Paying off the mortgage - tax effiecient????

Discussion in 'Finance, Property, Law' started by gijoe, Sep 9, 2007.

Welcome to the Army Rumour Service, ARRSE

The UK's largest and busiest UNofficial military website.

The heart of the site is the forum area, including:

  1. Probably one for the likes of Forces Sweetheart here so....

    If I had the means should I pay off the interest only mortgage on my rented out house and thereafter pay tax on all of the profit as opposed to using the interest charges to reduce my tax bill?


    Should I keep the mortgage and pay the cash that I would have used to clear the mortgage into cash and share mini ISAs in the hope that this will be more tax effiecient?

    Despite many hours of trying I can't get my head around the numbers?

    Can anyone help?
  2. msr

    msr LE

    Speak to an independent financial advisor - the first hour is usually free. The rest will save you way more than they cost you.

    P.S. No, I am not an IFA
  3. But bear in mind that once you've paid for it it's yours and if things go pear shaped you have it as a back up whereas if for some reason you hit a sticky patch while you're still paying it you might lose out. At least if it's yours you will have peace of mind .
  4. Tytus_Barnowl

    Tytus_Barnowl On ROPs

    Pay off the mortgage. Whatever an IFA says if given the choice they would do the same. Provided you keep saving at the same rate as your mortgage outlay you will never have your home threatened by an interest rate hike or some "Home Owners tax" which this government seem hell bent on applying. 8) 8)
  5. You need to look at how much interest you are paying on the mortgage, after taking into account the fact that you can offset the interest against tax v the interest after tax you can earn in a savings account.

    For example if you're a 40% tax payer paying (say) 6% interest on a mortgage then you need to earn 3.6% interest on your savings after tax to break even.

    Remember even if you are not a 40% tax payer now, if you have to add all the rental income on to your salary because you can longer offset the interest, it could put you in the 40% tax bracket.

    I would be surprised if it makes financial sense to pay off the mortgage, but I'm not an IFA!
  6. I agree with Tytus_Barnowl on this .

    Depends if you are a risk taker or not.

    remember the TAX you pay for renting can be reclaimed to look after the property Paintin, new windows etc.

    Also see the world markets right now. USA, Germany , Uk even harder for the Banks (or higher rates anyway) . There might be a bit of a crash coming.

    Im holding on for a few months before buying my next property.
  7. Depending on how big the mortgage is and where you are in respect of the term, and wether your on a fixed for X amount of time
    Pay some of the mortgage off , this reduces the interest or the time you have left on mortgage...

    or get an IFA... it looks like rates are only going up for the next 12 months even though there is still a shortage of houses.. If your fixed for the next 2-3 years no worries you need to check to see if additonal payments are OK.
  8. GI,

    The key question here is do you have the means to pay off your mortgage? If not the question is meaningless.

    If you do, I would recommend you settle it now and thereafter pay tax on rental income, or convert it into a repayment mortgage and reduce the capital outstanding by a sizeable chunk.

    Why? Because interest-only mortages only make sense if you believe that the asset will appreciate sufficiently to pay off the capital at the end of the mortgage term. The market has now peaked, and until the price/earnings ratio re-establishes itself (and this is not short term possibility) there will be very little money to be made from property, and there may even be the possiblity of negative equity.

    If you retain the status quo you are faced with a potential triple whammy of falling asset value, increasing interest rates and declining rental yield.

    Incidentally, if the property is a flat, I would recommend you sell now. These are always the first, and most heavily-damaged, casualties of house price stagnation/depreciation, and I forecast that shortly the market will be awash with them as the reality of the current global financial crisis starts to sink in.


    PS These are purely personal views - seek professional advice but be aware of the Vested Interest Bde.
  9. in_the_cheapseats

    in_the_cheapseats LE Moderator

    I'm with PAW here. I never like paying anything in tax so I aim to pay it all off as quick as I can. I've used a offset account for this purpose for the last couple of years. With the ever increasing interest rate, I felt it was the smart thing to do. I think I made the right call

    I know I'll be just as able to screw back money from the taxman when I'm claiming back against an income from rent on the incidentals you are allowed to.

    I am not a IFA.
  10. Thanks for all of the above.
  11. I'm going to disagree.

    It depends on what you mean by pay off your mortgage - do you mean you have a decent amount of capital and are asking whether to clear the debt or put a serious dent in it, or do you mean should you start paying it off gradually with a repayment mortgage?

    Either way, you need to do a calculation - how are you on Excel?

    First case:

    You will forgo interest on your savings. Work out how much this would be - remembering you can't put a lot into a cash ISA (well, not in a one-r anyway) so you will need to apply tax to the interest rate at either 20% or 40%, depending on whether you are a basic or higher rate tax payer - so multiply your interest by 0.8 or 0.6 as appropriate.

    You will then pay tax on your rental income - once allowable expenses are deducted.

    So there you have the two sums to see how much you are really making.

    Second case:

    If your interest-only mortgage payment + allowable expenses = rent, you have no tax to pay. This is probably the position to aim for.

    You could then add the difference in cost between the interest-only mortgage payment and what it would cost on a repayment basis to your existing savings. In time this would grow to enough to clear the mortgage. Use a savings calculator (you can find one online, eg on MSN Money) to work out how long it will take. Shorter-term, you can work out the interest you earn on it as above.

    This may well work better, on the basis that savings rates are invariably higher than mortgage rates, but it is likely to be your tax status that tips it either way.

    Offset mortgages can work well if you are a higher rate tax payer as you are effectively earning the mortgage rate tax-free on your savings, which means the equivalent of 9-10% before tax, but I'm not sure if they exist for buy to let loans - if that's what you need.

    Hope this is some help. I am no expert at all, but am at least pretty numerate and can do the calculations to work out which is best. It may well be that a proper expert could just tell you the answer straight off based on your circumstances.
  12. That's a good question and I don't have an answer for a rented property.

    I would recommend doing a before and after exercise on a spreadsheet. Time consuming and quite tricky work, though!

    For your own house, an offset mortgage is the best way to go, by far, except in your first few years when the mortgage should be fixed, IMHO!

  13. I use an offset mortgage. Mortgage of about 60k and savings account of about 60k so the whole thing is self financing. Advantage is if I need the money its readily available and my mortgage payment is pretty much all capital repayment.
  14. My mum has £25 left on her mortgage and pays only the interest on that each year, because then if anything goes wrong in life she can still re-mortgage the house.
  15. I think that this is probably also a cheaper way to look after all of the docs for the house rather than have them kept by a solicitor.