Emergency fund, pay down mortgage?

[keff]

Age: 33 (both)

Annual gross income from employment or profession: 39K
Annual gross income of spouse:65K

Type of employment: e.g. Civil Servant, self-employed
Private sector both.

In general are you:
(a) spending more than you earn, or
(b) saving?

saving c 1500 pm

Rough estimate of value of home bought 300K

Amount outstanding on your mortgage: hmm around 300K

What interest rate are you paying? ECB plus .95%, tracker

Other borrowings – car loans/personal loans etc
car loan, 8K

Do you pay off your full credit card balance each month? Yes

Savings and investments:
10K in rabo

Do you have a pension scheme? spouse has

Do you own any investment or other property? yes, house Dublin 8. Lived there 3 yrs then moved from Dublin and kept it, rent more than covers mortgage now thanks to interest only tracker mortgage again at ECB plus .95 BUT released equity to fund current house so bought for 290 originally, mortgaged for 390 now, value..hmmmm 350 maybe? So we can only claim 290/390 as our tax relief when we do our returns.



Ages of children: 1 under 1 year

Life insurance: yes.


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

1. My job isn't v secure and I could get made redundant any day, altho probably not til September. I'm on a 3 day week due to downturn. How much emergency fund do we need to keep? Should we pay down the car loan so we have less liabilities if I do lose my job?

2. The "investment property" mortgage- I know the usual advice is to keep interest only and never pay lumps off it but does this still apply where we can only claim relief on 290/390? The negative equity scares me.

3. Should we use savings to clear some of house mortgage.

4. We have over 35 yrs still to run on mortgage- should we increase the payments while we can afford it at the moment to reduce the term, or is it worth our while?

5. Anything else we are glaringly doing wrong

 

[Mr DT]

In summary then. You have 650k assets on which you owe 690k debt. So you have 40k negative equity. Other debt 8k and other assets 10K. So in total yr 38k down.

As you are in negative equity I doubt there is anything you can do about going interest only etc on the investment property. BTW how much to you make a year on the investment property?

I think in yr situation you need to concentrated on paying back your debt as quickly as possible. The 1500k of savings a month and any profit from the flat need to be taken off your debt.

If you lose more income you will need to use the 10K savings, pay down the 8k car loan and try and negotiate interest only on your own home to keep a float.

The risks of property investment and borrowing 6 times joint salary have come to rest with you and i'd say you now really need to get that debt down as soon as possible.

Could you earn any more income from any where to help?

 

[keff]

Thanks for the quick reply.

We are already interest only on the investment property mortgage, that's for 5 years so we have another 2 and a bit interest only period left. We clear 400 per month gross on the rental at present but the property is old so we do shell out a bit in maintenance, replacing things etc, and there's the old income tax return to do.

More income is unlikely, given the state things and the childcare costs. I have recently signed on due to my reduced hours though, and that brings an additional 80 pw in.

Which debt do you think we should prioritise paying down, our own mortgage, the rental one or the car loan?

 

[Butter]

Your mortgage rates are low at .95% above ECB. I'd imagine that the rate on the car loan is much higher and is costing you much more in interest payments (relatively speaking).
If it was me I'd clear the car loan first. Check there are no penalties for paying it off early. Keep back some cash in an easy access account in case the worst happens with your job.

 

[keff]

Thanks Marg, yes the car loan is costing us much more so that makes sense. Just trying to get my head clear.

 

[Frank]

Just be careful not to get any ideas of updating the car once the loan is gone.

Need to keep temptation in check.

Otherwise the car loan should be the first go.

 

[keff]

Thanks for the input Frank, don't worry, car is a diesel workhorse that we bought second hand and we intend to drive til it stops running Car loan has got to go so!

 

[Brendan Burgess]

Sure, pay off your car loan if there is no penalty for doing so.

Keep your expenditure under control in case you have a dramatic fall in income.

You have €660k in assets and €700k in liabilities.

If you save €10k and pay it off your mortgage, you will have €660k in assets and €690k in liabilities, i.e. a defict of €10k.

If you put the €10k on deposit instead, you will have €670k in assets and €700k in liabilities i.e. you will have the same deficit.

It makes no sense to pay off your commercial loan. You are paying 1.9% gross. you are getting around 50% tax relief on 50% of the interest, so the net cost is around 1.5%. You can get far more than this after DIRT on deposit, so it makes more sense to put your money on deposit.

This also has the advantage of being accessible if you do lose your job and need the money.

If you do want to reduce your mortgage, reduce the mortgage on your home first. This attracts much less tax relief than the commercial property. It is the combined negative equity which matters, not the distribution across the two properties.

See this Key Post about investing or paying off your mortgage.

The biggest issue for you is to decide whether you should keep your investment property or not. You are exposed to a number of risks:
1) Interest rates will rise
2) You may have difficulty renting it or collecting the rent.
3) If it falls further in value, it will exacerbate your situation if you do have to sell it. (I am not predicting a fall - I am just pointing out that it is a risk which you should not be taking).

Given the size of your debts relative to your income, I think that you are overexposed to the property market and should sound out putting it on the market. If you don't get a good price, don't sell.

Let me put it another way, if you had a home worth €300k with a mortgage of €340k on it, would you borrow another €300k to buy a property for €300k? Of course, you wouldn't.

Brendan