Maximising 1st mortgage and later acquiring a 2nd property

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zander1983

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Hi
Newbie question here - completely new to investing in property.

Im in the trying to buy a house in Dublin. I have savings of 165k. The house is costing 400k. I plan to put 40k down and get a mortgage for 360k. Im an IT contractor earning 95k per year (I get paid 425 euro per day). I setup a company a few years ago for the contracting with me as the sole employee. The 95k goes into the company and I pay myself roughly 65k. I put some of the rest of the money into a pension, and I put some money into a side business (which hasn't paid off yet but I hope will). I also inherited a farm and house worth about 1 million euro. The farm profit is low, roughly 10k per year (been investing money back into buildings and its mainly a hobby farm). I spoke to a broker and he said I would only qualify for a mortgage of 250k - roughly calculated on the salary I pay myself (65k), and not the gross earnings. The first question I have is can I get this calculated on my gross pay ie the 95k? I've earned between 400 and 450 euro a day for 10 years straight. Theres also the farm and its small profit. I believe I should be able to get 360k - is this realistic?

Second question I have is, assuming I can get the larger mortgage and buy the home, how can I after that go about acquiring an investment property? e.g. say I have 120k left over, could I buy a 1 bed for 300k, putting down 100k, and using the first home as leverage to acquire the 2nd home? A 1 bed in Dublin would rent at 1600, and mortgage repayments would be 800. In the UK and the US, this is a common thing for people to do - using their 1st house (or 2nd or 3rd) as leverage to acquire another property. Is this strategy possible in Ireland?

Thanks
 
zander1983 said:
I have savings of 165k. The house is costing 400k.
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zander1983 said:
of 250k - roughly calculated on the salary I pay myself (65k),
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So with your savings of €165k, you can buy a house for €415k.

You need to establish your priorities, both short term and long term.

1) I am guessing that buying a home to live in should be your first priority. So focus on that.

2) Do you have cash in the company? If so, get advice on taking it out of the company.

3)
zander1983 said:
I put some money into a side business (which hasn't paid off yet but I hope will).
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Doing this through a company might be the right idea, but it's not clear to me that it is.

4) Why is your business operating through a company at all? Maybe you would be better off operating as a sole trader. I am not saying that you would. But review everything with an accountant. Have a written plan in place.

5)
zander1983 said:
I also inherited a farm and house worth about 1 million euro. The farm profit is low, roughly 10k per year (been investing money back into buildings and its mainly a hobby farm).
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That is a very expensive hobby. A return of 1% on an investment of €1m is not very good.
It seems to me that you should sell it and buy a better house in Dublin.
Living mortgage-free is great.

6) You need to sit down and examine your priorities in life. Then your financial priorities. Then see where the farm sits within that framework. Somehow, I just don't see a leveraged investment property being part of it.

Brendan
 
What you are proposing is to purchase two properties worth €700k.

You are limit to the central bank lending rules of 3.5x salary. If you paused your pension and side business to draw down the full €95k as salary and you could include the €10k from the farm , then you are still only capable of borrowing the €360k you already mentioned yourself. You don't have the remaining €340k plus all associated costs to buy the properties.

As Brendan said, you need to sit down and assess your personal priorities and then your financial priorities. You are in very healthy financial position with a farm and house worth €1m and an income of €95k with what I assume is a nicely funded pension.

It makes no sense to try to buy a highly leveraged property when you are not maximizing the assets you already have, particularly the farm.

In your shoes, I would:
  • Buy the €400k property to live in and use all funds available to reduce the mortgage to €260k or less.
  • Forget about the 2nd property purchase for at least 5 years, you don't have the funds
  • Rent the existing property that you own on the farm
  • Consider leasing the majority of your farm, a few acres could satisfy your hobby & I believe there is IT relief on farm leases (don't take my word on that, do some research)
  • get your priorities straight, you have your main profession, a side business, a rental (farmhouse) and a farm. Which one is most important to you?
 
_OkGo_ said:
What you are proposing is to purchase two properties worth €700k.

You are limit to the central bank lending rules of 3.5x salary.
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Hi @_OkGo_ I don't believe they would be limited to 3.5x salary from experience. I had a PPR and bought a new PPR in 2021 planning to rent out the old PPR. I ended up with mortgage debt equivalent to 4.9x salary across two properties. When applying for the second mortgage the bank treated my existing mortgage as a monthly loan expenditure and lent me 3.5x salary.

So it is possible to exceed the 3.5x salary limit without an exception.
 
I'm in a similar situation currently. What I've mainly experienced is that most mortgage advisors will lick their thumb and run it down your accounts until they see a salary figure and just take that amount. A lot of them don't understand the gross earnings of the company vs salary.

You can get lucky with an advisor/broker who understands it or you can just ask them to put something in the notes that go to the back-office actuaries (for want of a better word - I'm not sure the job title of the staff who do the in-depth analysis) who are more likely to be familiar with this. Both a good AIB advisor and an independent broker have told me that it's down to the "actuary" to decide how much, if anything, extra they'll allow you above 65k. It might depend on how long / stable your company history is (yours seems good on both counts), if you're business banking with them and they can see your full history, and possibly other criteria that might come down to the personal opinion of the actuary.

