Over exposure to property, future plan

[Kellus]

Edit: Working in the North, living in Ireland, investment properties are in the UK

Age: 36
Spouse’s/Partner's age: 37

Annual gross income from employment or profession: £35,000
Annual gross income of spouse: £37,500

Monthly take-home pay £4,600

Type of employment: Public Sector, Private Sector

In general are you:
(a) spending more than you earn, or
(b) saving Saving around £1,500/€2000 per month

Rough estimate of value of home €120,000
Amount outstanding on your mortgage: €160,000
What interest rate are you paying? tracker 1.2% 15 years left, €950 repayment per month

Other borrowings – car loans/personal loans etc
None

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

Savings and investments:
€50,000

Do you have a pension scheme? Yes

Do you own any investment or other property? Yes
Property 1: Value:£60,000 Outstanding Mortgage:£65,000 Interest Rate 5% Rent £400 per month, Mortgage repayment £460 per month, 16 years left.
Property 2: Value £40,000 Outstanding Mortgage:£65,000, Interest Rate Tracker 2.19% Interest Only, Rent £350 per month, Mortgage repayment £125 per month, 12 years left.

Ages of children: 7, 4 childcare costs €750 per month

Life insurance: Yes

What specific question do you have or what issues are of concern to you?
We are about to start building our dream home taking out a new mortgage of €180,000 so repayments are not more than €1,000 per month, using €50,000 savings as a deposit. We want to hold on to our current home as it's a tracker mortgage, we would get €650 per month rent for it so would have to put €300 to it ourselves. Are we mad? I would like to have an investment for the future. I hope it would be out of negative equity in 2 years time with paying down the mortgage and property price rises, then we would only have just over 10 years left on the mortgage.
As for the investment properties. We want to sell these within the next 5 years, once they are out of negative equity. Property one we need to get a better interest rate, property 2 we need to start paying down the capital.
I have been watching our money and saving hard, but we made some bad decisions with purchasing property and I don't want to throw good money after bad. I would like to hang on to our current property if it is feasible.
Any advise much appreciated.

 

[Brendan Burgess]

A few points

1) Your home is an excellent investment because you have a cheap tracker. You should keep it unless BoI tries to take the tracker rate from you when you rent it, but I don't think that they will.

2) You should sell Investment 1 immediately. It is loss making and a hassle. You will have a shortfall of €5k but you have the cash to pay this. It makes no sense to wait until it's out of negative equity.

You already have a big exposure to property and to interest rates and will have a bigger exposure after building your home.

3) Investment 2 is very profitable and you should keep it.
"property 2 we need to start paying down the capital."

This makes no sense at all. Why would you pay down the capital on such a good investment?
The interest rate is about 1.5% after tax.
When you take out a new mortgage for your home, you will be paying about 3%. So you should pay down this mortgage before paying off capital on your cheap and profitable Investment 2.

You should review this decision every couple of years. If interest rates rise and rents fall, you might want to get rid of it.

Can you transfer your tracker to your new property?

Does Bank of Ireland allow people to transfer their trackers to self-builds?
If they do, you will pay 2.2% on the €160k for 5 years and then the normal mortgage rate after that.

Let's say you get your self-build from AIB, you will be borrowing €180k/€230k or 78%. So you will pay 3.3%.

Here is the situation for the first 5 years:



So it looks pretty clear, that you will be better off keeping your home as an investment rather than transferring the tracker to your new self-build.

I would expect that keeping your home as an investment will continue to be the right idea while it is in negative equity. But after you have built up some equity, it may make sense to sell it and pay down your home mortgage with the equity. But that is some time away.

Brendan

 

[Kellus]

Brendan,
Thank you for your reply. I'm much clearer on the way forward for our current home.
With regards to property 2, I was thinking as there is only 11 years left on the mortgage, I would need to start paying some capital, although I do realise the highest interest rate will be the new build (if property 2 is sold). But in 5 years time, I'll only have 5 years left on the mortgage with the full capital remaining. What then? Remortgage for another 10/15 years and start again or sell.
Why would the same logic not apply to property 1, to go interest only? Have lower repayments would make it similar to property 2. Not that I want to do this I'm just trying to understand the reasoning.
As it stands the rent covers the mortgages apart from repairs.

