Get a new mortgage rate or just pay it off?

El_Torro

I have a plan. Or should I say, I had a plan. As with many great plans now that the moment of truth is coming I'm starting to doubt myself and have second thoughts. Here's what the plan was:

BTL mortgage on interest only: My very low interest rate is coming to an end in a few months and the plan is to pay off my residential mortgage entirely. I will then borrow more against my BTL to be able to afford this. My new LTV on my BTL will be less than 60% so still getting a decent rate. Happy days and drinks all round. I haven't organised the mortgage yet but based on the market today I reckon I could get an interest rate of about 4.1%. As with any BTL I'll be able to claim 20% tax relief on my mortgage payments.

What has thrown a bit of a spanner in the works is that the provider of my residential mortgage has offered to give me a new mortgage hassle free. No valuations, etc... which I guess is normal practice to offer existing customers. Assuming I go with a mortgage offer with no product fee they are offering me:
2 year fixed rate - 4.59%
3 year fixed rate - 4.47%
5 year fixed rate - 4.26%

Not the greatest mortgage offer around (my LTV is very low, well below 60%) but the fact that they'll just give me the mortgage without having to go through the application process is tempting. My flat has cladding issues and a very high annual service charge so it could be a struggle to get an offer elsewhere.

What's really got me doubting at the moment is that I have about £22k set aside to help pay off my residential mortgage (the rest of the balance will come from borrowing more on my BTL). If I don't need to pay off my residential mortgage I can just shove that £22k into my Stocks & Shares ISA (not all of it can go in this tax year, I know) and worry about it in 5 years time. Of course none of us knows how my ISA will do over the next 5 years, though I don't need to pay off the balance then. There are currently 15 years left on my mortgage.

Before you ask my pension balance is healthy and I am salary sacrificing a significant amount of my salary into my pension. No concerns from me on that front. I am currently 44 and plan to retire by 60. 

With my BTL mortgage only plan I would be able to put the full £20k into my S&S ISA every year. If I go with Plan B (get a fixed rate on my residential mortgage for 5 years and not borrow more against my BTL) I'll probably only be able to put £15k or so into my S&S ISA every year, with the added benefit that I have £22k that I can put in now, or between now and after April the 5th I should say.

So yeah, I think I've rambled on long enough. Like I say I'm unsure what to do, so over to the MSE forumites to decide my fate. Fire away.

poseidon1

Re your BTL, aren't you adversely affected by section 24 Finance Act 2015, which restricts your mortgage interest tax relief to just 20% of the mortgage interest paid?

For higher rate tax payers, this has had an horrendous affect on the profitability of their BTL, so much so that they are either selling up entirely or radically reducing or eliminating BTL mortgage borrowings.

Of course if your BTL is held within a company structure, then no problem ( section 24 does not currently apply in that circumstance ). If not, I would think carefully about increasing the BTL mortgage unless absolutely necessary.

Incidentally, commiserations with regard to the cladding and high service charges burdened on your residential flat.  Personally, I would be looking to the possibility of moving the flat on ( once cladding resolved),  and finding a less problematic home going forward. 

El_Torro

Yes, I only get 20% tax relief on my BTL mortgage (I mentioned this in my opening post). 40% would be better of course but 20% still effectively changes my 4.1% interest rate on the mortgage to about 3.3%. 

No, I don't have my BTL in a limited company. It's directly owned by me. 

Thank you for the commiserations. My residential property was not my best ever purchase. You win some, you lose some. As you say I am more or less trapped in this place now as if I sold it I would get a pretty poor offer from any potential buyers. Once the cladding is fixed (when that will be is anyone's guess) I will have more options on what I can do.

jimjames

El_Torro said:

Yes, I only get 20% tax relief on my BTL mortgage (I mentioned this in my opening post). 40% would be better of course but 20% still effectively changes my 4.1% interest rate on the mortgage to about 3.3%. 

You might only get tax relief on the mortgage originally used to purchase the property so if you increase the mortgage the additional borrowing may not qualify for tax relief. Depends if you can demonstrate the funds are needed for the business, paying off the mortgage on residential may be dubious. If it's above the original purchase price it won't qualify anyway.

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Wouldn't the rate be better borrowing on your residential rather than BTL?

poseidon1

One further point is I assume your BTL mortgage is interest only.

Substantially increasing this debt to pay down your home mortgage is directly pulling equity out of the BTL and spending some of that  accrued gain for alternative purposes.

An acquaintance did this continuously over a period of 15 years, not realising that she was 'spending' accrued profit from her  BTL that would remain subject to CGT on eventual sale, based on the original purchase price. She is now in the sad position of a flat only worth around £40k more than the current outstanding mortgage but a taxable gain on potential sale of £100k. So a CGT bill that may almost match her net proceeds of sale, once sale costs are factored in.

She made her position worse by also failing to notice the BTL lease had been reducing markedly over her ownership period, so she now has the additional problem of a lease which is now borderline mortgageable, limiting the pool of potential buyers. At the moment she has what I would characterise as a 'zombie' BTL.

El_Torro

@jimjames - Thanks for that, I was not aware of those restrictions. I will have to calculate how much of my new BTL mortgage I can actually claim tax relief on. 

Even so I think that a bigger BTL mortgage is the way to go. I should get an interest rate of about 4.1% when I do remortgage, on a 5 year fixed rate. The best offer my current lender is giving me on my residential property is 4.26%, fixed for 5 years. I can't shop around due to the cladding issues and ridiculously high service charge on my residential flat. Nor can I borrow more against my residential property for the same reasons.


@poseidon1 - An important trap not to fall into. Even with the bigger mortgage on my BTL I would make about £50k after selling it. Including clearing the mortgage, paying estate agent fees, paying Capital Gains Tax, etc... 

Also the "profit" I am making by borrowing more on my BTL is going directly into my S&S ISAs. My current BTL mortgage term ends when I'm 70 (I can extend this further if I want to) so I have plenty of time for my ISAs to grow and pay off the mortgage as a lump sum if I want to. Alternatively I can just sell the property and clear the mortgage that way. I have 25 years or so to decide what to do. 

I am not currently planning on borrowing more against my BTL in 5 years time when my fixed rate expires. Plans can change of course. I just have to make sure there's enough equity there for me not to make a loss if I ever do sell it.