Money Makeover - Decisions decisions

[Familyman]

I previously posted here , and got great advice, but will start a new thread to update.

Personal details
Age: 45
Spouse’s/Partner's age: 43
2 kids, ages 6 and 5

Income and expenditure
Annual gross income : over €200,000, self-employed, unpredictable
Annual gross income of spouse: €61,000, private sector
Monthly take-home pay combined: approx €11k per month
Saving heavily

Summary of Assets and Liabilities
Family home worth €720k with a €320k mortgage
Cash of €125k, will be €175k by end of year, just sitting in a current account
Buy to Let Property worth €250k to €280k, no mortgage

Family home mortgage information (Dublin)
Lender - Avant
Interest rate - 1.95%, fixed for 3 more years, €1,750 a month
No other borrowings

Buy to let property (one remaining in Midlands)
Value: €280,000 (according to estate agent, but maybe optimistic, similar in worse condition sold for €235k last year)
Rental income per year: €9,000, but could be €15,000 in October
Rough annual expenses other than mortgage interest: €2,000
No mortgage. CGT not an issue if sell (historic losses still around).

Other savings and investments:
Pension: Approx €100k. Only started recently but I pay in tax-free max (€28,500), and will keep doing so.
Spouse pension: Approx 40k
Spouse pays 7.5%, matched by employer, but this year also uses the rent to make AVC to increase payment to her tax-free max.

Other information which might be relevant
Life insurance: no, just mortgage protection. No income protection.
10 year old car. Short commutes by bike.
Child care fees reducing dramatically (ECCE and move from creche to primary).

What specific question do you have or what issues are of concern to you?
We got really helpful advice here four years ago, and sold an investment property and more recently fixed our family home mortgage for 4 years, upped pension payments, (but didn't get income protection). I am maxing my pension payments, my wife this year used her rental income too for AVC. We are now very very comfortable, and slowly this is sinking in. We are living way within our means, from habit more than anything. We are treating ourselves a bit - Instead of always shopping in Lidl, we now do every second week, Lidl then Dunnes! And I maybe want to buy a 3- to 5-year old car. And we are talking about maybe our first foreign holiday in 5 years! We both like our work, and the amount of work we are doing.

But the kids are getting bigger, and our house is in a nice area but small. And our cash is devaluing with inflation. But we don't want to lock it into anything until we have a plan.

The very long term tenant in the buy-to-let has given notice, which gives us options - sell, or let again at a market rate (tenant was on a very low rent). We also want to either do an extension on family home or move to a bigger family home in the next 1 to 3 years.
My wife's appetite for property investment as a pension has started to return (she sold 2 of her 3 btls over the last 5 years), but interest rates for buy-to-lets are crazy and my appetite for bank debt is quite low and my fear of interest rates is quite high.

Assets -
BTL - €250k after sale costs, or €9,000 pa after tax
Equity in family home - €400k
Savings - €125k, could be €250k by end of next year
Current loan - €320k

I have started doing the maths on a few options eg
1. Sell BTL, use proceeds plus savings to extend/move, keep mortgage as is.
2. Sell BTL, use proceeds plus savings plus a bit more loan to get great family home.
3. Sell BTL, rent out current family home (could get €30,000 pa before tax to cover current mortgage at 1.95% but would not cover at 7%!!)), and use savings plus proceeds of BTL plus much bigger mortgage (approx €700,000) to get bigger family home.
4. Keep BTL, get additional €200,000 mortgage on top of savings to do big extension or buy bigger house.
5. Any other option - get loan against BTL / pay off mortgage / buy shares / etc ???

I know we are in a great place, but at the moment I have option paralysis and fear of risk, and my wife thinks btls are good pensions. Any thoughts?

 

[Sarenco]

In your shoes, I would sell the BTL and use the proceeds, together with your after-tax savings, to extend or trade up to a larger house.

Keep it simple.

Great to see that you are maxing out your tax-relieved pension contributions - keep it up!

And take your family on a nice holiday - you can well afford it.

 

[_OkGo_]

A few comments on the various options you are considering

1. Sell BTL, use proceeds plus savings to extend/move, keep mortgage as is.
2. Sell BTL, use proceeds plus savings plus a bit more loan to get great family home.

