28 - When is too young to be mortgage free?

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exhibita

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Personal details
Age: 28
Spouse’s/Partner's age: N/a
Number and age of children: N/a

Income and expenditure
Annual gross income from employment or profession: €90,000 pa
Monthly take-home pay: €4,500
Type of employment: Private sector
In general are you: Saving c. €2,500 pm

Summary of Assets and Liabilities
PPR: One bed apartment worth €300k with €130k mortgage. Repayments are €500pm with 1 year remaining on 2.6% fixed term.
Investment properties: Rental property worth €200k with no mortgage
Cash: €90k
No stock

Other borrowings – car loans/personal loans etc
N/a

Buy to let properties
Value: €200k
Rental income per year: €16k

Other savings and investments:
Do you have a pension scheme? Yes 12% employer and 8% personal. I just started contributing last year so it's only worth €20k

What specific question do you have or what issues are of concern to you?

I appreciate I have considerable assets for my age but hoping to get some advice on how best to leverage them more effectively. I have always held excessive amounts of savings in the bank instead of investing. I'm relatively comfortable with investing in property but have no idea when it comes to the stock market. My immediate plan is to buy a larger home so that I can avail of the €14k rent-a-room scheme, and to then max my pension and start investing my savings into stocks.

My current plan:
  • Sell my 1-bed apartment and buy a 2/3-bed property where I can avail of the €14k rent-a-room scheme.
  • Sell my rental property in 1-2 years unless tax treatment for landlords changes significantly. I would sell now if I could but this is jointly owned.
  • Maximise my pension contributions to 15% this year and 20% next year.
  • Start investing a large portion of my monthly savings in stocks - No idea where to start.
I should have €260k cash available after selling my apartment and I can borrow €315k. Selling the rental property in a couple of years should release a further €200k.

I always thought it made sense to leverage the maximum mortgage possible when interest rates were relatively low but this doesn't seem as clear with current rates. I noticed recommendations on here often lean towards paying off mortgages in full but not sure if that applies at my age. Is there a risk of being mortgage free too young and not extending yourself enough? Is it better to invest in the stock market in the long term?

I know it ultimately comes down to the price of the home I'll be happy with, but I'm currently leaning towards maximising my deposit and borrowing the smallest mortgage possible. This would result in low monthly repayments while still maximising the €14k net rental income. Alternatively I could borrow the maximum, minimise my deposit and invest the remainder elsewhere. Or just max out both and hope the property increases in value with no CGT liability.

Any advice welcome!
 
1) Paying down a mortgage is the safest, tax-free form of investing you can do. It does not matter about your age, other than a small consideration of an older person who might prioritise contributing to a pension.

2) If you have a mortgage at 4.5% while you own equities directly, you are, in effect, borrowing money at 4.5% to invest in equities. The return on the equities has to be about 9% before taxes and charges. This might happen, but it might not.

3) Likewise, having an investment property while you have a mortgage on your home at 4.5% means you need a 9% gross return, so it's not a good idea.

4) With your level of assets and income, you do not need to participate in the rent a room scheme. You can afford to live in a house on your own without a paying tenant. So you should focus on picking the house you want in the location you want and not on its suitability for rent a room.

5) Leveraging increases the returns and the risks. You are in a good place financially and you do not need to increase the risks.

6) So I would suggest
  1. Decide on what is the ideal house for you - and not another step on the housing ladder with a view to trading up later
  2. Can you afford that with €560k? ( €260k cash and €300k from selling your apartment)
  3. If so, sell your apartment now and buy the house you want.
  4. If not, wait until you sell your investment property which would increase your buying power to €760k
  5. Keep maxing your pension
  6. After you have bought your house, use your savings to pay down your mortgage.
 
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exhibita said:
I appreciate I have considerable assets for my age
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Indeed you do! You are very wealthy for 28 and it makes sense to be thinking about how best to manage and maximise that wealth. OTOH I don't see any other objective set out (lifestyle, personal, professional) so it's very hard to know what you will need your wealth for, and when.


exhibita said:
My current plan:
  • Sell my 1-bed apartment and buy a 2/3-bed property where I can avail of the €14k rent-a-room scheme.
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When I was 28 I was figuring out how to move out from a houseshare and live on my own, not the other way around! Is this kind of living arrangement sincerely appealing to you at this point of life? I've known people who've done it - both as lodgers and landlords - and it's always been a step on the way to something better, not an end in itself.

exhibita said:
Is there a risk of being mortgage free too young and not extending yourself enough? Is it better to invest in the stock market in the long term?
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You can do a little bit of both but at your age your investment horizon is half a century for your pension fund. It makes sense to be carrying mortgage debt at even 4% or 5% as the return on equities (particularly with tax relief) will comfortably exceed that over the long run. Outside of that it makes less sense to be invested in equities while carrying mortgage debt given the tax treatment.

Overall: tell us where you want to be in five or ten years time personally and you will get much better advice.
 
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In the mean-time, pay down your mortgage with your €90k cash. The fact that you have one year to go on your fixed rate is irrelevant. You can pay it off now. There should be no early repayment fee.
 
NoRegretsCoyote said:
It makes sense to be carrying mortgage debt at even 4% or 5% as the return on equities (particularly with tax relief) will comfortably exceed that over the long run.
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In general I would agree.

Certainly with your present tiny mortgage, you should be maxing your pension contributions.

However, if you do max your mortgage, I would tend to pay it down to a comfortable level before making any pension contributions in excess of those matched by your employer.

At age 28, you have plenty of time to build up a pension fund.

Brendan
 
@Brendan Burgess from a timing point of view if poster pays down his mortgage today with savings then they won't have a deposit to buy the house and forces them to rely on closing apartment sale and house purchase on same day.

Probably makes sense to use cash for deposit towards house, and then clear apartment mortgage and paydown new mortgage once apartment sells.
 
@DublinHead54

As they are single, I think that they are better off just selling their apartment first. They can find interim accommodation between the sale and purchase.

If they were going to trade up in the immediate future, I would agree with you. But it seems more of a medium-term plan at the moment, so I think that clearing the mortgage is best.

Brendan
 
Brendan Burgess said:
@DublinHead54

As they are single, I think that they are better off just selling their apartment first. They can find interim accommodation between the sale and purchase.

If they were going to trade up in the immediate future, I would agree with you. But it seems more of a medium-term plan at the moment, so I think that clearing the mortgage is best.

Brendan
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Yes, one to factor in none the less, especially in this rental environment you could end up spending more on rent in the interim than any interest saving. I'd argue even if it is a plan to buy within 5 years it is better to keep the cash on hand. Posters current mortgage is 500pcm, a 1 bed rental is likely to be at 1k, and even more for a short term let, any interest savings would quickly erode.

In this situation the poster has a year until they have to refix with market interest rates.
 
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