Pay off mortgage or purchase buy-to-let?

[lettucelamp]

DH and I are in a position where we've managed to squirrel away a nice little nest egg, and I'm looking for some advice for what the best thing to do with it might be.

We have a mortgage on our own property with low monthly payments and 14 years left on the mortgage. We currently overpay on our mortgage by about 25-30% each month and we have a 6 month emergency fund.

We have three possible scenarios in mind about what to do with our savings:

1. Buy a buy-to-let property outright
2. Pay off our mortgage in full
3. Use the funds as a deposit on a bigger/nicer property for us while maintaining our current (or similar) mortgage terms and payments, however there is no real immediate need for us to do this as we can make our current house work for a couple more years

What would you consider to be the best option? We seem to go back and forth between all 3. A lot of advice I've read is to pay off your mortgage, BUT I'm hesitant to do that because when we do decide to do option 3 I worry we would find it harder to get a mortgage as our credit rating isn't as good as it was when we got it, plus it really is such a small amount it feels quite inoffensive. I'm happy to be told otherwise on that though!

Any advice you could give me would be gratefully received!

I would agree with you re retaining a small mortgage as it is so much harder now

if you have to move in a few years will you need a new mortgage if you get a bu to let now, and if your credit rating is not great might you find yourselves stuck where you are now?

Just to throw in a comment, we almost paid off a mortgage but kept it open by owing less than £100 and paying £1 a month for a while. Our mortgage company were happy to do this and we borrowed again on the same terms when we wanted to move. So it is possible to almost pay off a mortgage and keep your options open for future borrowing.

I guess part of the question is whether, say, a £100,000 house and a £300,000 house might be worth more in the long run than one £400,000 house? I don't know the answer to this but I'd like to!

You will still be credit checked if you want to borrow more on your current mortgage deal - whether releasing equity or moving. So this shouldn't necessarily be a factor in your decision. Might be an idea to use the money to repay any other debts you have outstanding first?

Find somewhere near a University in a place you like and you can winter let to students/academics and holiday let, or use it yourself, during the summer.

I think it depends on what is more important to you-investing or living debt free. Neither is necessarily better! For me personally, I would rather pay off my own mortgage. I love the idea of having no debt whatsoever and would happily live in a small house forever in order to have no payments. But I will probably never be rich or have a property empire and I have no desire for either!

If you can afford to buy a property to let outright I would do that.
Will your rent cover your main mortgage?
Would you still be able to overpay your main mortgage?
If yes you are in a good position.

We did it and it's worked out very well so far.

Bear in mind that rental income would be taxed at your normal tax rate. If you did use part of the money to purchase a buy-to-let with a mortgage you would be able to offset the interest charges against tax.

I would suggest that there's an option 4: use some of the money to buy a bigger property for yourself and buy a rental property with the rest of the money and a mortgage.

If you plan to buy soon anyway then get on with that and use all the money for the new place.

However before doing that check you will be allowed to borrow even what you now borrow as lenders have really tightened up and you might find they do not even allow you to borrow what you currently owe and are able to repay. It is a whole new world of lending since the change of rules in 2014.

Make what is called a capital repayment to the mortgage instead (this is usually a lump sum of say £500 plus) rather than overpay the monthly subscription. Your current action does nothing apart from keeping your mortgage account well in credit.

"I guess part of the question is whether, say, a £100,000 house and a £300,000 house might be worth more in the long run than one £400,000 house? I don't know the answer to this but I'd like to!"

We found the more expensive one did much much better. (We sold 2 buy to lets and our last house to buy this house which went up a lot in value).

However it depends on the property location and value. Once you get to the next stamp duty level and particularly at levels like £2m (potential mansion tax and 12% stamp duty rates) then we will probably find houses at that level go up less in the next few years than say 4 flats worth £500k so it is interesting times.

I qualified as an accountant but please do not take this as advice and sue me :) best to confirm with an accountant in practice.

One think you may consider and I think this would work as you have not given numbers I will assume your current mortgage is £100k and the buy to let property is also £100k and you have £100k in cash.

If you
(1) Pay off your mortgage
(2) A little later get a new residential mortgage maybe the 10 year fixed rates at just under 3% you can get at the moment
(3) Within 18 months if you use the funds raised on the residential mortage to buy a buy to let I believe you will be able to claim tax relief on the funds even though the mortgage would be secured on your own property.

Points
It believe it is true you can raise money on your own property and HMRC look at the purpose of the borrowing.
So the object of doing this is to reduce the post tax cost of your residential mortgage

If you were to think of doing this it might pay you to take advice from an accountant in practice I passed my tax exams 7 years ago.

woops did not mean to say the post tax cost of your borrowing this would be a buy product. I am in the position to pay off my own mortgage and this is a route I may take unless I trade up. I would probably post first on taxation web , or accounting web and if they say they can not see a problem with it I would confirm with a local accountant assuming they do not wish to charge an arm and a leg

I was trying to point out if the original poster wished to go for the buy to let option what I might do.

A bit hard to know exactly as we do not have all the details. The route I outlined would mean you would get tax relief on a residential mortgage if the mortgage raised was for the purpose of buying a property to let.

I trained as an accountant straight from school AAT and then ACAEW and work for a retail bank so I do get a good salary. Though not as much as someone who works for a merchant bank. Quite some luck in that I bought at the dip in the London Market in 2009 and also I go help from parents I saved £50k living at home got a gift of £50k and bought a £250k flat in Battersea with a £150k mortgage .

Buy the buy to let out right and get the rent from that pay towards your current mortgage.