Hello

This question relates to the classic 'pay off mortgage or invest' query but with specific calculations behind it.

By my calculations I'm worse off investing (on a pure monetary basis regardless of other factors such as ready availability of cash etc).

I would be grateful if someone with a larger brain than me could check my calculations and let me know if I'm missing anything. Many thanks!

**Background**

I have a property in a country I no longer live in with an outstanding mortgage of 265,000. My interest rate is 4.78% (this is the lowest rate available in this country for a buy-to-let mortgage.

I do not live in this country or earn any other income in this country.

I rent the property out for 1,250/month (i.e. 15,000/year).

Other than a 2,000 tax free allowance all rental income is taxable at 20%. However, you also get a deduction for mortgage interest paid.

I have 50,000 in savings (in addition to an emergency fund) which I am deciding what to do with. Before considering other options which may lead to higher returns, I have found an 'instant access' savings account yielding 3%/year. The marginal income tax rate in the country I live in is 15%.

**Scenario 1 - Pay off mortgage**

265,000 - 50,000 = 215,000 mortgage

215,000 mortgage = 10,191 interest.

13,000 potentially taxable rental income (15,000 - 2,000 tax free sum).

13,000 - 10,191 as a deduction = 2,809 taxable rental income

= 561.8 income tax bill for the year.

**Scenario 2 - Invest**

265,000 mortgage

265,000 mortgage = 12,561 interest

13,000 - 12,561 interest = 439 taxable rental income.

= 87.8 income tax bill for the year.

= 474 less in income tax.

+1,500 interest from the savings account (-15% tax = 1,275).

BUT: 2,370 more in interest.

**Therfore: ** 2,370 - 1,275 - 474 = 621 worse off a year.

What do you think?