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Original poster

Is it worth overpaying on an interest only buy to let mortgage?

24 replies

confusedlots · 19/02/2022 10:03

I have an interest only buy to let mortgage on a house I rent out, and although I couldn't make big overpayments, I could probably overpay by about £100 per month.

Just trying to figure out if it's worth it? Or am I better keeping that £100 in rental income? My plan for the rental income is to use it to boost the kids premium bonds accounts and hopefully keep it to one side to have some savings for them when they're older. But I can access the money if I need to, so it's not locked away.

OP posts:
Callisto1 · 19/02/2022 11:00

It depends on what your mortgage rate is. Maybe a repayment mortgage would have a lower rate and would be more worth while? If you have a very low rate then probably investing the money long term would give better results although it's more risky. What is the plan when the interest only mortgage comes to an end?

Original poster
confusedlots · 19/02/2022 11:22

Current rate is1.7%. We didn't go with a repayment mortgage as we want to have the rental income available to us over the next couple of years just in case we do need it (doing a separate major renovation which is budgeted for but there is always the potential to go over budget) and we'd have very little left after paying the repayment mortgage and paying tax on the profit.

Guess I'm just wondering now if overpaying a little bit would be of benefit in the long term without eating into our profits too much? My head gets a bit fried with all the finances if I'm honest.

Eventually we will sell it and either use the profits to help the kids with university/house deposits (this is a long way off) or maybe even keep it longer and sell it to help us in retirement.

OP posts:
ThatsGoingToHurt · 19/02/2022 11:23

If you have still got a residential mortgage on your own home I would use any extra money to make overpayments on that first

Original poster
confusedlots · 19/02/2022 11:33

@ThatsGoingToHurt that is the plan but we can't start to do that until later this year due to our current mortgage conditions.

The buy to let is really mine to manage myself so I'm just thinking about different options. If I do overpay it will only be maybe £50 or £100 a month.

OP posts:
caranations · 19/02/2022 11:44

Speak to a tax adviser.

Lunar27 · 19/02/2022 12:18

We have an offset BTL mortgage, which suits us as we have about half the mortgage value in savings. The interest rate is high at 5% apr but the amount of savings makes it worthwhile as we also maintain our liquidity. So we overpay by virtue of increasing the savings.

Callisto1 · 19/02/2022 18:23

I would probably have a look on the mse mortgage overpayment calculater and see how much you can save with overpayments. It probably won't be huge for £100 unless you mean to keep it up a few years!

Saskatcha · 19/02/2022 20:21

We overpay ours by a lot a month but we want it paid off by the time dd is 18 so we can use the rental income to pay for her uni fees. I’m not sure this is what most people do though and we are very financially cautious. I kind of see it as the sooner it is paid off the less interest we will pay overall and the higher the rate of return as it will start generating significant income sooner.

I like the idea of investing rather than overpaying in theory but my defined contribution pension is not growing much at all (and actually seems to have fallen a bit in value recently) so I think that given that we want to pay the mortgage off quickly we are better just going for it, reducing the interest we pay and protecting ourselves against any potential rate rises once our fixed rate ends rather as opposed to taking a risk with the stock market.

alwayswrighty · 19/02/2022 20:26

Don't forget you have to declare the income to HMRC so its probably worth waiting until you know what you owe the tax man before deciding to overpay the mortgage. Also make sure you have something in the pot for emergency repairs/replacements.

BloodyCreateUsername · 19/02/2022 20:48

Tax liabilities- remember that mortgage rate relief is minimal and tax is charged on the basis of your gross rent.

Original poster
confusedlots · 20/02/2022 09:29

@Saskatcha can I ask if there a reason you have an interest only mortgage rather than a repayment mortgage if that's your plan?

Yes I know how the tax works on rental income, I know roughly how much that will come to.

Having done a bit more research and done some calculations yesterday, I think i've now decided to invest half the profits into a stocks and shares ISA and keep the other half accessible. Hopefully that's a sensible plan.

OP posts:
SudokuMania · 20/02/2022 09:30

How are you planning to repay the loan at the end of the term? Are you selling it then?

Original poster
confusedlots · 20/02/2022 09:38

@SudokuMania yes we will eventually sell it, but probably not for at least 10 years, possibly longer.

OP posts:
DropYourSword · 20/02/2022 09:42

I'm probably being a bit thick here, but how can you overpay on an interest only loan?!
Aren't you only ever paying the interest each month. How can you pay more than that?

Saskatcha · 20/02/2022 10:37

We did interest only incase one of us lost our jobs or something so we weren’t tied to a big repayment or defaulting.

ForensicAccountant · 20/02/2022 12:47

@DropYourSword You make capital repayments and ask them to reduce your loan. The most common way to do it is by lump sum rather than monthly extra payments.

Saskatcha · 20/02/2022 13:23

You are allowed to pay a certain percentage off a year depending on the terms of the loan.

cocktailclub · 24/02/2022 06:26

We have an interest only mortgage on a btl
Currently we make overpayments up to 10% of the mortgage outstanding amount (all we can do according to the mortgage terms).
We can afford to do this currently but will stop when we can't.
Our longer term plan is to sell up in about six to ten years and at least by the end of the mortgage term which is 12 years and use the capital to fund our retirement without having paid off the full mortgage

Henlie · 24/02/2022 06:38

Hi Op - can I ask when your 1.7% fixed deal comes to an end? I’m guessing it’s within 3 years(?) After that period I foresee interest rates in general being around the 4-5% rate for everyone. Therefore if you can lower the capital amount you owe before then, it’ll help your repayments when you next renew your mortgage.

cocktailclub · 24/02/2022 07:25

@DropYourSword depending on the mortgage terms. Ours is interest only nut allows you to make repayments of 10% of the balance every 12 months either monthly or lump sums as long as you don't go over the amount.

SudokuMania · 25/02/2022 07:24

cocktailclub what you you mean by this 'without having paid off the full mortgage'?
You are going to have to pay the mortgage off at some point.

Henlie · 25/02/2022 07:35

cocktailclub what you you mean by this 'without having paid off the full mortgage'?
You are going to have to pay the mortgage off at some point.

@SudokuMania - I think the poster is implying they could sell it before having paid it off in full, and take whatever profit it has yielded.

SudokuMania · 25/02/2022 08:18

Thank Henlie
You sometimes hear of people who seem to forget you still have to pay off the loan at the end of the interest only mortgage term - or remortgage or sell.

cocktailclub · 25/02/2022 21:39

@Henlie and @SudokuMania
Henlie is exactly right. We would pay the mortgage off when selling the house.

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