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.

[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.

[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.

[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.

[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

[JapanRed]

LivingTheDream said:

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.

I would pay the tax bill from future dividends.

[JapanRed]

roadsmash said:

I would pay it off.

Or at the very least remortgage to a better rate. I presume based on that 4+% rate it’s not fixed?

But if the money isn’t doing anything else then paying it off is fine.

Thanks mate. Yeah it’s 4% as it’s not fixed. I could probably remortgage to under 3% if financially viable, however I think you are right in that paying it off makes better financial sense.

[JapanRed]

Thanks everyone. Really great replies as always. Think I’ll pay off the mortgage. I could take the dividend and invest elsewhere but it would be riskier than I’d like and not guaranteed. Whereas the savings on both mortgages interest is guaranteed.

[JapanRed]

Tumbler said:

Have you checked with the bank how much you can overpay without incurring a interest penalty, often it is only 10% of the outstanding balance in any year.

We aren’t tied in. No early repayment charges as I’m on base rate.

[JapanRed]

williaa68 said:

Is the business ongoing? If not, you could (potentially) liquidate it and take the cash out and pay 10% CGT via entrepreneur's relief, rather than 32.5% tax on the dividend. Even if it is ongoing now, if you are planning on stopping in the near future, this is worth bearing in mind. This is, broadly, my strategy - I have a similar amount tied up in my company but plan on accruing cash for approx another 3 years and then retiring. The only potential spanner in the works is a corbyn government in which case I will be liquidating and retiring very quickly!

Hi mate. I started the business 5 years ago. The reason I’ve got £250k in there is because I planned to do 5-10 years and then liquidate via entrepreneurs relief. It was almost set in stone and I had it all planned out with the accountant too.

Through sheer luck and not judgement, the business has gone from £30-50k a year profit to £120k last year and potentially £180-220k next year. Hence me now not wanting to close it for the foreseeable future. Maybe if it gets to a million I might close it but can’t see me wanting to shut it down while ever it’s going from strength to strength. It’s increased its profits year on year from inception so seems daft to think about closing. Hence the change of heart regarding entrepreneurs relief.

[JapanRed]

JulianPH said:

Foundthecure said:

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.

Do this.

Thank you!

One other thought OP. It may be possible to reduce the tax bill by transferring part of your shareholding to your wife (or vice versa) in return for the capital payment.

This would then be subject to CGT rather than Income Tax which would give rise to a tax liability of 20% or even 10% if you could use your entrepreneur relief.

It is certainly worth speaking to your accountant about (or asking Eric very nicely! )

This is simply tax saving however, the principle still remains the same on the dividend income tax payment, just even more attractive on the CGT/ER basis if that can work.

Cheers

Hi Julian.

Could you expand on this? My wife is already a shareholder and I already give her dividends. I plan to give her about £50k and myself £20k before April 5th. And can then fo the same after April. Is this what you mean?

[JapanRed]

selmahoose said:

@JR:

Hate to tell you, but the fact that someone else is buying that btl in Barnsley for you is just about the only thing it's got going for it.

It grosses £9k, £6.6k of which is going to the lender. Then there's the factoring, the insuring, the gas, elec, pat, legionella and other testings to pay for. Then there's the calc. for the self-management (inc.time cost at whatever your PAYE rate is). Then there's reps & maint which no property ever escapes from for long including the ones we live in. There's even landlord registration, accountancy, and probably a factor/buildings manager to pay for too. And those are my top of head calcs so there'll be other costs on top.

So there's not much to worry about taxwise because it's making jack anyway.

The ONE thing it does have is that you're NOT paying for it. The tenant is. So, so far your ROI (calculated on the 'hurt' money you paid to get it - deposit, conveyancing etc) may well be pretty decent.

Often enough that thought is the only thing that keeps a landlord sane!

And you want to spoil that. By dumping another £120k from a different company on it. Massively reducing your ROI.

And it's to be paid from dividends. Which are not 'business costs' like fee/salary income from companies is. So the dividends are from residual profits taxed at the corp tax rate (19%, 20%??). In other words, the dividend has already BEEN taxed before you get it.

Then you get it. And I'm surprised that the daft folk who encourage you to do this haven't told you to limit that dividend to £34.5k instead of £40k for reasons that I can't be bothered explaining.

Next you've to take the now mortgage free rent money (which once again has a tax implication) and use that towards your resi mortgage which is most definitely not a deductible business cost and may be "investing" in a depreciating asset!

Well you're a Yorkshireman so you'll appreciate some blunt speaking rather than ego-puff. I'd say give your head a wobble, join those Barnsley landlords who're getting their nice 10% from those decent little £50k terraces Rightmove is full of, and just further that plan you were talking about a few weeks ago of building up a nice portfolio of btls.

ETA: Deleveraging a btl business at age 33??? Seriously? lol!

With the greatest respect to St Eric, I'd look to PH counselling from say Dazwalsh or Cerbperv if he's still around re btl affairs. IME - albeit fundamentally flawed - in the property business you need an accountant prepared to have a laff with HMRC rather than someone keener to take the cautious (aka paranoid) approach so often to be seen on this font of wisdom.

PS: I know what I'd have done with your 1/4 bar of company moolah when I was 33. But then, I was never certain I was going to be 34

Edited by selmahoose on Saturday 19th January 15:13

Hi selma,

Thanks for the comments. To answer a few of them:

Yes I know it’s a poor example of a BTL. If I was a professional landlord I would’ve bought 4 terraced houses for the price I paid for this house (£185k I think).

