BTL - overpaying on interest only mortgage

Asmithalex

I'm confused... (it doesn't take much...) I have a small flat I rent out, value £150K. I have an interest only mortgage on £67k of that, on a tracker of 0.88% above base rate. The equity in the house is supposedly my 'pension' ....

I am trying to work out whether its worth paying down the BTL mortgage by around £7k which I have 'spare' in savings. The calculators are telling me that I will save roughly the same in interest as the amount I'm paying down - which leaves me in a position where I have less accessible cash, but more equity in the property. 

Given that I can leave the £7k in savings or add it to my pension instead - I'm not sure of the benefit of paying down the mortgage down. I won't sell the flat for another 5-8 years.

What would you do? I'm 56 and have woeful pension arrangements currently.

(I am also looking at moving to a fixed rate of 5.05% fixed for 5 years - as a supplementary question, how sensible is that right now?)

Thanks!

kipperman

Others far more knowledgeable than me will come along, but assuming that you are still working have you factored in the (at least) 20% benefit that you get from the Government when you pay into a pension?

Albermarle

kipperman said:

Others far more knowledgeable than me will come along, but assuming that you are still working have you factored in the (at least) 20% benefit that you get from the Government when you pay into a pension?

Or if employed an employer may add a bigger % if you do.

jonnydeppiwish!

Don’t forget the change in tax on income as well - you may well pay more tax if the interest is less. Could you not out it into a high earning account and leave it there till retirement?

Grumpy_chap

Asmithalex said:

I'm confused... (it doesn't take much...) I have a small flat I rent out, value £150K. I have an interest only mortgage on £67k of that, on a tracker of 0.88% above base rate. The equity in the house is supposedly my 'pension' ....

I am trying to work out whether its worth paying down the BTL mortgage by around £7k which I have 'spare' in savings. The calculators are telling me that I will save roughly the same in interest as the amount I'm paying down - which leaves me in a position where I have less accessible cash, but more equity in the property. 

Given that I can leave the £7k in savings or add it to my pension instead - I'm not sure of the benefit of paying down the mortgage down. I won't sell the flat for another 5-8 years.

What would you do? I'm 56 and have woeful pension arrangements currently.

(I am also looking at moving to a fixed rate of 5.05% fixed for 5 years - as a supplementary question, how sensible is that right now?)

Thanks!

As a LL, you need to be sure to retain sufficient funds in instant access to be able to meet any emergency that may arise to keep the BTL in good order.  If the £7k is the extent of savings available, this needs to be kept accessible for that emergency event situation.  That means either in savings or, if the mortgage allows overpayments to be drawn down again, the mortgage overpayment.  If the funds are needed for instant access / emergency events, the pension option is not suitable.

If the £7k is over-and-above a suitable emergency fund, then the options are savings, mortgage overpayment, pension contributions.
With the limited information available, mortgage overpayment would typically be preferable to savings.
Pension may be preferable to mortgage overpayment - do you have available allowances to allow pension contributions to be made?

These options will need some assessment of greater details than shared in this thread - only the OP can do that full assessment. It is difficult for contributors to make a full comment based upon minimal information.

theartfullodger

Will lender accept overpayment or charge you extra for doing it? 

?  Check first!

AlexMac

It seems an equal sum game to me so I’d keep the £7k available in savings, ensuring that you’re getting current top rate of 5%+ for cash. 

Assuming you’re paying tax on the rental income, and noting your current 6% or so mortgage you’ll be offsetting the £4k interest against tax, so you’ll be getting 20% of that back - £800 in tax relief?

Put another way, the taxman or tax woman is reducing your mortgage interest to just under 5%, which is less than the interest on a decent savings account? So if you closed your savings account down and gave it to the mortgage company, you’d actually be a few quid worse off, unless my logic is flawed?

So, noting also the comments above about keeping a cash cushion for the odd emergency like having to buy a new boiler, I would continue to pile any spare cash into savings. Interestingly my wife disagrees; despite us having a higher Loan than you, albeit on an even lower %, she’s averse to debt and fancies paying it off soon. I argue that this would cost us money, so she reluctantly agrees. And it keeps the savings liquid 

I dunno about a fix? We always had a low tracker until recently, and I naively hope that the Base Rate will drop sooner than in 5 years.  But what do I know?

Hoenir

Asmithalex said:

What would you do? I'm 56 and have woeful pension arrangements currently.

Pensions are generally more tax efficient when it comes to retirement planning. A BTL is subject to Capital Gains Tax which diminishes the net equity that's eventually realised. 

Asmithalex

AlexMac said:

It seems an equal sum game to me so I’d keep the £7k available in savings, ensuring that you’re getting current top rate of 5%+ for cash. 

Assuming you’re paying tax on the rental income, and noting your current 6% or so mortgage you’ll be offsetting the £4k interest against tax, so you’ll be getting 20% of that back - £800 in tax relief?

Put another way, the taxman or tax woman is reducing your mortgage interest to just under 5%, which is less than the interest on a decent savings account? So if you closed your savings account down and gave it to the mortgage company, you’d actually be a few quid worse off, unless my logic is flawed?

So, noting also the comments above about keeping a cash cushion for the odd emergency like having to buy a new boiler, I would continue to pile any spare cash into savings. Interestingly my wife disagrees; despite us having a higher Loan than you, albeit on an even lower %, she’s averse to debt and fancies paying it off soon. I argue that this would cost us money, so she reluctantly agrees. And it keeps the savings liquid 

I dunno about a fix? We always had a low tracker until recently, and I naively hope that the Base Rate will drop sooner than in 5 years.  But what do I know?

Thank you for this, which I had not thought about. You are quite right re tax on self assessment. 

Asmithalex

Thanks for all the responses. I can pay the mortgage down at any point currently, so no problem there, and do have a slush fund for the endless repairs etc the flat seems to need.... 

Given the tax advantage of actually paying interest as above, and the fact that I can remortgage to a lower rate than currently offered in savings, I'll leave the £7k where I can get to it at least for now. 

Many thanks! This question has been wandering round my brain for weeks so I'm glad to put it to rest! 

jonnydeppiwish!

Asmithalex said:

Thanks for all the responses. I can pay the mortgage down at any point currently, so no problem there, and do have a slush fund for the endless repairs etc the flat seems to need.... 

Given the tax advantage of actually paying interest as above, and the fact that I can remortgage to a lower rate than currently offered in savings, I'll leave the £7k where I can get to it at least for now. 

Many thanks! This question has been wandering round my brain for weeks so I'm glad to put it to rest! 

Always good to ask as there’s always something you forget, don’t know or even realise!