If trading up - reduce mortgage or maximise deposit?

If you are trading up, is it better in general to use your savings to reduce the existing mortgage as much as possible or should you maximise your deposit for a new property instead?

Concrete example - existing mortgage of 180,000, savings of 200,000, hoping to buy a new property worth circa 400,000 and rent out old one. Should I pay off the existing mortgage in full or would the banks be more impressed by putting down such a large deposit?

All suggestions gratefully received - thanks.

Hold on to the existing mortgage of e180k,you will be able to offset 75% of this mortgages interest against rental income,reducing your tax liability.

Thanks - can you explain to me exactly how that works?

Eg if I have a rental income of 1,000 and 600 of that is paying off interest, can I offset 75pc of that against the tax I am paying on that income?

Maybrick said:

Thanks - can you explain to me exactly how that works?

Eg if I have a rental income of 1,000 and 600 of that is paying off interest, can I offset 75pc of that against the tax I am paying on that income?

Click to expand...

Not really a good example,a clearer example would be say for 2010 you rented a property,you received 1k pm so a total of 12k for the year.

The interest portion of your mortgage for 2010 was say 3k,so you are allowed write of (75%) 2,250 against your rental income of 12k leaving you with 9,750 to be taxed.

You should also be aware of other items you can use to offset against this amt.

Management fees
Accountants fees
Repairs
Ads
PRTB fee
Depreciation.

There are I am sure plenty of threads available that illustrate more clearly what you can use to reduce your tax liability,make sure you know them inside out as everything you do not claim for will come out of your bottom line.

Thanks again. So just to make sure I understand, in general it is counter-productive to reduce the mortgage on your first property as it reduces the amount of mortgage interest relief you receive? And it is preferable to use the money to maximise the deposit on your new property as it will minimise the mortgage payment on that?

In other words, better to retain the 180k mortgage on the first property and put down a deposit of 200k on a new property rather than reduce the mortgage to 130k and the deposit to 150k?

Or have I missed something?

Correct.

Also there is clawback of Stamp Duty if you put your former PPR (principal private residence) into a rental property inside of a set number of years,it used to be 5 years and was reduced to 3 years? a number of budgets ago...if you feel you may have a problem in this regard,do some research on this matter,its better to know now than the day a letter from the revenue lands in informing you of an audit.

This is a site you may find quite useful..

http://www.irishlandlord.com/

Great, thank you!