Can I ask when do you pay capital gains on our current house. If we paid off the mortgage whilst in the new house then sold it. I thought it was paid on any profit over what we paid for it initially. Other half thinks it's paid on all of it.

Many thanks

 

[Brendan Burgess]

With regards to property 2, I was thinking as there is only 11 years left on the mortgage, I would need to start paying some capital, although I do realise the highest interest rate will be the new build (if property 2 is sold). But in 5 years time, I'll only have 5 years left on the mortgage with the full capital remaining. What then? Remortgage for another 10/15 years and start again or sell.

After 11 years, you sell Property 2. If prices don't change in the mean-time, you will have to find €25k for the shortfall.

As I have already noted, keeping Property 2 is correct for now. You should review this decision from time to time. If it moves into positive equity, it may make sense to sell it. I would be surprised if it did not make sense to sell it before the 11 years.

Why would the same logic not apply to property 1, to go interest only?

Look at the numbers. Property 1 has a much higher interest rate and is just about out of negative equity. At 5% gross interest, the rate after tax is about 3%. You must be able to see that it clearly makes sense to pay capital off Investment 1 which is costing 3% , than Investment 2 which is costing 1.5%.

I think you should sell Investment 1, but if you choose to hang onto it, then any optional capital repayments should be made against this mortgage.

You are correct. You will pay CGT on the price you sell it for less the price you paid for it. The mortgage has nothing to do with it.

Brendan

 

[Kellus]

Yes, I agree as it stands property 1 is loss making, I was thinking if we got a lower interest rate it may be worth keeping. I've looked and we can fix the rate for 2 years at 2.49% monthly payment of £397. That saves us £80 a month.
Would the lower rate make it worth keeping?
It's just a bitter pill to swallow that in 10 years time we would have sold property 1 barely breaking even and made a loss on all the upkeep we've spent on it and sell property 2 just out of negative equity. It would have all been for nothing and we would have made a loss.
Or if both properties rent combined cover the mortgages, then in 11 years sell property 2 and hopefully use any profit to pay off/down property 1 at least then we would have a property paid for to use the rent as income or sell.
I wouldn't consider this if we had to put any money to the mortgages each month but we don't. Of course all of this is depending on interest rates not rising.
The other side if we sell property 1 we will have £200 income each month from the rent of property 2.
Is it as straightforward as comparing £200 per month X 10 years = £24,000 versus property 1 worth £70/80,000 with say £15,000 left on the mortgage (in 10 years time).
Thanks

 

[Brendan Burgess]

we can fix the rate for 2 years at 2.49% monthly payment of £397. That saves us £80 a month.

Hi Kellus

You appear to be based in the UK.

This is an Irish site and while the principles are the same, the tax situation is very different, so forget about any of the tax implications.

Also, you have a competitive mortgage market in the UK. The advice above is based on the Irish market where interest rates are outrageously high.

It's best to continue your questions on a UK site.

Brendan

 

[Kellus]

We live in the south (I always have) and work in Northern Ireland, cross border workers. Our principle home and the home we will be building is in the south, but the investment properties are in the u.k. The exchange rate adds a further complication. We make a tax return north and south each year but are resident in the south.
Apologies I should have made this clearer.
A brexit will make for some interesting times for us.

 

[Brendan Burgess]

Your last second last post is very confusing.

I have set out the right way to look at it. You need to adjust my figures for any tax complications.

You judge the position from where you are now - not what has happened in the past.

You assess each property separately. Of course, if you can pay 2.5% instead of 5%, then Property 1 becomes profitable.

You review the decisions every year or so. Making a 10 year forecast is meaningless.

Not sure that Brexit would be that significant to this decision. You have, roughly speaking, the same amount of assets and liabilities in sterling, so you have a sort of hedging. If Brexit causes interest rates to shoot up, then there might be a rush from property. Which is another reason for reducing the amount of property you have.

Brendan

 

[Kellus]

Thank you for your assessment Brendan.it's given us plenty to think about.
I'm probably jumping ahead of myself trying to think of 10 years down the line and trying to hang on to one of the investment properties.
On a final note, when I spoke to AIB regarding getting a mortgage for the new build, they mentioned they would require a credit report from the uk since we are paid in sterling. Can they do this? Our address for over 10 years is in Ireland, I don't think you can get one without a uk address.
Many thanks