A client asked:
“I would like to ask your advice on the matter of endowment maturity and mortgage repayment.
“The endowment policy that I took out to repay the mortgage on my rental property is due to mature in November.
“The projected closing payment on the mortgage given to me today is £22,000.
“The projected maturity value of the endowment is £14,000.
“To cover the projected shortfall, I have been saving in an ISA account. The balance of this account is £7,500.
“This will leave an outstanding amount of approximately £500 which I can cover from other savings.
“I have the option keeping the endowment proceeds and continuing to pay the mortgage on a repayment basis.
“My idea is to pay off part of the mortgage on my home with the proceeds from the endowment and the ISA account then continue the mortgage on rental property.
“In this way, I assume that I would reduce my profits on the rental income and thus my tax liability.”
“I can’t see any problem with what you propose and, yes, it would maximise the tax relief on the rental property. You are free to pay of debts in whatever order you wish and the endowment & ISA, although originally earmarked for the rental property don’t have to be used there.
“The only thing you can’t do is increase the borrowing on the rental property over and above its value at the time of starting to rent it.
“EG if, at the time of renting the property out for the first time it was worth £100,000 and the mortgage is now £50,000, you can:
“- pay the mortgage off in part or whole
“- leave it as it is
“- increase it to £100,000 (and use the extra to reduce your domestic loan)
“and achieve tax relief on your interest – obviously there will be no interest if the loan is fully paid off.
“However if you increased the borrowing to over £100,000 – the value of the property at the start of letting – then you cannot claim tax relief on the excess over £100,000.”