The Lemon Fool

Hi,

I'm a newbie here but hopefully not a newbie on finances

I have question which I would like some thoughts on regarding the buy to let mortgage I have.

High Level Financial Situation:
- Owner of primary residence (no mortgage) in joint names with my wife
- Household income of ~£350K/year
- Stocks and Shares ISA, Cash Assets, Pensions ~£1 million
- married, 2 young children (between 5 and 10)

Buy to Let Property
- bought for £250,000 in 2006
- currently worth work about £425,000 .
- Mortgage balance: ~£150,000
- current interest rate is 2.04% and is a lifetime tracker (1.79% above base).
- Rent ~£18,000 per year
- Allowable expenses of ~£3,500 per year.
- Mortgage Interest: ~£3,000 per year (but likely to go up soon)
- Only in my name

My Question
Given that I am paying £3,000 per year on interest and only getting 20% relief on this of £600 per year would I be better off paying off the mortgage which would:
1. Avoid the annual mortgage interest of ~£3,000 less any relieft
2. Allow me transfer the property into my wife's name also as with no mortgage there is no consideration and therefore no taxes payable.

We have liquid assets we could use to pay off the mortgage. I realise it is an excellent mortgage rate but can't but help feel it would be better off without the mortgage. I understand that the £150,000 cash we would use to pay it off would be better off invested in something which will earn say 5-10% per year but this is offset against the cost of 2% and a bit more soon.

What is probably the issue and causing me to think of paying it off is that we have quite a lot of cash earning little to nothing which would be better invested in a long term investment - pension, ISA, GIA etc.

Am I a fool to be even considering paying this off?

Thanks

P.S. If this is better posted in a different forum please let me know.

I'm sure many will advise paying off the mortgage to reduce the risk, sleep better at night etc.

You have the rent to cover the interest so are you worried about voids and or loss of job. What position would you be in. Probably better than most looking above.

Normally it's was best to run the biggest btl mortgage possible and offset it against expenses but I think that is being eroded now after the tax changes.

You say you have spare cash not earning have you used up all your ISA, pension allowance. Think this would be my first call.

You can leave a will to change ownership if the worst happens or remortgage if the name change is such a priority.

If in fairly secure jobs and good rental history I'd probably keep the mortgage and invest the money in tax shelters and pensions until you find being a landlord too much hassle as selling will leave you with another nice dilemma over surplus cash

Gerry557 wrote:I'm sure many will advise paying off the mortgage to reduce the risk, sleep better at night etc.
You have the rent to cover the interest so are you worried about voids and or loss of job. What position would you be in. Probably better than most looking above.

Yes, not concerned about void periods, just about limiting tax payable - just completed self assessment which brought that home!

Normally it's was best to run the biggest btl mortgage possible and offset it against expenses but I think that is being eroded now after the tax changes.

Yes it is.

You say you have spare cash not earning have you used up all your ISA, pension allowance. Think this would be my first call.

Yep, I think this is the key issue here - I'm looking at the wrong thing. If I had my other assets in investments then I wouldn't have the option to pay it off. My current issue is having actual cash which could pay off the mortgage earning 0% effectively when I'm then paying 2.09% on the other hand and this is clouding my judgement.

You can leave a will to change ownership if the worst happens or remortgage if the name change is such a priority.

Correct - I need to do this quickkly.

If in fairly secure jobs and good rental history I'd probably keep the mortgage and invest the money in tax shelters and pensions until you find being a landlord too much hassle as selling will leave you with another nice dilemma over surplus cash

If I still have remaining cash after maximising pensions, ISAs etc, then I would love to buy/build a Furnished Holiday Let (FHL) which attracts far greater tax relief that BTL. Around 20/30% of capital expenditures can be written if e.g. furnishings, electrics, plumbing etc. However it would be a very big undertaking but the benefit of being quite tax efficient and having a holiday home to use whenever.

Don't let the tax tail wag the investment dog. Certainly take steps to reduce it but paying tax also helps the country.

You also need some spare cash access, just in case. This could be premium bonds and you might get a return in winnings. Six months outgoings is recommended.

Yes you could invest in more property or do up your own or trade up.

The holiday place sounds your favourite, I think you know deep down and just want confirmation on your thoughts

Gerry557 wrote:paying tax also helps the country.

Couldn't agree more - a sensible middle ground between contributing and efficiency is what I'm after.

You also need some spare cash access, just in case. This could be premium bonds and you might get a return in winnings. Six months outgoings is recommended.

Agreed - a decent instant access option with possible (limited) upside.

The holiday place sounds your favourite, I think you know deep down and just want confirmation on your thoughts

It's definitely a favourite but a lot of work, especially when I'd like to do it in Ireland (and I'm in London)

Bare in mind that FHL's are expected to have all the latest fully functional equipment. They suffer heavy wear & tear with frequent tenant change over and require regular expenditure on repairs, replacements and maintenance. The tax advantages may not look so good when that is taken into consideration.

Thanks for the input.

Are you speaking from experience? Do you have any numbers on this?