Remortgage due

[the0ni0nking]

As I've mentioned elsewhere (probably on FIRE), one of my mortgages on a BTL is due to expire from its delightfully low fixed rate at the end of August this year.

I used L&C previously as the broker last time around and will likely re-use them for the purposes of this but am not wedded to that.

What I'm after is opinion - the mortgage is currently c£70k on a property that according to Zoopla/Other house price comparison sites & my own knowledge of the local area is probably worth c£250k.

All rates cap out on the low side at c60% LTV so I could materially increase the mortgage to say c£150k with no detrimental impact to the interest rate. Looking at rates, I'd probably 5 year fix in the low 4.XX% depending on what incentives are available or whether I pay a product fee.

Increasing the mortgage could (yes I know this is debatable) increase the interest I can claim relief on and I'm currently a higher rate tax payer.

With the additional money, I'd probably be looking to either invest additionally in my pension or invest in some tracker type fund outside of that.

What would you do?

[kempiejon]

With the additional money, I'd probably be looking to either invest additionally in my pension or invest in some tracker type fund outside of that.

What would you do?

How much above 4.xx% have your investments been making? How much do you think they'll make. Our mortgage is still fixed low and I'm not overpaying choosing to invest spare as I think I can return more.
You mentioned a 5 year fix do you not think interest rates could be down at 2.xx% in a couple of years? With a shorter term term fix if you then took the smallest debt wouldn't that leave more money from the let to invest monthly? Rather than paying 4% to borrow it now.

[Gerry557]

What I'm after is opinion - the mortgage is currently c£70k on a property that according to Zoopla/Other house price comparison sites & my own knowledge of the local area is probably worth c£250k.

All rates cap out on the low side at c60% LTV so I could materially increase the mortgage to say c£150k with no detrimental impact to the interest rate. Looking at rates, I'd probably 5 year fix in the low 4.XX% depending on what incentives are available or whether I pay a product fee.

Increasing the mortgage could (yes I know this is debatable) increase the interest I can claim relief on and I'm currently a higher rate tax payer.

With the additional money, I'd probably be looking to either invest additionally in my pension or invest in some tracker type fund outside of that.

What would you do?

Can you still get relief on BTL? I thought that was going hence the struggles generally with BTL
Do you have a mortgage for your main house? if so what rate/term

Putting it into the pension might be good for a higher rate tax payer but you will loose a lot of flexibility. Its locked away until you are 55 or 57 might you need it before then. Do you have a partner to aid you in sheltering the extra cash. Even so x2 lots of £20k for isas means you will have other unsheltered investments/savings.

Can you get higher return than the mortgage rate. Even so Is the risk worth it for the small extra gain

I suspect its 6 of one and half a dozen of the other. I lot will depend on your own personal circumstances, earnings, job security and risk profile

[the0ni0nking]

Can you still get relief on BTL? I thought that was going hence the struggles generally with BTL
Do you have a mortgage for your main house? if so what rate/term

Putting it into the pension might be good for a higher rate tax payer but you will loose a lot of flexibility. Its locked away until you are 55 or 57 might you need it before then. Do you have a partner to aid you in sheltering the extra cash. Even so x2 lots of £20k for isas means you will have other unsheltered investments/savings.

Can you get higher return than the mortgage rate. Even so Is the risk worth it for the small extra gain

I suspect its 6 of one and half a dozen of the other. I lot will depend on your own personal circumstances, earnings, job security and risk profile

The way in which the "relief" is calculated from a tax perspective has changed (for the worse) but there is still an allowance.

As I am a higher rate tax payer, this is one of my thoughts ie. SIPP it to get me back to a basic rate taxpayer.

Job security wise, I'm ambivalent as the cost of making me redundant given my length of service combined with the payout on unvested share options would more than pay off this increased mortgage. Maybe that's what I should aim for although I'm not sure how best to go about getting sacked as they always seem to pick me for problem projects!

[DrFfybes]

Basically you are thinking of borrowing £70k against your BTL to invest?

First question to ask youself is... could you have done this previously when interest rates were lower, and if not why not?

