Purchasing a BTL on a Residential Mortgage - Tax Position

Ignoring the question as to whether the banks are allowing it these days, what is the tax position on borrowing against your PPR on a residential mortgage in order to buy an investment property?

I know, from reading the Revenue website, that the borrowing are allowable in the same manner as if the loan were secured against the investment property, i.e. 75% of interest. The total allowable is up to the purchase price and cost of renovations - but not purchasing costs or cost of furnishings.

However, let's say I have a €100,000 mortgage secured against a €300,000 home and I borrow a further €100,000 for the purchase of the investment property.

Would the position be that 75% of the interest on €100,000 can be offset against rental income right down until the home loan dropped below €100,000? This makes sense because the €100,000 would never have been needed without the rental property.

However, are Revenue more likely to only allow you to attribute 50% of the total interest bill for the entire term - meaning that, as you pay down the mortgage, you are paying down half of the capital of each of your PPR mortgage and investment mortgage (now combined).

Would the position be that 75% of the interest on €100,000 can be offset against rental income right down until the home loan dropped below €100,000? This makes sense because the €100,000 would never have been needed without the rental property.

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The lender will give you a second account for the top up mortgage.

If you can convince the lender to make the top-up interest only and pay the home loan off quicker, you can claim the full interest for longer on the top-up.

Brendan

Brendan Burgess said:

The lender will give you a second account for the top up mortgage.

If you can convince the lender to make the top-up interest only and pay the home loan off quicker, you can claim the full interest for longer on the top-up.

Brendan

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Thanks Brendan.

It's not something I'll be doing in the short-term but just wanted to look into the mechanics of it as a possibility in 2-3 years (that's the reason my original post referred to ignoring whether the banks would currently allow it).

It seems a good option considering the extremely high taxation on other types of savings and investments when compared to the 7-year exemption on CGT in residential property investments (whether that's extended again beyond next year is another question but the post may be helpful to those considering it next year).

Basically, current BTL mortgages have a minimum APR of 4.8% at 75% LTV. That would give an effective (4.8% * 75% LTV * 75% tax write off) = 2.7% of the value of the property to write off against rental income.

Doing it on a residential mortgage has the possibility of an APR of 3.85% at 100% LTV (of the investment property if you have enough PPR equity). That would give an effective (3.85% * 100% LTV * 75% tax write off) = 2.8875% to write off against rental income.

So basically, you are paying less interest but able to write more off against your tax bill.

NOTE: With the second option you are paying more overall interest due to being on a higher LTV but gaining elsewhere as you haven't lost the opportunity cost of your 25% deposit.