6 mortgages- which to pay off

Discussion in 'Money makeover' started by nbc, Jan 14, 2013.

  1. nbc

    nbc Frequent Poster

    I have a principle residence and 5 investment properties. 2 years ago I had to come to the UK as things were getting very tight for me financially. To cut a long story short I have worked my ass off and I now have saved E40000. I would like some advice on which of the following to put it towards. My brother in law has suggested what he thinks is the obvious answer and I give his answer at the end but would appreciate other views
    |value| outstanding mort| int rate |mortgage| rent
    ppr| 160000 |120000| 1.45| 1100 | n/a
    inv 1| 180000| 140000| 4.6 | 1200| 975
    inv 2 | 200000 | 40000| 3.5 | 700| 1050
    inv 3| 75000| 70000| 4.5 | 700 | 550
    inv 4 |75000| 150000| 1.8 | 225(int only)| 500
    inv 5| 75000 | 150000| 1.8 | 225(int only)| 500
    Obviously numbers 4 and 5are worrying. I bought in 2005. The only saving grace I have is that they are trackers and I know from reading here there are a lot of unfortunates who would think I'm doing ok.
    My brother in law says pay off Inv no 2 as high int rate and it give sme 700 dis income. Is he missing anything?
    Thanks for taking the time to read this!
  2. LDFerguson

    LDFerguson Frequent Poster

    On the other hand, the tax relief available on interest on a buy-to-let mortgage is far more valuable to you than the relief available on the PPR mortgage.
  3. Brendan Burgess

    Brendan Burgess Founder

    Hi nbc

    This is a really interesting question.

    The simple answer would be to pay off investment no 1 or Investment no 3.

    You will save
    €40,000@ 4.5% or €1,800 annually.
    You are getting around 50% tax relief on this, so you will save around €900 annually.

    If you pay off the tracker on your home, you will save €40,000@ 1.45% or €600 annually.

    But the bigger question is whether you need to dispose of some properties.
    You have €765k worth of properties and €670k worth of mortgages.

    This makes you very vulnerable to future price falls or interest rate rises or a combination of both.

    If you agree, then you should probably put 1, 2 and 3 on the market and see which one gives you the best price.

    Will you have a taxable capital gain on Investment Property 2? If so, then you will need to sell off one of the others first to realise a capital loss first. You can carry losses forward against gains. But you can't carry gains backwards against losses.

    Can you get a discount for early repayment of a tracker?

    Which lenders are involved here? If any of the trackers is Bank of Scotland they may well give you an incentive to dispose of the property. This would be a very good use of your €40,000. For example, if you got a 15% credit for selling Investment Property 4...

    Sales proceeds €75,000
    Cash : €40,000
    15% credit: €17,000
    Total: €132,000

    This leaves you €18,000 short which you could get by selling either Investment 2 or Investment 1.

    Some other points
    Yes, he is. The disposable income criterion is not really relevant. The most important thing is to pay off the loan with the highest net interest rate after tax.

    They should not be that worrying. The rental income exceeds the monthly repayments, so they are contributing to your cash flow at the moment.
  4. Bronte

    Bronte Frequent Poster

    Are 4 & 5 interest only for the lifetime of the mortgage? How much would it be for capital and interest?

    Can you put up the terms in the table of the loans.

    If you pay it off your highest loan No. 1, you will gain in interest but lose on the 75% mortgage interest relief. You would then have a reduced payment. Would you be able to use this to go on Capital and interest on either 4 or 5.

    What is your ultimate aim, to have everything paid off and use rent as a pension?
  5. buytolet

    buytolet Guest

    im confused LDFerguson, you state above "the tax relief available on interest on a buy-to-let mortgage is far more valuable to you than the relief available on the PPR mortgage"

    but the Revenue website states;
    What type of loan does NOT qualify for mortgage interest relief?
    Mortgage interest on a loan taken out for investment, rental, secondary or any properties other than your main residence does not qualify for interest relief. Mortgage relief for rental properties as part of your business is available through the tax system and you should contact your local Tax Office.
  6. LDFerguson

