Buy house or renovate

[AnneMc]

We are a couple in our 50's, trying to decide between spending 90,000 on a renovation of our current home or to move to a newer,bigger house increasing our mortgage by 80,000.
We have an outstanding mortgage of 286,000, current house valued at 360,000, new house would cost 440,000. We own a second home valued at 380,000. The rent from our second home almost covers our mortgage repayments of 1600 a month.. Tracker mortgage with Ulster Bank. We do not want to sell the second home for another few years and neither do we want to surrender our tracker mortgage! Any advice on options for borrowing or additional mortgage please.

 

[Brendan Burgess]

Can you provide the following information for clarity

Current home
Value: €360,000
Mortgage: €286,000
Interest rate:
Lender

Investment
Value: €380,000
Mortgage: ?
Interest rate: ?
Lender: ?

Rental income:

What is your joint gross income?
What specific ages are you?

Brendan

 

[AnneMc]

Hi Brendan
Current home
Mortgage remaining 175,467 @ 0.95% with Ulster Bank.
Repayment 907.31 p.m.
Investment Home
Mortgage remaining 110,[email protected]% with Ulster Bank
Repayment 702.54 p.m.
Rental income 1600.00 p.m.
Gross income 100,000 p.a.
I am 53.. My husband is 52.

Thanks

 

[Brendan Burgess]

Let’s look at whether keeping the investment is a good idea or not.

So you are getting a return after tax of 2%.

If you borrow an additional €80,000 to buy a new home, you will pay around 3 % interest, so you would be getting a better return on this €80k by selling your property and buying with cash instead of borrowing.

So, overall keeping the investment property is not a great idea. If one has a cheap tracker mortgage equal to the value of the property, it's usually worth keeping the investment. But as you pay down the mortgage, the tracker becomes less of an argument for keeping the investment.

Ulster Bank will allow you to transfer the tracker on your home to a new property but will charge you an additional 1%, I think for 10 years. Let's now look at the options, if you sell the investment.

In the overall context of things, the additional €3,000 a year is neither here nor there. So, it's really up to you whether you trade up or extend. It's not a financial decision as such.

Now let's say that you decide to keep the investment and trade-up.

It's certainly achievable. On a salary of €100k, you can cover the interest and any increase in interest rates. However, you will have a fairly high level of borrowing for your ages against the value of your property. If prices fall or interest rates rise or you suffer a drop in income, things could become tight. As you get older, you have less time to recover financially if things go wrong.

It seems a much better strategy to me to sell the investment, trade up or extend without worrying too much about money. And you will have €180k cash in the bank.

If you decide to trade up, you could even buy a new home, do it up and move in before you sell your own. With €270k cash, you have a lot more flexibility.

At your ages, you will probably get a much better return on your cash by investing it through your pension fund in equities.

Brendan