14:25 PM, 4th July 2011, About 12 years ago 2
Buy to let landlords often wonder if paying their mortgage off early is a good investment.
The answer is it depends on the borrower.
Most of us prefer not to have debt – but as a property business, landlords need to recognise some debt is good and some is bad.
If having mortgage debt on buy to let property worries you and you have the means to repay the loan, then get rid of it. There’s no right or wrong, just personal preference.
But before you rush off to transfer that cash, think the consequences through for your property business.
Property business mortgage interest is an allowable expense that landlords can set off against rental profits.
Every pound of mortgage interest reduces rental profits by a pound, and landlord tax by 20p or 40p a year, depending on if the owner is a low or high rate income tax payer.
Paying down a buy to let mortgage will increase profits and leave the property owner with more income tax to pay.
With that in mind, if the landlord has a mortgage on his or her home, then the interest on that loan does not attract any tax relief, so it makes more sense to pay that borrowing down first rather than a loan against an investment property that is a tax reducer.
Next look at other borrowings.
Credit cards, HP and other finance is likely to have a higher interest rate than a buy to let mortgage. The facility is available for landlords to draw their investment out of a buy to let property while charging the interest on any loan they take to do so against their business.
Taking cash out of the rental business to pay down those high interest rate debts frees up cash flow while reducing tax.
Dealing with mortgage debts is about landlords managing their money to their best advantage.
If a landlord does decide to pay down that mortgage – then they should look closely at their mortgage agreement to make sure any early repayment charges are not triggered.
Don’t up the payments either – in most cases, landlords are better off sticking to an interest-only mortgage while they salt away any extra cash over the financial year.
Property118 founder Mark Alexander wrote a similar article offering buy to let mortgage advice, you can read it here.