Pay off investment property??

Age: 32
Spouse’s/Partner's age: 30

Annual gross income from employment or profession: €65k
Annual gross income of spouse: €20k

Type of employment: e.g. Civil Servant, self-employed: Company Director

In general are you:Saving
(a) spending more than you earn, or
(b) saving?

€1000 per month

Rough estimate of value of home: €360k
Amount outstanding on your mortgage:€350k:
What interest rate are you paying? €1390 pm 1.95% tracker over 25 yrs

Other borrowings – car loans/personal loans etc; 0k

Do you pay off your full credit card balance each month?
If not, what is the balance on your credit card? 0

Savings and investments: €15k (Halifax savings a/c)

Do you have a pension scheme? Yes

Do you own any investment or other property? Yes. Value €320k, mortgage €300k. €1200 per month interest only @ 4.69% fixed until jan 2010, Rent €1200

Ages of children: 2

Life insurance: Yes


What specific question do you have or what issues are of concern to you? I'm concerned

I'm concerned about my investment property as I'm not paying off any of the capital of the mortgage (this suits for tax reasons however I dont want to always owe the €300k!!). Should I start paying capital and interest or just continue saving? Also, I'd like to eventually move house and rent out my existing home, can anybody offer the best way forward??

Thanks...

Are the house values above realistic in current climate or are they prices paid for them?

I would continue to save and if you are thinking of moving house then you need to consider selling one before buying another. You currently owe 650k in mortgages... i dont think a bank would give you another mortgage based on your incomes above

You have €680k in property at the moment which is a very big exposure for your level of salary. If you want to move home, you should either rent a new home or else sell one or both of your existing properties. You should not buy a third property, even if the bank would lend it to you, which I hope they wouldn't.

Should you save or pay off your mortgage? It all depends on the interest you can earn on your savings vs. what you are paying.

As you have a fixed rate loan on your investment, are you allowed to make additional payments without penalty? I suspect not, so you don't face this decision until January 2010. Make the decision then based on the rates you are offered.

You are paying just under 2% on your home loan, which is reduced a little by tax relief. As you can exceed this on a deposit, you are better off leaving the money on deposit. Even if the rate on deposit falls a bit below the rate you are paying for the mortgage, you might like to keep the cash available

Don't worry about not making any inroads on your €300k mortgage as you are accumulating cash in a deposit account. You can pay this off the loan at any time, as long as you don't have a fixed rate.

In general, as your borrowings are high, I would focus on either reducing the loans or saving the money in an accessible account rather than putting money into a pension.

In general, fixed rates are not a good idea for you as you may need the flexibility to pay off the loan if you dispose of either property.

Brendan

Because the sale of a PPR is exempt from CGT, I don't believe you can carry a CGT loss on it. Am open to correction on this.

WaterSprite said:

Because the sale of a PPR is exempt from CGT, I don't believe you can carry a CGT loss on it. Am open to correction on this.

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Does that mean if I rented it out (as an investment property) for just over a year I would be able to?? As far as I'm aware there is a years grace with on appliccable CGT on PPR-investment property transfers...

In the case of CGT, if you rented it out for over a year, then after that year is up, you would pro-rate the gain on a straight-line basis, based on the number of years you owned the house. I can only presume that the same is true for a capital loss. So, if your loss stays static at 70k and you own the house for e.g. 5 years (including the extra year) and sell it in year 6, you'd only be able to claim 1/6 of that capital loss.

With your good salary I would be paying down more on the home loan. You need to have a better equity level to achieve what you want. When do you want to move house ? I would also advise you to save as much as possible.

If you sell your investment property you can deduct your entry and exit costs from the CGT liability (auctioneers, taxes and solicitors fees etc). If you've owned it a very long time there might also be indexation. Have you taken a drop in rent recently, are you prepared for that. Your rent is only just covering the mortgage interest. However you have had capital appreciation of circa 80%.
I would go through all the figures again and decide what is your long term goal.

Investment property was originally my PPR however I remortgaged to start my company as well as a deposit for new house and then transferred it as an investment property (most of the equity was used and now owe €300k on it). Ideally I'd like to move in the next 4-5 yrs, I'm saving €1k per month which will give me approx €60k + existing €15k in savings. Are you saying I should reduce the mortgage on my PPR even though I'm only paying 1.95% at the moment?

(Bought the original house in 2001 for €175k, outlayed approx €4k stamp duty, €2k solicitors, €10k new kitchen bathroom etc - moved out 2006)

That means part of your investment property mortgage can not be offset against rental income. Not good.

In general for an investment property it is better to be able to write off as much mortgage interest as possible. Therefore saving separately to pay off the capital can make sense. You win on tax and interest on your savings. There is less tax benefit in relation to one's home, so it makes sense to pay off as much of this mortgage as possible. Your situation is complicated in that you want your current home to become an investment property. I'm not sure if you mean to then have 3 properties. Nevertheless you are too exposed to one asset class. We are not allowed to discuss house prices but you need to think about where you think the market is going yourself. My advice would be to get down the mortgage amount on your home, this gives you more room for manoeuvre, easier to negotiate loan rates with banks etc, easier to sell at a time that suits you etc.

In relation to CGT if you sell you can also offset the auctioneers and solicitors fees for selling. Have a look at revenue.ie CGT section.

That means part of your investment property mortgage can not be offset against rental income. Not good.


I remortgaged while it was still my PPR, am I wrong to assume that the interest on the full mortgage outstanding at the time of transfer from PPR to Investment can be written off for tax

You remortgaged and used the extra money for a business. You did not spend the money on the house therefore it is not eligible. How have you been doing your rental income for tax purposes, do you use an accountant? If not I think one now might be a very good idea to set you straight and will be money well spent.

Bronte said:

You remortgaged and used the extra money for a business. You did not spend the money on the house therefore it is not eligible. How have you been doing your rental income for tax purposes, do you use an accountant? If not I think one now might be a very good idea to set you straight and will be money well spent.

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I've been doing an annual return (through my accountant) for the last number of years as I'm a proprietary director. All I've ever done relating to the investment property is supply my interest statement and other expenses- no questions asked.
Thanks for the info guys. I think I'm gonna bite the bullet and sell the investment property...... fingers crossed I can get rid of it without losing my shirt!