Flexible Reserve vs. Interest Tax Relief

Posted on 1 July 2011 by Bart

I have a property worth £800k that I live in. It has a flexible mortgage of £400k (the credit limit), with an outstanding mortgage value of £216k. Term is 35 years, 0.5 above BBR, repayment. My wife holds £200k cash seperately. Lets call this mortgage 1

My question is; am I better using £200k cash as deposit on x1 BTL (mortgage 2) property transaction and getting interest relief on Mortgage 2


paying back Mortgage 1, then buying BTL for cash and subsequently mortgaging the BTL when ready. If I did this would I be able to claim interest relief on both outstanding mortgages?


Let me start by saying that we are not qualified to give tax advice and you need to speak to a professional tax specialist about your circumstances.  However, costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis.

I'm not sure that the tax benefits will outweigh the cost of losing your current mortgage deal.  0.5% above base rate is a very cheap mortgage in today's market and especially so when compared to BTL mortgages.  The best BTL base rate tracker for term is priced at BR + 3.38% with arrangement fees starting at £1895 and even allowing for interest relief I think you may be worse off if you repaid your existing mortgage.

I would check with your existing lender what rate they would charge if you drew down the remainder of the reserve and ask the tax specialist how you can prove that this expense was solely for buying a rental property. This way you may be able to claim the relief on what would be a BTL mortgage secured at residential rates?

In all likelihood I think you will end up with option 2 and in this case I believe we can help you and that you would benefit from speaking to one of our independent mortgage advisers.  Please call 0344 346 3672 and tell the consultant the date and title of your question, they will then be able to offer you further mortgage advice.


Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

We recommend you seek professional advice with regard to any of these topics where appropriate.

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