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My partner and myself are planning to buy a property together

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My partner and myself are planning to buy a property together but keep the existing properties, she has a house valued at £175k and is due to remortgage. This will raise £32000 towards a deposit and will rent the property out for £750pm.
My property is mortgaged at £1035 pm and can be let at £850pm. It has a fixed mortgage until May 2015 and will be remortaged then.
I also have a flat on a B2L mortgage, this clears £200pm approx after costs. I am a higher rate tax payer, my partner earns approx £11000 pa.
When remortgaging will it be more tax efficient to go for interest only mortgages or in her case a repayment to pay down the mortgage. The properties are our pension fund.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you confirm that the property that you are planning to buy togather is one that you will both make your home and that the existing properties that you each own will be let please.
Customer: replied 2 years ago.

That's correct, other properties will be let on a long term basis.

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with while I draft my answer.
Customer: replied 2 years ago.


ok, thanks

Expert:  TonyTax replied 2 years ago.
Hi again.

So long as you and your partner have equity in the properties that you intend to let, you will be able to claim a deduction for the interest you pay against the rental income. See Example 2 here.

If you go for a repayment mortgage, a part of the capital will be repaid each month in addition to the interest but only the interest will be deductible from any rental income as described in the previous paragraph. If some of the loan remains outstanding if and when the property is sold or the mortgage terms ends, that will have to be repaid one way or another. If you go for an interest only mortgage, then none of the capital will be repaid until the property is sold or the mortgage term comes to an end.

There isn't really a tax issue around the type of mortgage that is taken out. Any calculation of a capital gains or loss won't take account of any mortgage that has to be repaid.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.



The question is which is more efficient for a low tax rate payer


 


Repayment - pay tax on rental less interest part of mortgage and allowable costs but gain from paying down the loan and therefore on retirement have minimal outstanding mortgage but a property that is rented out to provide retirement income against:


 


Interest only where less tax is paid because allowable costs are higher but retirement income is less due to the capital loan not being paid off.


 


I think for me as a higher rate tax payer I would take an interest only or I would be paying too much tax on any income/capital repayment.


 


What do you think? Hope that is clear


 

Expert:  TonyTax replied 2 years ago.
I'm afraid that is personal decision for the individual and there is not right or wrong answer.

Clearly, the longer a repayment mortgage goes on, the capital element of the repayments increases and the interest element decreases depending on the level of interest rates of course. So, a lower rate taxpayer with a low income may choose to use the rental income to supplement their income and may, therefore, choose the cheapest mortgage option to keep the payments down and their income up, paying tax at just 20%. If it were me, I'd want to use the surplus rental income to make overpayments on loan repayments which would also serve to reduce the interest payments and so I would probably choose a repayment mortgage.

A higher rate taxpayer may also choose to use rental surpluses to reduce the loan especially if the income isn't required to supplement income. I've never known anybody use the tax argument that you did to vere towards an interest only mortgage, though it has its merits.

Much depends on where you think property prices will be in the future and how big a pension fund you want. There is no guarantee that there will be a profit to pay off an interest only mortgage as well as provide a "pension fund" as you referred to it in your question. That's why I'd probably choose a repayment mortgage. Everybody I know personally who is in the buy to let business chooses the repayment route and uses surplus rental income to reduce the loan. Some take account of the income tax on the rent and only repay the net of tax surplus rental income off the loan. You'd be surprised how quickly the loan balance comes down.
Customer: replied 2 years ago.

Thanks for this, it has been a great help. Actually it confirms my sentiments that a repayment mortgage if possible makes sense.


As the rent would not cover the repayments in my own case then an interest only or possibly combination of the two might be more appropriate but I can worry about that in a year when mine is up for remortgaging.


 


Thanks for your help.


 


Regards

Expert:  TonyTax replied 2 years ago.
Thanks. Enjoy your new home.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15761
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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