To sit it out in small starter house with 2 kids or bolt!

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speckybecky

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I would really appreciate any advice anyone has for me on this subject.

My husband has a mortgage on our current home. It is a very small 2 bed in Dublin 12. It was bought for €330k, outstanding mortgage is €260k and the current value is €240k approx. We also invested €35k in the house to refurbish it :(. Our interest rate is very high (4.9%) meaning we our monthly mortgage repayments are €1650 approx.

The house is no longer suitable for our needs. We have sat it out for as long as we can but with 2 kids now, it has just become very impractical. The idea was to sell this house & ultimately buy a bigger house in the greater Dublin area/surrounding counties. We tried to sell but cannot achieve a high enough price to clear the mortgage so husband is not keen to sell at what he perceives to be a big loss (I agree). Now, we are thinking of renting it out. It would probably command €1400 a month, leaving us with a shortfall of over €200 in monthly repayments. Also, there will be the costs associated with renting (PAYE on rental income etc).

Given this, we are considering using the majority of our savings to switch our mortgage to a different bank (possibly KBC), we will need to contribute 25-30k to switch and get a lower rate - this should bring the mortgage repayments down to €1200 approx. a month. We feel that this is a good idea as it will bridge the monthly shortfall & seeing as we can't buy the bigger house until we sell this house, our savings will be working for us, instead of just sitting in the bank. We intend to rent in the GDA/surrounding counties.

However, I am worried it is risky to invest all our savings in the mortgage & am wondering if this a risky practice or does it make financial sense? I wonder if we would be better accepting the current offer on our house of €240k approx. and just cut our losses? When/(if!) we eventually sell the house & achieve the price we need to clear the mortgage, the houses in the GDA will have also increased meaning that whatever we saved in waiting will be gobbled up by the increased prices. That is assuming prices continue to rise!

Other information of relevance:
My husband also has a second property, also in negative equity (25k approx.) but this is rented out & there is no shortfall in rent/mortgage repayments (although associated PAYE/maintenance costs).
Both of us are in employment, two children in childcare, one approaching school going age so we need to put down roots somewhere asap.

I would really appreciate any objective opinions/financial advice!
Thank you in advance.
 
Which lender is your home loan with?

Which lender is your investment property with and what interest rate is it? What rental income are you getting?

How much savings do you have in total?

Brendan
 
Thanks for your response Brendan.
Lender for home loan (Dublin 12 house) is Danske Bank.
Lender for second property is Ulster Bank. It is a tracker mortgage, current interest rate is 1.05%, current balance is €119k and the rental income received is €564 (mortgage repayments are €475).
At present, our savings are €45K. My husband regularly invests in his employer's shares scheme which usually enables him to yield €10k a year (although he pays some capital gains tax on this) so we envisage our savings increasing year on year.
Please let me know if you have any other questions.
 
There are a lot of negatives in retaining House No 1. Danske Bank have exited the market and have no interest in either reducing SVR or dealing on a new mortgage. You are paying 12.7k annually in interest on the borrowed funds. Renting out the property would bring in a gross income of 16.8k. However you will not be able to offset 9.5k of interest paid against this income. I appreciate that with other expense to offset tax on the RI is likely to be negligible. However you will still be contributing a minimum of €250 pm to your mortgage payments as well as paying RI yourself.
Alternative is to sell the property immediately and realize your loss. I.e. shortfall between sales price and current mortgage. Positively you can meet this from your savings. waiting for the property to rise in value is not a 1 way bet!! You will not be exiting the property market as you intending buying another property. So why would you assume that the property that you are selling will rise in value and any property you intend buying will not rise in value? Realistically any rise in value of your own property will be negated by a similar and possibly higher rise in value of the property you intend to purchase. Selling now will cost you circa 30k to meet the mortgage shortfall but you will still hold the balance of your savings and be in a position where you can build up your savings to a level that will facilitate the purchase of a new PDH more quickly than the alternative proposal.
 
It's a pity you are with Danske, as other lenders would have given you a negative equity mortgage and you would not be subject to the Central Bank's lending requirements.

1) You should immediately pay your savings of €45k against your home loan. This will yield you a return of 4.9% tax free. There is no reason not to do this.
2) Not sure of the terms and conditions of your husband's share schemes, but cash in the hand now may be more useful to you. So probably hold off buying shares until you have the house issue sorted.
3) How much are your husband's shares worth at present? When can he cash them?
4) After setting your savings against your mortgage, your position will be:
House value: €240k
Mortgage: €215k
Equity: €25k
5) You will find it hard to get a mortgage to buy another house as you would need a 20% deposit under the new Central Bank rules.

Options
1) Stay where you are as long as possible and try to accumulate the 20% deposit required - this is financially the best option.
If you go for this, pay down the mortgage and switch to AIB. Do not touch KBC.
2) Sell your home and rent a suitable house.
This is probably the best option but it will take you longer to save for a deposit to buy a house.
Again, you should pay down the mortgage anyway with your savings. You probably should not switch lender unless you expect the sale to take at least 12 months.
3) Let out your home and rent a new home for yourselves.
The advantage of this is that you keep a bigger stake in the housing market, so that if house prices rise, your wealth will increase with the rise.
The downside is that you will have to eventually sell it if you want to buy another home. If you have tenants with a lease, it may be difficult to get them out when you want to sell it. You will get a better price while you, as owners are keeping it looking nice.

The investment property
How did your husband come to have this? Was it ever his family home?

It's a bit of a long shot, but you could try the following:
1) Sell the family home
2) Ask Ulster Bank for a tracker mover mortgage. In other words, you would sell the investment and move the mortgage to your new home.

If they agree to this...
  • You keep your tracker although you will have to pay 1% more
  • Because your investment property is in negative equity, you would be exempt from the Central Bank's requirement to have a 20% deposit.
It would be easier to get their agreement to this if you were living in the investment property as your family home.

Brendan
 
Thanks to both Brendans for the advice.

The fact that our home loan is with Danske is really a killer. Can you tell me why we should avoid KBC? It is the bank we were thinking of going with.

That is a great suggestion regarding Ulster Bank but the house has never been a family home, it was bought as an investment. I suspect it would be difficult to convince a bank that it is our primary residence??! How is this proven?

I am still debating what the best option is. The fact of the 2 children & relocating outside Dublin 12 to secure them a better standard of living & better education is the most important thing to me at the moment, so that outstrips regaining what we have lost financially. We could sit it out for another 12 months I suppose though as child no. 1 is not going to be going to school until Sept 2017 at the earliest.

I am glad you mentioned about the likely difficulties of getting tenants out in time & the fact that our home would deteriorate in condition when we rent it out. The latter makes me worried especially as if we switch mortgage providers we will have invested all our savings in the house.

I also agree with what Brendan44 said about us not exiting the property market when we sell our current home so it is slightly pointless to be pinning all our hopes on it rising in value as prospective houses will also rise in value.

Thank you both for your advice.
 
If you have 45k in savings, putting the whole lot against your existing mtg of 260 will bring you down to 215k which is still around 90% LTV. Are the banks offering switching giving up to 90%? I would have thought it was 80% but maybe I'm wrong, any of the presently employed bankers know?
 
It was usually only 80% on switchers even years ago, be surprised if they were more lenient now than in the boom days.
 
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