£70k at 4% = £2800pa at 20% tax relief (which AIUI is all that is available) costs you £2240

£70k invested with unsheltered (because if you put it in a SIPP you need to take is back out to pay the mortgage off again, which means a tax charge) at (say) 3.5% annual divi means £2450 of divis, probably taxed at 33% if you have other unsheltered assets to use your dividend allowance so £1600 pa. roughly £600 less than the extra interest.

So you need at least 1% pa growth in the investments pa to break even, anything over that and you're on a winner subject to tax.

If you think that is likely then go for it, you might make an extra few £k a year, but don't let tax allowances dictate whether or not you borrow to invest, because the £550 extra tax relief on the mortgage in this exercise is by far the minority component.

Paul

[the0ni0nking]

Basically you are thinking of borrowing £70k against your BTL to invest?

First question to ask youself is... could you have done this previously when interest rates were lower, and if not why not?

£70k at 4% = £2800pa at 20% tax relief (which AIUI is all that is available) costs you £2240

£70k invested with unsheltered (because if you put it in a SIPP you need to take is back out to pay the mortgage off again, which means a tax charge) at (say) 3.5% annual divi means £2450 of divis, probably taxed at 33% if you have other unsheltered assets to use your dividend allowance so £1600 pa. roughly £600 less than the extra interest.

So you need at least 1% pa growth in the investments pa to break even, anything over that and you're on a winner subject to tax.

If you think that is likely then go for it, you might make an extra few £k a year, but don't let tax allowances dictate whether or not you borrow to invest, because the £550 extra tax relief on the mortgage in this exercise is by far the minority component.

Paul

What I was actually thinking of doing was using the £70k (or whatever amount it should prove to be) to contribute additionally to my pension which allows lump sum one offs to such an extent that it would drop me down from a higher rate tax payer to a basic rate tax payer.

I'd need to do the exact calculations given my combined rental income + salaried income but I'd guess I'd need to make about a £30k contribution so as to get me back to that level so could do it for a couple of years (and possibly more with savings I have elsewhere).

I'm now 44 and likely 30 months away from retiring - over those 30 months I'd probably pay off some of the mortgage either through earnings or rental income.

Clearly, I'd need to wait over a decade before being able to draw anything from my pension and in the interim I'd be living off rental and investment income.

The cheaper way to do it would be to raise the mortgage on my main home but that comes with its own headache of it being a challenge to then justify claiming that interest against the BTLs and as an accountant I don't want any ambiguity that could be looked on unfavourably from my professional body should HMRC ever do a personal tax inspection of my returns.

An alternative would be to start my own SIPP instead of going into the company DC scheme - but it'd simply invest in a similar fund (Global Equity tracker I think) to what my existing one is. There's probably some incentives available somewhere to opening a SIPP at a given provider but I've not looked into it in any detail.

[Gerry557]

Sounds like you are in a healthy position and not too bothered about the risk profile. If you are happy with the current available cash situation your plan might work.

I can see the merit of trying to reduce the tax rates. Hopefully when you collect things won't move again you and the 25 percent tax free will be an option.

If things go well you can fill your isa and pay down the mortgage too with a back stop of keeping working should all else not pan out.

[scrumpyjack]

Reminds me of a story my oldest friend told me. After a lifetime teaching he had retired and the lovely stone house he lived in in an old town in the Midlands was finally mortgage free.

He was at a dinner party and several younger people started talking earnestly about their mortgages, blathering on and on about it. He rather naughtily said ‘what’s a mortgage’! His host chided him for rather poor taste but it did stop the conversation instantly!

[DrFfybes]

Reminds me of a story my oldest friend told me. After a lifetime teaching he had retired and the lovely stone house he lived in in an old town in the Midlands was finally mortgage free.

He was at a dinner party and several younger people started talking earnestly about their mortgages, blathering on and on about it. He rather naughtily said ‘what’s a mortgage’! His host chided him for rather poor taste but it did stop the conversation instantly!

