What mortgage method is better repayment or interest only for tax purposes.

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    What mortgage method is better repayment or interest only for tax purposes.

    Hi I,m a bit confused and need some help.

    I read in a rental guide that interest only is the best mortgage type to get.

    The property I am letting is my own property and I am on a repayment mortgage.

    What I would like to know is it worth switching to interest only to reduce any taxes that I will have to pay.

    My mortgage is about :

    Repayment : £480 pm with around £80 interest
    Interest only will be about £270pm

    Rent received around £650pm
    Letting agent fee £50pm

    Would it be worth me switching

    Thanks

    #2
    You are currently paying £80 per month in interest.

    If you swap to an IO mortgage it will cost you £270 per month in interest.

    And you are asking whether you should swap!?!?!?!?!?

    Comment


      #3
      Originally posted by Telometer View Post
      You are currently paying £80 per month in interest.

      If you swap to an IO mortgage it will cost you £270 per month in interest.

      And you are asking whether you should swap!?!?!?!?!?
      I know but I dont understand why the book says that its better for landlords to go with interest only. Are there any added tax advantages by going interest only???

      I don't have long to get this all in place and if I have to switch mortgage type I need to get it right.

      Comment


        #4
        Maybe starting-off on interest-only is better; but you're not starting-off.
        JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
        1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
        2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
        3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
        4. *- Contact info: click on my name (blue-highlight link).

        Comment


          #5
          You should make a very simple calculation to compare the 2 mortgage situations :

          Int-Only Mortgage-

          Income - expenses = 650 (rent) - 50 ( agent ) - 270 ( interest ) = 330 pm which is taxable at say 20% = 66 p.m leaving free cash of 264 p.m in your pocket to spend.
          Result = 3168 per year cash after tax.

          Repayment Mortgage -

          Income - expenses = 650 (rent) - 50 (agent) - 80 (Loan Interest. ) = 520 pm which is taxable at say 20% = 104 p.m leaving cash of 416 p.m but 400 p.m goes in repayment leaving 16 p.m in your pocket to spend.
          Result = 16 x 12 = 192 per year cash and mortgage loan reduce by 4800 .

          Comment


            #6
            Note for Gordon999's post:

            Profit on int only mortgage is £3,168
            Profit on repayment mortgage is £4,920.


            OP. An interest only mortgage means the amount of interest paid in future doesn't go down. But you have to find something else to invest the money in that will yield more than the interest.

            Comment


              #7
              I think your best bet maybe is to get paid advice, as I don't think you are interpretting your book correctly.

              The interest on a mortgage is tax deductible (generally, but I'm not going to elaborate here). A repayment mortgage consists of an interest slice (usually the bigger slice) and the repayment slice that reduces your mortgage balance.

              The business reason for going interest only is that it eases the pressure on your cash flow, as you don't have to pay out as much. Generally businesses like to be leveraged and debt financed to x%, so not paying off the loan, hence interest only. They can then save the 'spare cash' from not repaying the loan to invest in other investments.

              Tax wise, the interest from the loan is deducted.

              ie. Interest only: £100 per month interest = £100 per month tax deductible
              Capital repayment: £100 interest + £20 capital repayment = £100 tax deductible
              I can take no responsibility for the use of any free comments given, any actions taken are the sole decision of the individual in question after consideration of my free comments.

              That also means I cannot share in any profits from any decisions made!

              Comment


                #8
                I,m on a repayment and all I want to do is put back as much as possible into the property.

                So interest only wouldnt be worth it because I don't have another investment vehicle.

                Comment

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