What Investment Reader's Question: My mortgage repayment dilemma.

I own a second property, which I rent out for £300 per month. The majority of this money is currently used to pay off the mortgage repayment, insurance, rates and any repairs. I am not concerned about the fact that I do not make money on the house, as it is appreciating each year in value and the longer-term plan is to use this house to supplement my pension in retirement.

At the moment, the mortgage is £170 per month and almost £80 is made up of interest. It is a small mortgage, currently £15,000. I have this money invested in stocks and shares and was considering taking this money and paying off the mortgage.

There are obvious tax implications with this, but I was thinking that I would be better off paying the tax (if it was less than £80) rather than paying £80 per month in interest. Can you please advise if this would be a wise move or should I just leave the money invested in the stocks and shares and continue to have the tenant pay off the existing bills?

From Mr J Roy,  Armagh



Donna Bradshaw replies:
There are a number of questions to be addressed in order to identify the best course of action.  And one myth to be dispelled is that property appreciates in value each year – this is not always the case. Property can, and does, go down in value as well as up.

The property cycle is, however, a long one and it looks like the UK market is now overheated and that property prices are falling and have further to go.

That said, if you are investing for the very long term, returns are expected to be greater than cash and inflation.  The important thing to look at when investing in buy-to-let is the yield you achieve. This is the rental income divided by the property price expressed as a percentage.  For example, if you paid £40,000 for your property and receive rental income of £300 per month, that is a gross yield of nine per cent, which is very attractive. Avoid property where yields are around five per cent or lower, particularly in the current market where prices are likely to fall before they rise.

Coming on to whether to pay off your mortgage or keep your shares, it depends on the mortgage deal you have, your credit worthiness, the shares you hold and any capital gains tax liability on selling. With shares, you need to look at the net returns you are achieving and offset that against the interest payments. Interest on your mortgage is offset against rental income, as are other costs.

If you are a higher rate taxpayer, paying off the interest would increase your tax by £32 per month, if you are a basic rate taxpayer you would pay a further £16. You must factor in this additional cost against income and gains lost from selling your shares to identify whether or not the exercise is worthwhile. Finally, you should also be aware of market conditions when selling your shares. The ideal is to take profits from shares that are performing well and hold on to those that are at the bottom of a cycle and have good prospects for recovery.