A different generation, MrsF's parents apparently hadn't had a mortgage since 1960 - they saved up for their next house and moved infrequently. We were brought up with economic uncertainty, power cuts, strikes, inflation over 20%, interest rates not much behind, and for us Debt is Bad. We were brought up to believe the bast thing to do is clear your mortgage, not increase it to gamble on the stockmarket, and certainly not in a wrapper you can't access for over a decade.

the0ni0nking is 44, since they became a teenager inflation has been circa 3% until the last year or so, and is now heading back, and throughout most of their adult life interest rates have been virtually nowt. For them credit is good - I know people who borrowed huge sums as they believed the returns from investment would outstrip the interest and it worked out for them.

What I was actually thinking of doing was using the £70k (or whatever amount it should prove to be) to contribute additionally to my pension which allows lump sum one offs to such an extent that it would drop me down from a higher rate tax payer to a basic rate tax payer.

I assume you have sufficient headroom in your contribution allowances to do this.

For me, the certainty is you can't access the money for another 13 years. The uncertainties are...
Interest rates
Market returns (OK, not so much a worry over 13 years)
Govt treatment of Landlords - tax relief, expanding the new Social Housing reforms to private Landlords, other tenant rights changes, EPC requirements for letting, ther restictions we haven't dreamt of.
Tax treatment on Pension & withdrawals
Will the LTA reappear and would the £70k extra now be an issue?

And lastly...

Increasing the mortgage could (yes I know this is debatable) increase the interest I can claim relief on and I'm currently a higher rate tax payer.

I don't think it is debatable...

https://www.gov.uk/guidance/income-tax- ... tal-income

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, or get relief against Income Tax as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Now the way I read that is that as the additional borrowing is NOT " wholly and exclusively for the purposes of the letting business" so you would not gain any extra tax relief on the interest.

But then I'm not an accountant

Paul

[scrumpyjack]

I agree. In my youth the aim was to pay off the mortgage as soon as you could. In the early seventies as I recall the mortgage rate was about 11% but you got income tax relief at your highest rate (up to 98% for 'unearned' income). When they abolished this tax relief the real value of my mortgage had been pretty much wiped out by inflation and I was able to pay it off in one go. The girl in the Halifax was rather surprised

[the0ni0nking]

I don't think it is debatable...

https://www.gov.uk/guidance/income-tax- ... tal-income

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, or get relief against Income Tax as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Now the way I read that is that as the additional borrowing is NOT " wholly and exclusively for the purposes of the letting business" so you would not gain any extra tax relief on the interest.

But then I'm not an accountant

Paul

It's one of the items that has been the subject of much discussion on the likes of AccountingWeb and other such interesting websites that you should visit if ever suffering from insomnia! Indeed, there seems to be some debate about whether the published guidance doesn't align with their BIM Notices.

Suffice to say, I've got myself comfortable around the whole thing ...... I think!

[the0ni0nking]

I agree. In my youth the aim was to pay off the mortgage as soon as you could. In the early seventies as I recall the mortgage rate was about 11% but you got income tax relief at your highest rate (up to 98% for 'unearned' income). When they abolished this tax relief the real value of my mortgage had been pretty much wiped out by inflation and I was able to pay it off in one go. The girl in the Halifax was rather surprised

I bought my first house in May 2007 on a five year fix at 5.69% at a 60% LTV.

I fixed purely because I wanted certainty on the rate and as a just qualified accountant was expecting my salary to increase reasonably well.

What happened was I got a new job almost immediately after and they then relocated me down south in 2009 which is when I then bought my 2nd property.

But, what the relocation facilitated was work paid for my new main house mortgage down south but also paid the huge exit fee to extricate myself from my mortgage on what was previously my main property and put it on a BTL mortgage which was at a lower rate than what was the old main property rate.

So that worked out well - but it wasn't a fun time as I was regularly travelling on the train on a Sunday night to be at work for Monday while also losing a chunk of the weekend because I'd also head back up north. But I'd do it again, and similarly my 2 years or so in Switzerland away from friends and family as it facilitated the fortuanate position I'm now in.

Although given the increasing tax take, and the BTL tax noose, maybe it would have just been easier to have bought a one bed flat and have been totally mortgage free about 15 years ago and now live off the state. But, I have a sense of pride and self decency that such behaviour isn't acceptable.