    LDFerguson Frequent Poster

    You can write off 75% of interest you pay on a loan used to buy, repair or renovate a residential investment property against the rental income, before calculating your tax liability on the rental income. I presume the Revenue extract above is referring only to Tax Relief at Source.
  7. buytolet

    buytolet Guest

    that's why we come here.... clarity and enlightenment by the experts us!!! thanks LD
  8. nbc

    nbc Frequent Poster

    6 Mortgages

    Thank you Brendan for taking the time to read and giving me a very detailed answer.
    The last 2 mortgages are with PTSB and are in fact connected so 1 can't be sold without the other(they are located in the same estate in a large town close to a hospital and to be fair have rented pretty easily). I contacted them and they are Not interested in bonuses for paying off a portion of tracker mortgage.
    Yes I do realize my vulnerability and hence why I'm in the UK working my ass off. The figures I quoted as to current values are a bit on the negative side and are all about 60% from peak. I don't know if them falling another 10-20% would make a big difference to my situation and so hadn't considered it.You're essentially saying that I should reduce my total mortgage amount in case interest rates double. perhaps I need to give that some serious thought.
    You also say that it's what gives me the best return after tax is more important than cashflow. But for example if I pay if off my ppr then if interest rates do go up I won't have the extra cash flow to help me pay the mortgages which selling the investment property with a current balance of 40,000 will. Is this not an important factor for me to consider?
    To answer an earlier question- yes they are investments for the longer term and I feel in 20 years time they should all be worth more than now.
    I have to admit Brendan the last 2 properties do worry me as I'm sure the permo will ask me to pay capital at some stage. they wrote to me 18 months ago advising me that it would happen and then wrote back saying it was on hold for the moment. I wonder is time and inflation my best option here? Assuming int rates stay lowish for the next few years(big assumption- ok my hope) then they won't cost me too much and the debt becomes smaller with inflation effectively and there's always the small hope that the value of the properties might improve a little.
    Overall I'm very tempted to pay the investment mortgage off that was suggested by my brother in law. I always have the option of selling it but that was a very good tip you gave about capital gains. I bought it for £95,000 in 1998 so I would have some to pay.
  9. dogfish

    dogfish Frequent Poster

    Have you considererd just keeping the money. It gives you flexibility.

    The propertys are all rented at the moment. If you are unable to rent one of the propertys for a period of time or bad tenants in the future it gives you the option to sell it and use the money to cover some if not all the negitive equity.

    You seem to be comfortable with the amont of risk you are taking. If you are not follow the advise above.

    At the moment your investment property income exceeds the mortage payments. Continue saving. You will be in a position to take advantage of any possible offers in the future to pay off the trackers early or cope with any financial upsets in the future.
  10. nbc

    nbc Frequent Poster

    6 mortgages

    Apologies Dogfish for not replying sooner. I hadn't really considered keeping the cash as I felt if I kept it the best I could get would be 2% or a bit more. If I pay off a mortgage I get 4.5 % aprox and also will immediately give me 700 quid more liquidity per month which I feel is a little bit of security. If I do go this route would you then recommend I save this 700 extra I have a month or should I increase payments on another mortgage? The 2 interest onlys worry me although brendan was a little reassuring when he said they're making money so relax a little. However in a few years I may be expected to pay capital and interest rates may have increased substantially so instead of paying less than 500 a month for the 2 I could be paying over 2000- That makes me very uneasy. Im considering pumping the 700 into them but when I look at the tracker interest rate Now I think it's a waste. I'm confused.
  11. Brendan Burgess

    Brendan Burgess Founder


    This throws a different complexion on it. I assumed when you said that they were interest only, that they were interest-only for the full term.

    You will only be expected to pay capital, if the contract says so.

    If you have to make capital repayments, then you need to plan accordingly. If you fall into arrears on these, you could lose the trackers or be charged penalty interest on the arrears.

  12. nbc

    nbc Frequent Poster

    Int only

    Thanks Brendan. Appreciate your advice. Irish permanent- initially 5 years when took out in 2002-They told me 18 months ago they were going to change to repayment but then wrote back and said they weren't and haven't heard a word since.
  13. SPC100

    SPC100 Frequent Poster

    The best return for your 40k would be to pay down the mortgage with the highest interest rate, BUT, The first issue here is cash flow; I think you need to do a ten year cash flow projection, to examine the impact of some mortgages which will be paid off as a matter of course, and of capital repayment starting on the interest only ones.

    Here are my back of envelope calculations.

    Capital repayments will start, the question is when, if there is a 11 year term remaining on them, that will be nearly 2k extra a month. a 20 year term would work out at about 1k extra per month. If your current income will not subsidise this you should keep your 40k to subsidise this.

    In 5 years time property 2 will pay itself off, and that will help with cashflow.

    If you start paying your current extra monthly savings towards the mortgage on property 3 you could have that mortgage paid off within 5 years also. The extra cashflow from these two (1400) would make a significant impact on the capital repayments due on the two interest only. Your 40k would need to subsidise the capital payments till then.

    Other solutions; Refinancing properties 1,2 and 3 over 20 years would also help your cash flow.