Pay off mortgage with dividends???

[JapanRed]

Hi all,

I’ve got a BTL mortgage that I’m not tied in on. £120k owing. Currently paying 4.24% and have 32 years left (would likely pay it off before then as once or twice a year I tend to pay off a decent chunk (£5-10k each time).

I’ve got enough money in my limited company to pay it off. I’ve so far held back as I’ve been of the opinion that why would I pay 32.5% on dividends to pay off a 4.24% debt. It didn’t make sense.

I had an epiphany last week and realised that the 32.5% is a one off payment whereas the 4.24% is year on year so compounds.

Now I don’t want to earn over £100k for various reasons. My day job earns me £60k so I could take £40k in dividends per year for the next 3 years and pay 32.5% on them.

Seems like I could be mortgage free in 3 years and it would be worth doing so.

Am I missing anything here? I don’t need the money that’s in the company for anything else. The money in the company is currently earning 1% interest.

Cheers guys.

[FredClogs]

I'd keep the mortgage and do the most tax advantageous thing with the money in the company, probably put it into a pension, get it invested properly. But it could be 6 and two threes you have to do the numbers properly and see where you are and consider where rates might go in the medium term.

[JapanRed]

Thanks. I’m already maxed out on pension contributions for the time being. And have diverse investments elsewhere.

Literally just need to know if what I’m planning makes sense and that I’m not missing something obvious.

Dropped the calculations into Money Saving expert overpayment calculator and a £40k overpayment would save me £68k in interest over the term. I’d have a £13k tax bill next year but would still be £55k “up” (£68-13k). Unless I’m talking rubbish which won’t be the first time haha.

[springfan62]

Why don’t you transfer the BTL to the company, depending on the numbers this may be a better option.

That way u get rid of the mortgage and save on the 32.5 dividend tax.

[Alpinestars]

springfan62 said:

Why don’t you transfer the BTL to the company, depending on the numbers this may be a better option.

That way u get rid of the mortgage and save on the 32.5 dividend tax.

Probably a pretty bad idea;

- capital gains triggered on the sale in,
- SDLT for the company,
- tax inefficiencies when selling the property, and
- could scupper any entrepreneurs’ relief that might otherwise apply.

[JapanRed]

Thanks Springfan. Already considered and ruled that out thanks.

I know everyone means well and thank you all very much but I dont need anyone to suggest any other options. I only need to know whether what I’m considering doesn’t have a great big flaw somewhere in it that I’m overlooking.

Thanks again.

[selmahoose]

I always find these "should I pay off the btl mortgage" threads really strange.

Should I 1) take my hard earned money that I could spend on a thousand other things and pay off the loan I arranged ?

or 2) should I just let that tenant-bloke pay it off for me with his hard earned money instead ?

Ummm....hmmm.....ermmm....

[Chainsaw Rebuild]

I'm no expert but could you split the difference and pay half off? then you get to reduce the repayments etc but also keep some money in the company for a rainy day.

[JapanRed]

selmahoose said:

I always find these "should I pay off the btl mortgage" threads really strange.

Should I 1) take my hard earned money that I could spend on a thousand other things and pay off the loan I arranged ?

or 2) should I just let that tenant-bloke pay it off for me with his hard earned money instead ?

Ummm....hmmm.....ermmm....

Sorry but your post is fundamentally flawed. I’ve got >£250k sat in my business doing nothing. The business is a side venture. Mine and the wife’s annual income from our PAYE jobs is £105k which we live on comfortably. We have 3 cars and a caravan that are paid for. We went abroad 3 times last year. We have no need for the £250k other than to pay off mortgages. No other debts. I don’t want to invest any of it as I’ve got plenty of investments elsewhere and also maxed out pension contributions.

And it’s not as if when I pay this off I’m not still receiving the rent. I still will be. If I pay the BTL off then I will use the tenant money to overpay our residential mortgage and make further savings that way.

Over the 2 mortgages I’m paying £1500 a month in interest alone. Which seems criminal when I’ve got so much sat doing nowt.

[JapanRed]

Chainsaw Rebuild said:

I'm no expert but could you split the difference and pay half off? then you get to reduce the repayments etc but also keep some money in the company for a rainy day.

Great point chainsaw but as per my above post I’ve got £250k in there and likely to increase by another £150k in next 12 months. I’m already splitting the difference.

[markiii]

my view, if the business doesn't need and won't need it. that money has no use to you unless you can extract it from the business.

whatever point you extract it your getting hammered on the tax front.

might as well do it now and save the interest

[supercommuter]

JapanRed said:

selmahoose said:

I always find these "should I pay off the btl mortgage" threads really strange.

Should I 1) take my hard earned money that I could spend on a thousand other things and pay off the loan I arranged ?

or 2) should I just let that tenant-bloke pay it off for me with his hard earned money instead ?

Ummm....hmmm.....ermmm....

Sorry but your post is fundamentally flawed. I’ve got >£250k sat in my business doing nothing. The business is a side venture. Mine and the wife’s annual income from our PAYE jobs is £105k which we live on comfortably. We have 3 cars and a caravan that are paid for. We went abroad 3 times last year. We have no need for the £250k other than to pay off mortgages. No other debts. I don’t want to invest any of it as I’ve got plenty of investments elsewhere and also maxed out pension contributions.

