Thursday, 22 August 2019
If you take out a buy to let mortgage you have the choice of opting for “repayment” (where you pay both the interest and some of the capital back each month) or “interest-only” (where you only pay the interest). For clients who also have a residential mortgage, we usually recommend choosing interest-only, even though this means the balance of the buy to let mortgage won’t fall. Why is this? Three main reasons spring to mind:
1) It keeps your monthly payments as low as possible, which makes periods when you have no tenant easier to deal with.
2) It means that your tax returns are simpler to complete, as all of each monthly payment is interest so you don't have to do any calculations to work out what to enter on your self-assessment tax return.
3) It is more tax efficient to repay your residential mortgage before you repay your buy-to-let mortgage. This is because, even under new tax rules phased in since 2017, at least some of your mortgage interest can be deducted as an expense from your rental income. As such if you pay down your buy to let mortgagethen you will make more profit on your buy to let property, so will pay more tax on that profit. As such, you would be better repaying your residential mortgage first, as there are no tax disadvantages to doing that.
Once you have paid your residential mortgage off you can, if you wish, then concentrate on paying down your buy-to-let mortgage by making regular overpayments.
For more details of our buy to let mortgage advice service, please click here.