BTL mortgage advice please!

[tim123]

2. You pay CGT when you sell the property, less taper relief.

Not any more you don't. Taper relief has gone

tim

[Trev16v]

I've been in more discussions with my IFA about this lately and he's still saying to go for an interest-only BTL mortgage as you gents are mainly recommending; however, what I still need to get straight in my head is what I should be doing in the long term regarding the actual capital of the rented-out house.

Just to put some figures into the equation here, the oustanding balance on our house is approximately 100K and the house is probably worth £135Kish. If I am to pay the smallest deposit I can get away with, then I would probably pay another 10K or 20K off the balance so that I could have it on a 75 or 60% LTV BTL mortgage. The BTL mortgage would have a rate of 4.99% - that's the best rate we can find (Cheltenham and Gloucester). I am therefore looking at monthly interest-only repayments of approximately £400.

New house will be about £260Kish; our existing mortgage (0.49% above base) would be ported over to that new house. Towards this house we may provide about 100K, which would be split between an initial capital deposit and a lump to go into the offset savings account.

Okay, let's say that the rental income will be £600 per month (realistic, but worst case). Once the interest component and agency charges are taken out of that, there's not a whole lot left over really. If I wanted any profit from the rent, I would need to pay a larger deposit off the balance.

Let's say for the sake of argument that I could potentially have some money left over from the rent each month as profit.

Now a friend of mine has a BTL house and he has it on a repayment mortgage. He has insisted - lectured me, in fact - that this is the way to go; he says that surely it is pointless having a house sitting there and have all rental income go towards interest, and for the house capital to not be paid off whatsoever. It's much better having capital paid off the BTL house, too, so that when you come to sell it, you're not just going to rely on equity in the house to make you money.

But am I right in understanding that, due to the complexities of Capital Gains Tax and so forth, it is actually much better to invest the profit from the rental income anywhere but the rental property? If I get profit each month, it's better off going into the offset savings pot on our own residential house (or some other investment means), as opposed to the rental home?

My friend is telling me that I'm bonkers not repaying any of the capital from my BTL, because in, say, 30 years time when I come to sell it, I would only have the equity generated by the house (which, in 30 years time, should hopefully be a lot more than 100K).

On the other hand, if I provide a large enough deposit towards the BTL (say I pay off half of it, i.e. 50K), the monthly rent could start to pay off the capital, too. So when I come to sell in 30 years, the oustanding loan amount is a hell of a lot less than 100K and I'm better off.

But actually I'm worse off, right? Because the implications of CGT and so forth actually means that my 50K deposit, and any rental profit, would have been better off invested elsewhere (e.g. paying off our own home's capital, a good savings account, and so forth).

I'm still trying to grasp why it would be better for me to put the 100Kish balance of my BTL on a 4.99% mortgage and then use all of our money to pay off a large whack from our new house, thus reducing the amount we're borrowing at +0.49%; when my simplistic mind tells me that surely it's better to reduce the amount I have to borrow at 4.99% as much as possible.

Trev

[b0redom]

Because if you pay off the capital on your BTL, you'll be deemed to be making a profit, and will start to be taxed on the income from it.

[tim123]

You are understanding wrongly.

If your 100K house sells for 200K in 5 yeras time, you will make (and be due to pay tax on) 100K of profit regardless of how much of the original 100K you have paid off.

tim

[Ardesco]

Your friend doesn't really understand it himself, and is paying out a lot of money on tax that he doesn't need to.

To put it simply, if you pay off the outstanding capital on your BTL you have to pay more tax.

If you use the money from the BTL to pay off the capital on the house you live in you do not pay more tax, and you are mortgage free on your main residence quicker.

Where would you rather be in 30 years, a BTL property that is mostly paid off, but you have paid a load of tax and are no nearer to paying off the mortgage on your main residence. Or mortgage free on your main residence with a BTL that will get you some cash in your pocket when you sell it.

it is very simple, PAY OFF THE MORTGAGE ON THE HOME YOU LIVE IN FIRST. If the worst should happen, which property would you rather be left with? Once the mortgage on your main residence has been paid off start paying off the capital on the BTL, but not before!!

If your freind can't see that this is the obvious thing to do I suggest he is not really cut out for the BTL market himself.