I have my personal and business accounts with AIB, a case was made by the advisor for us, and they're allowing me a percentage of my pension contributions as extra "salary". The broker wasn't able to allow as much, presumably because the entities they deal with have no such details on me.

Lastly, if you have an SSAP and contribute everything from the company, instead you could split your contributions into AVCs (the limit of which depends on your age) and the rest from the company. While your contributions remain the same to the pension and there's extra payments to be made, it has the effect of looking like a higher salary on paper for the bank advisor. Obviously that'll take a year or two to come through into your accounts though.
 
argolis said:
Lastly, if you have an SSAP and contribute everything from the company, instead you could split your contributions into AVCs (the limit of which depends on your age) and the rest from the company
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Check the tax effectiveness of this. I think he would pay PRSI and USC on the AVC bit. But doesn't pay it if the company contributes directly.

Brendan
 
Looks like you're right Brendan... Hadn't realised that, thankfully payroll software means I didn't skimp on my taxes. I guess the question is then if paying the USC & PRSI on the AVCs to get a higher "salary" for a year or two is worth it to you for the bump in AIP that you might get.

Types of pension contributions

Types of pension contributions
www.revenue.ie www.revenue.ie
 
argolis said:
What I've mainly experienced is that most mortgage advisors will lick their thumb and run it down your accounts until they see a salary figure and just take that amount. A lot of them don't understand the gross earnings of the company vs salary.

You can get lucky with an advisor/broker who understands it
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I think most brokers understand the difference between salary and turnover. But a good broker will not give you false expectations just to keep you on the hook. A lender is not going to be interested in assessing what elements of turnover could be turned into cash to repay a mortgage and what ones can't. You might get an increase over 3.5 x salary in recognition that the pension contribution is voluntary and could be stopped if times got tough, but that's about it.

I have a client running a business with a turnover of >€2 million and a salary for him of €70,000 + pension contributions. Which of these figures do you think should be looked at for assessing a mortgage for him?
 
Hi Dave

He raises an interesting point though.

What if a contractor has a limited company with fees of €100k a year and, say, €10k costs to give him a profit before director's salary of €90k.

John takes a salary of €90k - so presumably the lender will give 3 1/2 times €90k
Mary takes a salary of €70k and puts €20k into a pension, so the lender will give her 3 1/2 times 70 and might give a bit more for the pension.
Paddy takes a salary of €50k and leaves €40k cash in the company - how will the lender treat that?
Ann has built up cash in the company in previous years. She takes a salary of €120k and creates a loss of €30k. Will the lender give her 3 1/2 times the €120k?

Brendan
 
@Dave Vanian I'd agree based on my experience that brokers tend to understand more often with less or no explanation then frontline bank advisors. Your first paragraph is essentially what it's about, however I've been told at least twice by different institutions that it would be done by adding a notional amount to the official salary based on my pension contribution, before then applying a 3.5 multiple or whatever they deem. Maybe you're right and internally they they're giving a higher multiple of the official salary in recognition of the ability to draw down more pay if needed but it amounts to the same thing.

However, I'm not talking about the case of somebody running an actual business where things are more complicated... I'm referring to the OP's situation and my own, which is a one-man band operation where all the company earnings are taken every year either as salary or pension and there's little other complication. That's what I'm expecting to be taken into account, especially with that pattern borne out in the accounts.

@Brendan Burgess to answer an earlier suggestion, AFAIK Irish IT contractors almost exclusively operate through ltd companies, it used to be a mix of self-employed and ltd company but ltd company has become the norm for reasons I don't know, maybe we followed suit from the UK, it might be easier for the hiring process or it's for liability insurance reasons but in any case, everyone I know who contracts does so through a small ltd company.

Your scenarios are interesting, especially the last one. AIB examine three years of company accounts and would have questions around the profit and loss of the company. So, where there was a 30k loss AFAIK that would be flagged and have to be satisfactorily explained by the mortgage applicant. I actually had that situation, was able to give a good explanation around it and it was fine.

Lastly in Ann's case, while she'd get a bump in salary calculated by the bank it wouldn't be to 120k as AIB take the average salary of your last three years. Other banks might have different approaches. So I'd guess:

John - gets 3.5 times 90k but might be allowed a higher multiple
Mary - minimum of 3.5 times 70k but might be allowed higher salary or multiple
Paddy - Presumably same boat as Mary. Minimum of 3.5 times 50k but might be allowed higher salary or multiple. Likely lower than Mary though.
Ann - Not sure how the bank/broker would view it but she'd have been better off not having a company loss

This ended up way longer than intended...
 
Brendan Burgess said:
Paddy takes a salary of €50k and leaves €40k cash in the company - how will the lender treat that?
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Most likely €50K x 3.5. He can't pay his mortgage using money that's in the company, without first choosing to taking it out as salary. Lenders tend to prefer dealing with what Paddy actually does than what Paddy could choose to do in the future.

