Tax on mortgage interest

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    Tax on mortgage interest

    I'm new to letting and I'm just starting to do my research. There are a couple of things I don't understand that some of you may be able to help me with.

    One of the things that is recommended in a property letting book is that you have an interest only mortgage so that you pay less tax. It makes sense that you would pay more tax if you pay off some of your mortgage, but the reason for this is that you are making a profit. Isn't it good to maximise your profit? Instead of 0% you'll get 60% (if you pay 40% tax).

    It has also been recommended to me (not in a book this time), that I minimise the mortgage against my property to save tax. From what I've read on here it doesn't matter where the mortgage is as long as it is for financing the investment property. By putting a large amount of the mortgage against my current house I would save a lot of money.

    #2
    Hello

    I'm not sure which book you have been reading, but if those are the conclusions of the book I would burn it. However, I suspect your conclusions drawn here are based on facts in the book that are then not quite being conveyed properly in your summary above.

    An IO mortgage will not change a thing on your tax return. If you pay £600 interest on an IO mortgage or £750 on an equivalent repayment mortgage your tax return will look the same. You will have a £600 deduction against your rental income.

    Going IO means that you have more cash leftover in the bank at the end of the month and more debt against your name with the bank. It has no effect on your tax.

    The only time you pay more tax in this scenario is because under the repayment mortgage your interest amount falls with time. You are thus making more monthly profit, so you pay more tax. It reminds me of a time that a friend of mine refused a pay rise because they would have to pay more tax... simply a flawed thought process! You are only considering one side of the equation.

    In your third para, I am not sure what the context is here - there are many different possible variations as to how you have finance against your own home. But interest on finance used for the purpose of the BTL will be deductible. In this paragraph you have recognised the importance of profit - presumably that your mortgage secured against your own house will have a cheaper interest rate, so you make more money. Applying your logic from para 2, you might conclude that you're are paying more tax as a consequence, but here you recognise that that isn't a bad thing!
    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


      #3
      Great, that's answered my questions and confirmed what I was thinking

      Comment


        #4
        Originally posted by HouseInvestor View Post
        Great, that's answered my questions and confirmed what I was thinking
        No problem.
        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

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