# Should I pay off mortgage on investment property?



## vajra (9 Sep 2008)

Age: 40
Spouse’s/Partner's age: 42

Annual gross income from employment or profession: 60000
Annual gross income of spouse:0 stays at home to mind baby

Type of employment: e.g. Teacher

In general are you spending more than you earn or are you saving?  saving approx 1500 per month

Rough estimate of value of home 450000
Amount outstanding on your mortgage: 0
*What interest rate are you paying? *

Other borrowings – car loans/personal loans etc 0

Do you pay off your full credit card balance each month? yes
If not, what is the balance on your credit card? 

Savings and investments: 70000 on deposit

Do you have a pension scheme? I have a teachers pension. but my husband hs none

Do you own any investment or other property? yes rental property worth 220000 with 32000 left on mortgage at 5.6% and eight years left on mortgage

Ages of children: 1 year and hoping to have another

Life insurance: only linked to  rental property


*What specific question do you have or what issues are of concern to you? *
*I am getting 5.6% on savings at moment and am tempted to pay off mortgage on rental property. Would this be considered a good idea? I would really appreciate some advice. Thanks*


----------



## zxcvbnm (9 Sep 2008)

you might find this post interesting

http://www.askaboutmoney.com/showthread.php?t=6217


----------



## vajra (10 Sep 2008)

Thanks for that. The reason that I am considering paying off the mortgage is because at the moment I have 32000 euro available to pay it, which if I kept in a deposit account would earn me around 1600 euro a year. 

If I paid off the mortgage I would get all the rental income as opposed to paying loads of it to the bank. I would get perhaps 5000 euro a year after tax and expenses etc. So it seems to me to make more sense to take this route rather than paying it to the bank for another 8 years. 

Am I missing something or would this be the best route to take??


----------



## coppers (11 Sep 2008)

I think you are missing something.

You need to consider that only some of this "loads of it to the bank" actually goes to the bank I.e interest payments, the rest (capital repayments) are purchasing you an asset. 

What is your annual rent and what are your repayments(broken down into interest and capital). Also what is your mortgage rate?


----------



## vajra (11 Sep 2008)

My annual rent is approx 7000 gross.The  interest is approx 1800 and the capital repayments would be 4800. The interest rate is 5.59%


----------



## landlord (11 Sep 2008)

vajra said:


> My annual rent is approx 7000 gross.The  interest is approx 1800 and the capital repayments would be 4800. The interest rate is 5.59%



Personally I would go in the other direction. Instead of paying off the rest of the mortgage, i would immediately stop paying off any more capital and switch to an interest only mortgage. This will maximise your yearly interest payments which has tax advantages.  If you pay off this loan in full now, you will be exposed to paying tax on 100% of your rental income net profit (i.e. after capital allowances, management fees, letting fees etc....). Instead put your available funds in either Anglo, First Active or Northern Rocks high interest accounts and keep it on demand for a rainy day.......There is a recession on the way you know !!!


----------



## vajra (15 Sep 2008)

I am not sure about interest only mortgages. I would rather see the capital been paid off really, but thanks for your reply.


----------



## z106 (15 Sep 2008)

The advice of _landlord_ above makes sense


----------



## vajra (15 Sep 2008)

I realise that it is probably good advice but I would be nervous about taking out an interest only mortgage. My understanding is that I would have to take out an endowment policy to cover the capital repayment at the end of the term. I know quite a few people who ran into trouble with endowment policies which has put me off. I would be adverse to any sort of risk so I don't think I will go for it.


----------



## landlord (15 Sep 2008)

vajra said:


> I realise that it is probably good advice but I would be nervous about taking out an interest only mortgage. My understanding is that I would have to take out an endowment policy to cover the capital repayment at the end of the term. I know quite a few people who ran into trouble with endowment policies which has put me off. I would be adverse to any sort of risk so I don't think I will go for it.



I have many investment property mortgages and none of them are endowment policies. 
You should realise that if you currently have a tracker or variable mortgage as opposed to a fixed mortgage, there is nothing to stop you paying a lump sum off the mortgage (if you get nervous) a few months/few years down the line. You will have this money available from your high interest earning on demand account. However if you are currently fixed then you will not be able to pay off the loan without penalties.


----------



## z106 (15 Sep 2008)

Exactly. Just leave what you would be paying off the capital in a high deposit account.
That way it is always there to pay off the capital at any moment in time should you feel like it.

Undoubtedly it will save you money as a result.

So your choice basically boils down to one of teh following:

a) Pay extra tax and have less money in your pocket or
b) pay less tax and have more money in your pocket.

I certainly know which one i would go for.


----------



## asdfg (15 Sep 2008)

> My understanding is that I would have to take out an endowment policy to cover the capital repayment at the end of the term. I know quite a few people who ran into trouble with endowment policies which has put me off


 
Endownment policies were used many years ago to repay the principal not any more, you pay the interest only each year but at the end of the term (5, 10 years) you still have to repay the principal.


----------



## vajra (16 Sep 2008)

Thank you for explaining that. I didn't really understand what you meant before. Your advice has been great thanks.


----------

