INVESTMENT CLINIC: I have three buy-to-let mortgages and a £100k lump sum - should I pay down the highest interest rate or the biggest balance?

• e-mail

I invest in three buy-to-let mortgages and I have £100,000 to pay off a portion of one. Would I be better off paying down the mortgage with the highest interest rate or the biggest balance? 

J.S., by email

Higher: Buy-to-let mortgages will generally charge slightly higher interest rates than those on your own home

Holly Black, of Money Mail, replies: Firstly, I’m assuming you have no mortgage on your own home as it could also be worth considering whether that should be paid off before your buy-to-let loans.

You would normally pay off the debt with the highest interest rate, as that is the most costly, and also you are effectively earning that interest on your cash when you pay it off.

Buy-to-let mortgages will generally charge slightly higher interest rates than those on your own home.

However, you should also take into account that mortgage interest is currently an allowable expense, reducing your income tax liability.

At the moment landlords can off-set the mortgage interest they pay on a buy-to-let property against the rental income they receive and reduce their tax bill.

From April 2017 the rules will begin to change, however, and tax relief on the mortgage interest will gradually be reduced.

By 2020 the mortgage interest will attract a tax reduction at only the basic rate of 20 per cent.

This will, therefore, affect 40 per cent higher rate and 45 per cent additional rate taxpayers.

Mortgage rates, on your own home or on buy-to-let properties, will vary depending on how much equity you have in the property.

There could be a benefit in reducing one mortgage over another, if it reduces the mortgage as a percentage of the property value to such an extent that you would qualify for a lower interest rate.

Before paying off any mortgage you should also check whether it will incur an early repayment charge.

These can amount to thousands of pounds, although many deals can allow partial overpayments, typically up to 10 per cent a year, without penalty.

If you are going to breach the limit by paying off a large amount, it may be worth spreading the overpayment between the properties so you don’t incur any unnecessary charges.

This problem is a balancing act - there are lots of little considerations which will largely depend on your personal situation and how big each mortgage debt is.

If you have an investment question, get in touch at Investment Clinic, Money Mail, Scottish Daily Mail, 20 Waterloo Street, Glasgow G2 6DB or email [email protected].