Brendan Burgess said:
Ann has built up cash in the company in previous years. She takes a salary of €120k and creates a loss of €30k. Will the lender give her 3 1/2 times the €120k?
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Lender would most likely see from the company accounts that the salary is not sustainable and go with 3.5 x €90K unless there's a strong argument made.
 
Thanks all for the replies - I never got notified there were any, just logged in now and noticed!

So I have had meetings with both AIB and BOI. AIB offered me a mortgage of 210k - 60k (the average of the last 3 years salary I paid myself from my company) times 3.5. I asked whether they would consider pension contributions. I was told no. I asked whether they would consider the farm income - which I pay 52% income tax on. I was told no. So AIB are going above and beyond the already stringent central bank rules.

BOI were more open. They offered 65k (average of the past 2 years) times 3.5, plus some more for farm income, plus pension contributions.

A few posters above asked what my priorities are and what Im trying to achieve. My number 1 priority is financial freedom. By that I mean within 5 to 10 years I no longer HAVE to get up and go and work for someone else. I want to retire early so I can spend my time with my future kids.

One of the tried and trusted ways to do this is to increase your income one way or another - and put the money into property. I have 2 businessmen friends, 1 in the US and 1 in the UK who have done this, with great success (the US based person buys 1 property every year). In those 2 countries, a very successful strategy is to use as much leverage as possible to acquire properties. Essentially, you put as little money down as possible, with as long a mortgage as possible, and preferably at a fixed rate. Then you watch as inflation goes to work - rents and the value of the property prices go up whilst the repayments on the mortgage dont (I've learned recently that inflation is great if you have debt - your debt gets cheaper over time).

The strategy I outlined above has worked in Ireland - most of us know people with 6 or 7 properties who could only have acquired them using leverage.

However, the more I look into Ireland's rules around mortgages, the more it seems to me that banks and politicians are determined to put an end to this strategy (presumably the 35% of politicians who are landlords are happy to pull the ladder up after them).

The problems with this approach in Ireland:
- Minimum deposit of 30% is required on buy to let. In the US, it's 10%.
- I could not find any long term fixed rate mortgages for buy to let here. I researched in the UK, Germany, France, and the US and long term fixed rate mortgages for buy to let are common
- Rents caps of 2% in Rent Pressure Zones. Given yearly inflation is around 9%, thats not good
- 52% tax on rental income

Ireland does have one big advantage over most other places - Rent as a % of Property value in the US is 8.5%, in parts of Dublin its 18.5%.

Now, given the above, you want to put as little money down as possible. If I buy a place for myself to live, this means buying a property for 288k (260k mortgage plus 10% down). Which is going to be tricky. I'll probably need to spend 320k - which means putting almost 20% down, not ideal.

I'll be left with 100k in savings. I could then put 60% of that into a buy-to-let, meaning I could afford a place worth 200k (putting down the minimum 30% deposit). The rental income on this, despite being taxed at 52%, would still probably cover the mortgage.

Alternatively, I could do a buy-to-let now since I cant avail of the 10% deposit first time buyers rule anyway (288k wouldn't get me much in Dublin), pay myself 90k for the next 2 years, then go back to the bank with 90k salary plus 20k in rental income. By the letter of the law, they'd have to offer me a mortgage of 385k. I actually put this to AIB, and I got an uneasy silence, following by "I dont think we'd consider your rental income as part of the 3.5". BOI said no problem.

Its important to not that the 3.5 income limit does NOT apply to BLT, see central bank FAQs https://www.centralbank.ie/docs/def...-on-residential-mortgage-lending.pdf?sfvrsn=2

So considering what I want to achieve - financial freedom within 10 years so I can enjoy my life while Im relatively young - and the strategy Im looking at to do this, does anyone have advice on the best way to go about it? Or if its actually feasible in Ireland anymore (I tend to think it is when one truly understands inflation, despite all the private landlords leaving recently).

Thanks
 
Hi zander

1) That might work and you might quickly become a millionaire.
or
2) It might not work and you go bust and lose everything.

My advice would be to get rich slowly. It's not as exciting, but it's much more predictable.

zander1983 said:
Rent as a % of Property value in the US is 8.5%, in parts of Dublin its 18.5%.
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Really?
 
I think this is a fantastic investment strategy. What could possible go wrong?

Buy a gaff (with somenone else's money) --> ??? --> PROFIT! --> Financial freedom
 
I looked at that link and I see:

Gross rental yield:
city centre = 6.96%
outside of centre = 8.14%

I don't see a rental yield of 18.5%?
 
Protocol said:
I looked at that link and I see:

Gross rental yield:
city centre = 6.96%
outside of centre = 8.14%

I don't see a rental yield of 18.5%?
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I see 18.25% under Price To Rent Ratio City Centre for Dublin. But to be honest I didnt do much research into this metric. I was desperate to find some metric that wasn't way below the US or the UK, so this one stood out
 
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