should i reduce my mortgage in this situation?

[golden mean]

Am I right in thinking that it does not make sense to reduce the balance (and thereby the interest repayments) on our home mortgage, given that we expect to go abroad soon and rent it out?

I understand that we will have to pay income tax on our rental income (even though it is our principal residence- boo hiss to Revenue), less our allowable expenses, the vast majority of which will be mortgage interest. We don't know how much rent we will be getting, but given local prices I would expect it to be more than our current monthly mortgage payments.

On the other hand, if we reduce the mortgage, we will be getting a better "return" on the money than any other investment we can find at present........ I don't really know how to compare the value of money we save now with money we will have to shell out later- is there a generally accepted method of guesstimating? Also of course we don't know when there might be another Bacon type policy change and we might not even get our tax relief on the interest payments when we do rent it out (although this must be unlikely?)

If we reduce the mortgage now, I don't think we can increase it later and claim tax relief against rental income?

Any advice appreciated. it goes against my instincts not to pay something off the mortgage when I can afford to, so I really want to make sure I am not being stupid.

 

[Brendan Burgess]

If you are renting out your house, it makes sense to be borrowed as much as possible as you can write the interest paid against the rent received.

So if the interest rate is 4% and you are getting tax relief at around 50%, the net cost of borrowing is 2%. If you can invest your money and get a tax free return in excess of 2%, then it makes sense to invest your money instead of paying off your mortgage. I would think that a unit-linked fund is likely to produce more than 2% tax-free over the next few years.

I can't remember how the rental income from an Irish home is taxed while you are abroad. If your tax credits cover it, so that it's effectively not taxed, then the above argument does not apply and you have to be getting a tax-free return in excess of 4% to justify investing instead of reducing your mortgage.

It's unlikely that the tax treatment would change retrospectively. It didn't in the Bacon case, as far as I remember.

Brendan

 

[golden mean]

Thanks Brendan,
I know it makes sense, but I suppose the part I am having trouble with is factoring in the opportunity cost of the extra interest I am paying NOW (which I could be investing until such time as I rent the house). Theoretically, I could reduce my repayments now and invest the money in something which would perform wonderfully well. By not doing that I am costing myself money and I should be subtracting that from the future benefit of keeping my interest repayments high......