Pay off mortgage now or later?

A question about : Pay off mortgage now or later?

I'd welcome some perspectives on a dilemma with a rental property.

When my mother died about ten years ago, she passed her house to my wife and me and we've been renting it successfully through an agent since then. About five years ago we took advice to transfer the mortgage for the house we live in to the rental property, and transfer the property to my wife's name so it's effectively her business and the interest payments are a business expense and reduce her tax bill. So we have two interest-only mortgages on that property, both running until 2019. Together they amount to approximately half the market value of the property.

We have enough savings now to pay them off completely now, but are unsure whether it's best to do that or wait until the end of the term. There are no early repayment penalties as we're on the standard variable rate.

I get confused as to what exactly the considerations are - is the money better being invested for the remaining few years? Should we change the mortgages to fixed rate and give up the idea of paying them off? Or would the gain from not paying the mortgage each month outweigh any gains from leaving the money invested?

So I guess I'm asking what the questions are, rather than the answers - but any answers would be welcome!

Best answers:

• Hi
  Yes it had a small mortgage on it when I inherited it and I didn't pay anything. We had a mortgage outstanding on the house we lived in and the building society let us transfer that to the residential property in addition to the existing one, because they were both a lot less than its value.
  The advice was from some newspaper articles which I got an IFA friend to check out, and he said it was OK.
• You should post on mortgage free wannabe board and savings and investments.
• Personally I'd pay off the mortgage if possible because interest rates could escalate.
• Simple question - is the money currently earning more, after tax, than you're paying on the mortgage?
• Is it that simple? The mortgage interest rate is 4% and the money is mostly invested in managed funds, which appear to be making around 10 - 12%.
• Not _quite_ that simple, because there's also a question over flexibility and access to the money in the interim. There's also a question over risk, wrt the funds.
  But given that we're talking about four years remaining on the mortgage, that's not an unforeseeable term. And, on those figures, paying the mortgage off now will cost you a chunk of money.
• Interest on the mortgage, up to a mortgage of the value of the property when first let, is an allowable expense against rental income. Transfers between spouses don't muddy the waters, so basically you need to find the value of the property when you inherited.
  It doesn't matter whether the mortgage is secured on your home or on the rental property for tax purposes.
  So the payments are reducing your tax liability and you need to take that into account.
• Can someone confirm this 'rule' that there is a limit at the value of the property when first let?
  Reading HMRC's website it's not that clear.
• https://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm
  Took some searching! Book marking for future ref.
  Key para at the end of example 2 - my bolding:
  Although he has withdrawn capital from the business, the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.
• So it looks like (a) we gain tax relief by keeping the mortgage and (b) the interest we're getting by keeping it invested outweighs the interest we're paying. So keep the mortgage till the end?
• Depends on the numbers, as always.
  Even though you get tax relief, you are still paying the interest. So nothing is cut and dry.