And it’s not as if when I pay this off I’m not still receiving the rent. I still will be. If I pay the BTL off then I will use the tenant money to overpay our residential mortgage and make further savings that way.

Over the 2 mortgages I’m paying £1500 a month in interest alone. Which seems criminal when I’ve got so much sat doing nowt.

Well no, his post is not flawed. We did not have that information..even though it changes nothing.We do not know any figures...

Do his repayments service the debt on the property and provide a yield? If so, what is it?

I would leave a mortgage running if you are receiving a healthy yield and let your tenant pay off the mortgage. If not, service the debt to a level where a yield is being achieved and then diversify in something else with your lump sum or look to buy another BTL if you are already fully diversified.

[JulianPH]

To answer your specific question OP, yes.

The savings over the term of the mortgage would massively outweigh the tax on the dividend withdrawal.

Using the rental yield to overpay your residential mortgage will result in further interest savings.

[LivingTheDream]

JapanRed said:

Thanks. I’m already maxed out on pension contributions for the time being. And have diverse investments elsewhere.

Literally just need to know if what I’m planning makes sense and that I’m not missing something obvious.

Dropped the calculations into Money Saving expert overpayment calculator and a £40k overpayment would save me £68k in interest over the term. I’d have a £13k tax bill next year but would still be £55k “up” (£68-13k). Unless I’m talking rubbish which won’t be the first time haha.

Fundamentally yes - you would be much better off in the long run.

However, I would do the calculation slightly differently as you need to pay the £13k tax bill from somewhere. So unless you’re paying that from another pot you should take £40k divi, stash the £13k tax in somewhere with decent returns until you need to pay it and pay off £27k.

[grahamm]

LivingTheDream said:

Fundamentally yes - you would be much better off in the long run.

However, I would do the calculation slightly differently as you need to pay the £13k tax bill from somewhere. So unless you’re paying that from another pot you should take £40k divi, stash the £13k tax in somewhere with decent returns until you need to pay it and pay off £27k.

Given the amount of money in the Company and timing of the tax payment I think the OP could pay the full £40k off the mortgage and pay the tax from next years dividend

[JulianPH]

The mortgage is £120k, not £40k.

[JapanRed]

JulianPH said:

To answer your specific question OP, yes.

The savings over the term of the mortgage would massively outweigh the tax on the dividend withdrawal.

Using the rental yield to overpay your residential mortgage will result in further interest savings.

Thanks very much Julian. This is what I wanted confirming.

[JapanRed]

markiii said:

my view, if the business doesn't need and won't need it. that money has no use to you unless you can extract it from the business.

whatever point you extract it your getting hammered on the tax front.

might as well do it now and save the interest

Thanks Mark

[JapanRed]

supercommuter said:

JapanRed said:

selmahoose said:

I always find these "should I pay off the btl mortgage" threads really strange.

Should I 1) take my hard earned money that I could spend on a thousand other things and pay off the loan I arranged ?

or 2) should I just let that tenant-bloke pay it off for me with his hard earned money instead ?

Ummm....hmmm.....ermmm....

Sorry but your post is fundamentally flawed. I’ve got >£250k sat in my business doing nothing. The business is a side venture. Mine and the wife’s annual income from our PAYE jobs is £105k which we live on comfortably. We have 3 cars and a caravan that are paid for. We went abroad 3 times last year. We have no need for the £250k other than to pay off mortgages. No other debts. I don’t want to invest any of it as I’ve got plenty of investments elsewhere and also maxed out pension contributions.

And it’s not as if when I pay this off I’m not still receiving the rent. I still will be. If I pay the BTL off then I will use the tenant money to overpay our residential mortgage and make further savings that way.

Over the 2 mortgages I’m paying £1500 a month in interest alone. Which seems criminal when I’ve got so much sat doing nowt.

Well no, his post is not flawed. We did not have that information..even though it changes nothing.We do not know any figures...

Do his repayments service the debt on the property and provide a yield? If so, what is it?

I would leave a mortgage running if you are receiving a healthy yield and let your tenant pay off the mortgage. If not, service the debt to a level where a yield is being achieved and then diversify in something else with your lump sum or look to buy another BTL if you are already fully diversified.

Mortgage is £550 p/m rental income is £750. Obviously there’s small adhoc costs elsewhere in terms of being a landlord.

I don’t want to diversify anywhere else. I’ve got investments in property, stock market, pensions, savings accounts, a car and several watches. I don’t want any more investments at this time but thanks anyway.

I merely want my money to work hardest for me and if I can save £70k interest and be left with £15k tax bill I am making £55k from drawing out the first £40k of money. I can’t see anywhere else I can make that much money even over the 30 yr mortgage timescale.

[JapanRed]

Just spoke to the bank.
£120k owing. If I let the mortgage run it’s term I will pay back £98k in interest.

So if I take 3 x £40k (£120k total) out of my business over next 3 years I will save £98k or thereabouts. I will have a tax bill of £39k leaving me about £55-60k up.

Plus there are further savings of £16k if I overpay residential mortgage by the £750 that the tenant pays me so closer to £70-76k up in the end.

Where else can I make a guaranteed return of £70-75k from a £120k lump sum?

Edited by JapanRed on Saturday 19th January 10:42