Release equity in investment property to pay off principal residance mortgage

Z

z104

Guest
Hi,
I'm wondering what are the benefits and pitfalls of releasing equity in an investment property to pay off all the outstaning mortgage balance on my principal residence. ( Have had principle residence mortgage longer than 7 years) I like the idea of owning my own home free and clear but not sure if it's the smartest thing to do.

I owe 110k on my principal residence and can release this much in equity from my investment property. I did not use my principal residence as collateral for the investment property.

Also, If the outstanding balance ( with equity release )on the investment property is 200k and I sell it for 200k do I still need to pay capital gains tax on the difference between buy price and sell price. Investment property originally bought for 110k.
 
Not too familiar with the pro's and con's of the initial questions, so I'll leave that for others to advise on.

The outstanding mortgage has no impact on the CGT payable. The CGT will be calculated, as you say, on the sale price (minus allowable deductions) minus the purchase price (again, including allowable deductions).
 
One potential "con" is that you cannot offset interest on such a topup against rental income since the money is not used to purchase/renovate the investment property. You could claim owner occupier mortgage interest tax relief on it though. Note that this does not mean that you own your home outright since all that you've done is borrowed against another asset to buy it. You still have an outstanding mortgage just that it's secured on another propety!
The mortgage is irrelevant to the calculation of CGT and this sort of cross mortgaging does not affect the CGT issues at all.
 
In addition to losing the mortgage interest offset against tax, you'll probably get a less favourable interest rate - on an investment mortgage, you can expect to pay a premium of anywhere between 0.25-0.75 percent over home-loan rates (depending on how good either rate is). In addition, if, as seems to be suggested, the mortgage secured against the investment property would then be very high, you may not be able to get it in the first place, or not without very onerous conditions.

About the only pro of the proposal is that you may be able to dispense with mortgage related life assurance on your current PPR mortgage, but you may not wish to anyway, depending on your circumstances - and any life assurance savings are most unlikely to outweigh the various tax and financing costs.
 
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