I’ve considered buying a few properties as you have noted, but have yet to pull the trigger as I’ve had a bit of hassle with tenants and being a landlord, whilst not terrible, has occasionally been a bit of a ball ache.

I do indeed appreciate the straight talking ;-)
I’m 34 not 33 :-)

(Sorry I’ve not mentioned all this before. Didn’t want this to become my life story).

On a side note, you say you know what you would do with the money at my age. What would you have me do with the money at 34?

EDITED AS I FELT THERE WAS TOO MUCH PERSONAL INFO IN HERE

Edited by JapanRed on Saturday 19th January 16:11

Edited by JapanRed on Monday 21st January 10:01

[JapanRed]

rockin said:

IMO this finance forum is a very useful aspect of PH. For the most part it contains contributions from three types of participant,

• Those who know a fair bit about finance and are willing to share their knowledge in a straightforward way
• Those who don't know as much about finance and are here to learn
• Those who don't know and don't want to know.... Quite why this third category feels the need to be here I'm never quite sure.

To my mind most of the suggestions made in response to OP have been constructive - addressing the "gross to net" tax situation and that "there's not much point paying interest to borrow money you've already got".

Anyone who spends a bit of time and effort to follow this forum should be able to navigate the alien world of finance without getting caught up in the dodgy end of the business and without paying fat fees for general knowledge dressed up as "bespoke financial advice". Some people do need bespoke advice and paying for it may deliver excellent value for money. But not everybody does need it and that's where real benefit can be gained from this forum - deciding whether advice is needed and what to do if it's not.

I've learnt a lot from Julian PH, from Derek Chevalier, from EricMC, from Sidicks and from many others. They are all different, all knowledgeable and always worth reading.

Hi Rockin. Completely agree. I’ve also learnt a lot from Julian. Happy to hear everyone’s suggestions and try and wade through the good and bad.

I wouldn’t make a decision off the back of an internet discussion, but it gives me ideas of avenues to explore and do my own investigations and due diligence.

[JapanRed]

JulianPH said:

JapanRed said:

Hi Julian.

Could you expand on this? My wife is already a shareholder and I already give her dividends. I plan to give her about £50k and myself £20k before April 5th. And can then fo the same after April. Is this what you mean?

Hi Rob

I am not an accountant, but was putting forward the not unreasonable concept that you and your wife may be able to dispose of part of your business interests (the shares, in this case) to the other in exchange for a capital lump sum (rather than taking out an income which is taxed as such).

The question is would the new shareholder be able to use the funds now in their control to pay for this. If so (I cannot see any reason why not, but this is not my area of expertise) then the payment from the business would not be liable for income tax, but be liable for capital gains tax (20%) and potentially recieve the Entrepreneur Relief rate, dropping this to just 10%.

I've called my accountant regarding this (but it is a Saturday afternoon, so I am not expecting to hear back until Monday) but it appears to work in principle. Eric could give a definitive answer if he is about...

I was just floating an idea that may have legs.

Cheers

Julian

Thanks Julian. An interesting concept and one that I’ve not heard of before. I’ll ring my accountant next week.

Thanks again

[JapanRed]

WonkeyDonkey said:

I'm sorry if this sounds crass but if you are earning so much from your day job and side job why not just get proper financial advise from an accountant or something similar?

Surely they'll be able to advise you properly and the cost will be pennies compared to whatever interest you're paying at the moment on the btl

I get regular advice from 2 accountants but I like to bounce ideas off this forum before going to them. Wouldn’t make any decision purely based on an Internet forum but these forums have given me ideas in the past thaty accountants haven’t thought of.

[JapanRed]

red_slr said:

(dont take this the wrong way) All this d*cking about for £750 a month when your "side business" is (by the sounds of it) making at least £10k a month profit. Loans, mortgages, bla. Honestly you are just wasting your time. And if your side business really is making that kind of money (you say the business will account will grow by another £150k this year) then seriously jack in your £60k PAYE and focus on the business that probably has the potential to make a heck of a lot more.

Personally your best solution here, IMHO, is to sell the damn BTL and forget about it. There will be very little tax to pay that way (if that's whats bothering you) then focus on how to best financially manage your business.

It’s not wasting my time. My side business can’t expand exponentially. I’ve calculated a maximum it could earn per year as approx £350k pre tax. It’s also very volatile and could end with less than a years notice due to political situations.

I also don’t want to quit my day job, yeah it earns much less but is about a thousand times more rewarding - job satisfaction and all that. I’d rather be happy earning £60k than unhappy earning millions. I’ve considered selling the BTL multiple times (usually when it causes me hassle) but always come round to the thought that it’s not actually costing me anything so what’s point in getting rid...

I don’t have aspirations to become a millionaire. We aren’t ever likely to want to live in a house worth over £600-750k. I’m quite into cars so could see myself in a £100k motor one day but ultimately aren’t flash with money. That doesn’t mean I don’t want our money to work hard for us. We have a 1yr old child so everything is now done with her in the back of my mind. Just because someone can earn £10k a month doesn’t mean they should be daft with money. I’ve always been cautious with money and probably always will be.

I don’t really want to go into any more than that. I’ve already posted more about my life story than I ever wanted.

Edited by JapanRed on Sunday 20th January 15:41