Paying down BTL mortgage or ISA?

[boyse7en]

I've got a roughly £100k interest only mortgage on a BTL house. I also have £15k in cash.
Interest rate on the mortgage is currently 6% (Base Rate + 1.75%)

Am i better off paying down the mortgage, or putting the £15k into an equity ISA (i have an ISA with Vanguard already, but not paid anything into it this financial year)?
Will reducing the amount of mortgage interest due increase the self assessment tax payable (I'm a 20% tax payer)

[trickywoo]

boyse7en said:

Will reducing the amount of mortgage interest due increase the self assessment tax payable (I'm a 20% tax payer)

Yes.

The answer to the other question depends on what your plan is.

I think interest rates are going up for a while yet and stock markets are especially volatile at the moment.

Personally I'd pay down the mortgage or do a hybrid with 2/3 on the mortgage and the rest on S&S ISA. I wouldn't be expecting to make much, and possibly face a short term loss, on the S&S though.

[MarcelM6]

I thought interest was no longer tax deductible?

[B9]

MarcelM6 said:

I thought interest was no longer tax deductible?

It isn't, but you get 20% tax relief on it.

So no change for a 20% tax payer, notable change for the 40% tax payer (which more landlords will find themselves being as full rental income (minus costs, not mortgage interest) counts as income

[trickywoo]

B9 said:

It isn't, but you get 20% tax relief on it.

So no change for a 20% tax payer, notable change for the 40% tax payer (which more landlords will find themselves being as full rental income (minus costs, not mortgage interest) counts as income

You've got to love the tax arrangements we have when something isn't tax deductible but you still get 'relief' on it.

An example I've copied off google.

Assuming a landlord takes in £950 per month rental income, and makes mortgage interest payments of £600 per month.

They'll pay tax on the full £11,400 rental income they earn
They'll pay £7,200 in mortgage interest
They'll get a tax credit of £1,440 (£7,200 x 20%)
A basic-rate taxpayer will pay £840 - no increase compared to the old rules
A higher-rate taxpayer will pay £3,120 - double the amount payable under the old system

[boyse7en]

trickywoo said:

boyse7en said:

Will reducing the amount of mortgage interest due increase the self assessment tax payable (I'm a 20% tax payer)

Yes.

The answer to the other question depends on what your plan is.

I think interest rates are going up for a while yet and stock markets are especially volatile at the moment.

Personally I'd pay down the mortgage or do a hybrid with 2/3 on the mortgage and the rest on S&S ISA. I wouldn't be expecting to make much, and possibly face a short term loss, on the S&S though.

I'm not sure what you mean about my "plan", but my intention is to keep the BTL until a few years before i am due to retire (about 15 years from now) and then sell it and put the proceeds either in a pension or another investment.

I'd expect to take a bit of a rollercoaster on an S&S ISA in the short term, but over a 10-15 year period I would hope to do better than the ineterest rate on the mortgage over the same timeframe.

[trickywoo]

boyse7en said:

I'm not sure what you mean about my "plan"

If you don't have a plan just spunk it on holidays etc.

[tight fart]

Have you checked to see if there’s an early settlement penalty?

[boyse7en]

tight fart said:

Have you checked to see if there’s an early settlement penalty?

yes, there is no penalty for overpayments.

[thekingisdead]

The long term return of global equities is 7% p/a, to put that into context of your 6% mortgage costs.

Paying down the mortgage is of course risk free. Equities are not.
Conversely in a period of high inflation, debt is good

[boyse7en]

thekingisdead said:

The long term return of global equities is 7% p/a, to put that into context of your 6% mortgage costs.

Paying down the mortgage is of course risk free. Equities are not.
Conversely in a period of high inflation, debt is good

I'm leaning towards putting the money into an ISA as:

If average return is circa 7% then it is better than the 6% current interest rate.

My gut feeling is that interest rates may go up another 0.5%, but that will be the peak and then they will reduce (i haven't got much evidence for this, as there as many "experts" predicting this as there are the opposite)

If i reduce mortgage by £15k then my taxable income will increase as i will be able to claim less against interest payments

It is more flexible. If interest rates rocket then i can close the ISA and pay it off the mortgage. If i put the money into the mortgage now and then rates reduce, i can't get it back to invest so easily.

[thekingisdead]

I think you’re thinking along all the right lines, tax liability, liquidity etc.

But most people would not take on the risk of global equities (I.e potentially Years underwater) for a *possible* 1% PA greater return over cost of debt.

[boyse7en]

thekingisdead said:

I think you’re thinking along all the right lines, tax liability, liquidity etc.

But most people would not take on the risk of global equities (I.e potentially Years underwater) for a *possible* 1% PA greater return over cost of debt.

Yes, a 1% improved return, given the risk, isn't great. But if interest rates drop that will become 2-3%. Where's that crystal ball when you need it?
And it is 1% + whatever the tax increase would be if I paid it off the mortgage.

I suppose the third option is to pay it off of my own house mortgage, but that is "only" 4.5% currently

[Jawls]

thekingisdead said:

The long term return of global equities is 7% p/a, to put that into context of your 6% mortgage costs.

Paying down the mortgage is of course risk free. Equities are not.
Conversely in a period of high inflation, debt is good

Isn’t that 7% a real number though? 6% mortgage is nominal.