If you move, you will lose your current mortgage rate. If you extend, you need to stay within budget as Avant don't seem to do top up mortgages

3. Sell BTL, rent out current family home (could get €30,000 pa before tax to cover current mortgage at 1.95% but would not cover at 7%!!)), and use savings plus proceeds of BTL plus much bigger mortgage (approx €700,000) to get bigger family home.

€30k gross rent is terrible return from a €720k property , don't do it.

But what's worse is that you have the misconception that it will be profitable because of the 1.95% interest rate. What really happens in this situation is that you are borrowing €300-400k extra on your new PPR to facilitate keeping the old PPR. This is a real cost to your rental but it is not deductible because the loan is not on the rental.

In numbers, after expenses and (Avant) interest, your current PPR will have gross profit of €20k or €10k net of taxes, approximately. Now consider that you are paying interest on €300-400k at ~4% of unnecessary borrowing on your new PPR which is €12-16k. This is a net cost to to you so in reality, your former PPR will be making a net loss of €2-6k...Run a mile this idea.

4. Keep BTL, get additional €200,000 mortgage on top of savings to do big extension or buy bigger house.

Same as above, that €200k is debt you are carrying because you are trying to keep the BTL so it is a real net cost to you making it barely profit or loss making depending on your figures below

Rental income per year: €9,000, but could be €15,000 in October

€9,000 pa after tax

Which is it? Gross or net €9k

Pension: Approx €100k. Only started recently but I pay in tax-free max (€28,500), and will keep doing so.

I'm far from an expert on pensions but as a self employed person, why are you limiting yourself to employee revenue limit?

Other than that, I agree completely with @Sarenco in that you should keep it simple. Sell the BTL and decide whether it makes sense to extend or move.

 

[skrooge]

Family home worth €720k with a €320k mortgage

Cash of €125k, will be €175k by end of year, just sitting in a current account

Lender - Avant
Interest rate - 1.95%, fixed for 3 more years, €1,750 a month

While I appreciate you don't want to lock your funds away untill you have a plan you've effectively doubled your mortgage balance to have have a large cash sum earning next to nothing. By the sounds of it it's in one account in one bank so in the remote case that bank fails you could loose anything over the 100k DGS threshold.

In saying that you're in a great position whereby if you put that money into the right deposit accounts you'll likely be better off than if you paid off a chunk of your mortgage. You'll have also diversified your bank exposures and for the most part the funds will be easily accessible

With a mortgage rate of 1.95% and DIRT at 33% any deposit account over 2.91% represents a net gain as it stands.

A quick glance at the best buys and between Lightyear and Advanzia Bank you could put €120k on deposit at rates in excess of 3% - all instant access. There are also fixed rate offerings with terms of three year all the way down to 6 months that could suit you if you wanted to match the term of your mortgage rate.

Best Buy - Savings Best Buys

Savings Best Buys: There are 3 savings best buy threads on AskAboutMoney that are updated frequently. Instant Access and Notice Accounts - Lump sum variable rate savings. Fixed Term Deposits - Fixed Lump Sum Term Deposits from a few months to a few years. Regular Savings - Smaller sum...

www.askaboutmoney.com

 

[goingforgold]

A couple things to note that could and will cause you significant issues down the line if you don't address asap:
1. You can't get tax relief on AVCs from rental income (as it's 'unearned income'), so having done so already means your tax returns are not accurate.
2. You cannot increase the rent on your rental property from 9k p.a to 15k p.a as the rent is associated with the house, not the tenant. You can only increase the rent by 2% p.a currently due to government rent increase restrictions.

You are doing very well financially so be careful not to ruin some of that by making false declarations.

And take that well earned family holiday. Kids are a good age for it and you only get one chance as they grow up fast

 

[RedOnion]

1. You can't make AVCs on rental income, so having done so already means your tax returns are not accurate.

The OP said they used the rental income to maximise AVCs up to to maximum tax-free amount. There's nothing wrong with that.
I think you've interpreted the wording differently.

You can only increase the rent by 2% p.a currently due to government rent increase restrictions.

Only in an RPZ area.

 

[Bluefin]

The OP said they used the rental income to maximise AVCs up to to maximum tax-free amount. There's nothing wrong with that.
I think you've interpreted the wording differently.


Only in an RPZ area.

