Interest Only Vs Traditional Mortgage

[TomP1975]

Hi, I am about to buy and live in a property. I was ready to go with an interest plus capital mortgage repayment until i spoke with another mortgage broker.

He suggested that as I only plan to live in this property for about 3 years and then either sell or rent it - i should consider and interest only mortgage from the outset where i can maximise my tax write-off on interest repayments when i start renting it.

I'm pretty new to this and still am confused. Is there much of a difference between the tax treatment on the interest paid between these two mortgage types? If i were to go with a capital & interest repayment mortgage and then rent it out in 3 or so years - would i be losing out?

How is interest (for tax purposes on rental income) calculated on a capital & interest repayment mortgage?

He also stated that the difference on the monthly repayments (between interest only and capital + interest) can be used to save for a deposit on a new property - which does appeal to me as this is what i would like to do in 3 yrs. However, i'm unsure as to what kind of a yearly saving i can expect on say 100K mortgage for example

I've been looking at the revenue site to try and understand it more but what i really need is an applied example - could anyone oblige?

Thanks in advance

 

[Brendan Burgess]

If you have any mortgage on a rental property, you can deduct the interest paid on the mortgage against the rent received in calculating your taxable profit. If you have a mortgage on your home, you can only claim tax relief at the 20% rate up to a certain limit. So, if you have two properties, you want as high a mortgage as possible against the rental property and as low as possible against your home.

So your broker is correct, if you are planning to let the property in three years time. However, the amount of capital repaid in the first three years would be very small, so it won't make that much of a difference.

Brendan

 

[ClubMan]

Hi, I am about to buy and live in a property. I was ready to go with an interest plus capital mortgage repayment until i spoke with another mortgage broker.

How independent is this broker?

See this thread for more on interest only mortgages on investment properties.

Interest only mortgage

He suggested that as I only plan to live in this property for about 3 years and then either sell or rent it - i should consider and interest only mortgage from the outset where i can maximise my tax write-off on interest repayments when i start renting it.

If you rent within 5 years of purchase as an owner occupier then remember that you will be liable for a clawback of stamp duty (the investor SD minus any SD that you paid (possibly zero)).

He also stated that the difference on the monthly repayments (between interest only and capital + interest) can be used to save for a deposit on a new property - which does appeal to me as this is what i would like to do in 3 yrs. However, i'm unsure as to what kind of a yearly saving i can expect on say 100K mortgage for example

Beware of any mortgage broker that dispenses more general investment advice in my opinion.