I've got a share in a buy to let property. The outstanding mortgage balance is £19,000 and I've got £20,000 in an offset savings account with my mortgage provider. My current 2% deal is about to expire.

The reason I haven't paid off the mortgage balance is that my partner and I are looking to buy our first home and the £20K in my savings account would add to the deposit. We've got a decent deposit without the £20K as we'd be able to put down (deposit) around 50% of the new home cost.

I'm thinking it shouldn't really make much difference whether I pay off the £19K on the existing mortgage or add it towards the deposit for a new home as:

1. If pay off the existing mortgage, I'll have £19K less to put towards a new property and therefore will have to pay off a slightly higher mortgage on our new home.

2. If put my £20K of savings towards a deposit for a new property, I'd have to pay interest on the £19K outstanding mortgage balance for the buy to let?

In theory there shouldn't be much difference in cost between options 1 and 2. Have I assessed this correctly?



 

Are you and your partner looking to buy in England?  If so, have you factored in the extra 3% stamp duty land tax for buying if you retain your share in the let property?

silvercar

Funding for the BtL can be secured anywhere, it doesn’t need to be on the BTL property, in fact it could be an unsecured loan. It is the purpose of the borrowing that counts not where or if it is secured.