 

[Bluefin]

Is the OP maxing his pension contributions?

He state's that he's self employed... Own company?

Executive pension possible?

 

[goingforgold]

The OP said they used the rental income to maximise AVCs up to to maximum tax-free amount. There's nothing wrong with that.
I think you've interpreted the wording differently.


Only in an RPZ area.

I would imagine with potential rental income of 18k p.a that OP BTL is in an RPZ...but good point nonetheless.

Not sure what you mean by maximum tax free amount if OP is not claiming tax relief? One can contribute whatever they wish as AVCs anyway if they're not claiming tax relief, so I don't understand your point there? I think you're confusing the maximum 115k limit but that's only if you're claiming tax relief. You can put in whatever you want to an AVC above this amount but can't claim tax relief on it. The point here is that OP is claiming tax relief on rental income

 

[Gordon Gekko]

Self employed typically doesn’t mean having one’s own company. It means direct income.

I’d sell the rental. If it’s in an RPZ, you can’t increase the rent when the tenant moves out and the Shinners plus all of the other noise make ‘landlording’ a fool’s errand. The Midlands may not be.

Your wife’s idea of ‘property as a pension’ is madness.

 

[RedOnion]

The poj there is that OP is claiming tax relief on rental income

I don't think they are but @Familyman can confirm what he meant.

I understood wife is making 7.5% contribution from her 61k salary. And then using cash flow from the rental income to make an extra contribution up to bring her up to 25% of the 61k.

 

[goingforgold]

I don't think they are but @Familyman can confirm what he meant.

I understood wife is making 7.5% contribution from her 61k salary. And then using cash flow from the rental income to make an extra contribution up to bring her up to 25% of the 61k.

Ok but the 25% makes no odds, as it could be 50% or 10% given she's not getting tax relief on it, or certainly shouldn't be.
25% is only relevant if she's claiming tax relief as it's the max amount she can claim on salary given her age bracket.

 

[RedOnion]

Ok but the 25% makes no odds, as it could be 50% or 10% given she's not getting tax relief on it, or certainly shouldn't be. 25% is only relevant if she's claiming tax relief as it's the max amount she can claim on salary given her age bracket.

Of course she can get tax relief on it!
Take a step back for a minute and think about it.

She has taxable earned income of 61k. She can make a tax relieved pension contributions of 25% of that.
The fact that the cashflow came from rental income is completely irrelevant!

 

[Gordon Gekko]

I suspect the wife is doing what lots of people with salaries and rental income do.

When they get their rental income tax bill in October/November, they make an AVC equal to an amount that negates the tax bill.

This creates the mental illusion that the rental income and the pension contribution are somehow linked, but they’re not.

The relief is being claimed against the salary.

 

[goingforgold]

Oh ok, apologies, if she's using the income from rent to boost her to the 25% max of 61k earned income then I get it. OP can clarify.

 

[Clamball]

Compare the after tax & costs income of the btl to having the money in a high interest deposit acc (less dirt) and I doubt it would make sense to hang onto the btl. Skrooge gave more detail above.

If you rent your current ppr and then borrow to purchase a new ppr you are just moving the costs associated with a rental into your mortgage, and will end up paying that cost for years, so don’t do it. Okgo explained it a lot better than me.

What makes sense is sell the ppr and the btl and move to the bigger house, using your savings and house sales to fund it all, and ending up with as small a mortgage as possible. Doing an extension may only put off the move to the bigger house for a few years.

Get income protection to protect your family if you cannot work in the future. Read all the small print first.

Once you do your house move the diversify in your saving options for pensions/early retirements/ etc. Don't just let it sit in the bank. You both seem to have a saver mentality so I doubt that is going to disappear and you can focus on wealth growth both for now and the future. You appear to have different risk appetites so your wife might prefer buying and renting house and you might prefer stocks/shares and pension investment. Maybe there will be room for both.

 

[Familyman]

A couple things to note that could and will cause you significant issues down the line if you don't address asap:
1. You can't get tax relief on AVCs from rental income (as it's 'unearned income'), so having done so already means your tax returns are not accurate.
2. You cannot increase the rent on your rental property from 9k p.a to 15k p.a as the rent is associated with the house, not the tenant. You can only increase the rent by 2% p.a currently due to government rent increase restrictions.

