Intrest only should i switch?

cundall

Good evening....

I am getting around to sorting out all my finances and i now need to sort out my mortgage .... (bit worried).

I currently have my mortgage with the Beverley Building Society and owe £112k on an interest only mortgage. I have enquired about changing my mortgage to a repayment one and it would cost £100 to change then I would have a rate of base plus 1.5% (6.5%) - Is this a good deal?

The reason why i ask is that i don't live in the house as i only rent it out but i now want to start paying off my debts (only one ) I only earn 20k but should have a good credit history and the houses around my area are up for £210k.

Thanks very much in advance...

BrokeRage

If you are declaring the income to HMRC (as you should do) then it is probably best to leave it as interest-only as the mortgage interest is an allowable expense to offset against the income. Repayments on the mortgage are not treated as an expense and reduce the amount of interest as the debt reduces (resulting in more taxable profit).

My view is that you should put any excess into a cash ISA at a similar rate to your 6.5% (which is an excellent rate for buy-to-let in current conditions). This means that your money is growing in a tax-free environment without affecting the tax-efficiency of your mortage. I hope that this all makes sense to you.

BrokeRage

Should have read: "Capital repayments on the mortgage are not treated as an expense and reduce the amount of interest as the debt reduces (resulting in more taxable profit)."

jamesd

BrokeRage is correct. If you have equity in your own home that's sufficient to repay this BTL mortgage you might consider doing that and lending your letting business the money. You can still deduct this interest from rental income, up to a maximum of the value of the letting property at the time you started the business. Residential mortgages are usually cheaper than BTL so this generally increases the profit from the rental business.

cundall

Thanks very much.

At the moment all my free cash is locked into a fixed rate savings account (£30k@6.7%) then i have my isa's full up for the last 5 years (6.55%). All my new savings (around £3K) is currently earning 6.5% (not tax free) then next month i am starting the new reg saving account at 10% (£500pm).

If i can pay a lump sum off my capital once a year i guess this would be a wise thing?

BrokeRage

It sounds almost "Tax neutral" whichever way you do it then. Maybe go and have some fun with the spare money!

I guess that if you do build up enough savings to clear the debt, then you have that option (if, for example, you wanted to buy somewhere as a main residence), but I'd think twice about clearing any of the mortgage at present as it may be tougher to borrow in the future.

If savings rates fall significantly compared with mortgage rates, then it is worth reappraising at that time.

jamesd

It's not usually a good thing to pay off the loan used for a BTL property. Better to invest the money somewhere else, either more property if the market looks good or in some other way.

You might consider using investments instead of savings accounts, perhaps through this fairly low risk mixture:

30% BlackRock UK Absolute Alpha
20% Cru Investment Portfolio
20% Invesco Perpetual Monthly Income Plus
20% Invesco Perpetual Income
10% Neptune Global Equity

The chart shows how the volatilities differ and why so much is in the more stable ones (colors are red, blue, yellow, green, gray/blue top line in fund order).

The Invesco Perpetual Monthly Income fund is best held inside a stocks and shares ISA, the rest are fine outside an ISA. Likely return is 8-12% a year with no tax to pay if your CGT allowance is usable.