You are doing very well financially so be careful not to ruin some of that by making false declarations.

And take that well earned family holiday. Kids are a good age for it and you only get one chance as they grow up fast

As noted by others, we are tax compliant. Just used the rental income to make up the difference between the 7.5% of €61k paid by her at source and the 25% of €61k payable tax free.

Property is not in an RPZ. Rent was/is low, tenant was/is long term, tenant is moving on due to life changes, estate agent advises that €15k (9k after tax) achievable. I say 9k but even with deductible costs etc, I should say 7.5k or 8k after tax.

€30k gross rent is terrible return from a €720k property , don't do it.

But what's worse is that you have the misconception that it will be profitable because of the 1.95% interest rate. What really happens in this situation is that you are borrowing €300-400k extra on your new PPR to facilitate keeping the old PPR. This is a real cost to your rental but it is not deductible because the loan is not on the rental.

In numbers, after expenses and (Avant) interest, your current PPR will have gross profit of €20k or €10k net of taxes, approximately. Now consider that you are paying interest on €300-400k at ~4% of unnecessary borrowing on your new PPR which is €12-16k. This is a net cost to to you so in reality, your former PPR will be making a net loss of €2-6k...Run a mile this idea.


Same as above, that €200k is debt you are carrying because you are trying to keep the BTL so it is a real net cost to you making it barely profit or loss making depending on your figures below

Extremely good advice - I knew I must have blind spots, and that is a glaring one. The cost/value of the equity. Thank you - makes the real cost an awful lot clearer. Ditto, Clamball. Will do the maths anyway, but I'll be doing it with the full cost in there, and the likely answer is clear.

Thanks everyone else for all the advice. Clear message of get the PPR sorted fully first, have as small a mortgage as possible, and only start investing with money we actually have, rather than the bank's money!

 

[Bronte]

Self employed typically doesn’t mean having one’s own company. It means direct income.

I’d sell the rental. If it’s in an RPZ, you can’t increase the rent when the tenant moves out and the Shinners plus all of the other noise make ‘landlording’ a fool’s errand. The Midlands may not be.

Your wife’s idea of ‘property as a pension’ is madness.

It is not the 'shinners' that caused the current housing mess. And there is still money to be made. I disagree that a property as pension is madness.

 

[Bronte]

I'd

Property is not in an RPZ. Rent was/is low, tenant was/is long term, tenant is moving on due to life changes, estate agent advises that €15k (9k after tax) achievable. I say 9k but even with deductible costs etc, I should say 7.5k or 8k after tax.


Thanks everyone else for all the advice. Clear message of get the PPR sorted fully first, have as small a mortgage as possible, and only start investing with money we actually have, rather than the bank's money!

The rental return is 3.2% . At 15K it is 5.4%. I'd sell and buy again if I were you, looking for a return nearer to 10%. I have a rental empty that gave me 8.4%, I'll be spending a lot on it, plus a state grant and will get it to 10.2% and use the rental income as pension. The money put in will be reflected in it's value, and it will be hassle free for me, plus meeting all regulations and with market rent.

You should be looking for something that will give you a better return. AAM is anti property investment.

We cashed in a pension, paid the tax, to get control of the money. Which is going back into property. And this means the 'asset' of pension remains in the family. We did not need an annuity. Which we consider bad value.

You need some kind of insurance in case you are unable to work, remember covid. And what that taught you about the world suddenly changing.

I cannot fathom out what type of extension would cost 300k. You need to do one thread just on that alone. About doing up, selling, and buying. What exactly is wrong with your current home. And is the location excellent etc.

 

[Gordon Gekko]

It is not the 'shinners' that caused the current housing mess. And there is still money to be made. I disagree that a property as pension is madness.

You’re right.

It’s not madness, it’s idiocy.

Especially when one can own property via a pension. That is, if one prefers higher risk massively concentrated bets on a single asset class in a single geography.

Most of us have decent exposure to Irish property by virtue of owning our own homes.

Some of us have additional exposure to Irish property via an investment property.

It is madness and idiocy to ignore pension funding and lob further money into the same asset class in the same geography.

It’s as mad as owning a load of Diageo shares to fund one’s retirement, generating some cash, and buying more Diageo shares.

Probably a decent asset to hold, but maybe not, and concentration risk is a real thing.