good savings but too highly geared on the mortgage(s)?

R

rjn

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Annual gross income from employment or profession: combined 92K

Expenditure pattern: In general are you spending more than you earn or are you saving? Yes. Mortgage repayments are high

Rough estimate of value of home: 560K
Mortgage on home: 360K
Mortgage provider: BOI
Type of mortgage: Tracker

Other borrowings – car loans/personal loans etc: nil

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

Savings and investments:
50K

Do you have a pension scheme? yes

Do you own any investment or other property? yes, value 360K, mortgage 270K - interest only BOI 4.9%

Life insurance: yes

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

 We have historically both had good earnings but I am now off work spending time with our two children. We are becoming particularly nervous that we are too highly geared mortgage-wise on one income (and in the event of a property bust).

We don't know whether to

i) Use our savings to pay down a bit on the primary mortgage (keeping some in reserve? and if so, how much)
ii) keep the mortgage as is and look for an alternate savings option - subsidising our mortgage repayments from these savings
iii) sell our investment property (see below)

The investment property is marginally losing money at present (about 200 euro a month shy once we've paid the agent, insurance etc etc).

On the up side, over the next year or so I will return to work and my partner has good further income potential.

I'd be very grateful for any thoughts, and in particular advice from anyone on a good independent financial/budgeting adviser who might go through this in person with us if necessary. I've searched other threads but haven't been able to find any recommendations. We want someone truly independent - not someone trying to sell us products in any way shape or form.

Thanks so much, this is a great site.
 
Last edited by a moderator:
Sorry, I've just done another search, this time spelling advisor (adviser) correctly! I have read Brendan's general advice and comments, thanks. His general point is to avoid them and use this site, so all comments are all the more welcome.
 
Your existing plan looks good. If you pay back some of the mortgage you'll make long term savings at the expense of short term flexibility before your planned return to work. The LTV is high but your spouse has a secure job. If you sell the investment property now you'll be selling at the worst time. Move the savings to the best yielding accounts.
 
So you have nearly 8k before tax each month. How are you possibly struggling?

What are you spending all your money on?

How much is wasted on meals out, fancy new cars, flash clothes, unnecessary coffees and cakes, etc.?

Have you written down everything you spend your money on to see where the wastage is?
 
Struggling is probably not the right word. It's more a fear that we may be too highly geared and won't have enough flexibility if our property related outgoings go up at all. (eg if interest hikes happen or if our investment property were untenanted).

The big question for me is the high LTV issue as identified by General Zod. But then again, I don't want to be overly pessimistic and sell our investment property on the fear of something that may not happen, and lose money in a stagnant market.
 
Hi RJN

We are becoming particularly nervous that we are too highly geared mortgage-wise on one income (and in the event of a property bust).
Click to expand...

You have nothing to be nervous about, much less worry about it.

You need to take a long-term view. Long-term, you are two high earners. You have good assets: €290k equity in your properties, €50k in savings and a pension scheme.

You are currently making an investment in your children by taking time off work. During this period, your expenditure will be higher than your income. Think of this as an investment. You are not living beyond your means when you take a long term, or even a medium term, perspective.

A decline in property values won't hurt you. In fact, if you are planning to move, the house you would be moving to would be cheaper, so it might even be good for you.

You are getting around €11k a year rent on your investment property. If the rental market collapses and property prices go down, you will still be able to comfortably weather the storm from your €50k savings. If it lies idle for six months, you are still ok.

The worst that can happen to you is that you have to go back to work a little earlier than planned.

Where should you invest the €50k? Keep enough in cash for around 12 months to make up the difference between what you are spending and what you are earning.

You could pay off your home mortgage with the balance. However, deposit rates are so close to mortgage rates, that you won't save that much by doing it. I would put the balance into a unit-linked fund with no entry or exit charges. If you need more money in 12 months, then you can cash part of the fund. If share prices fall, you can handle the loss comfortably. Long term, and medium term, the stock market is the least risky place for your investments.

What rate are you paying on your mortgage? If you reduce it, would you qualify for a lower rate because of the reduced LTV? If so, it might be worth doing so instead of buying shares.

Brendan
 
I assume that your home mortgage is a repayment mortgage and not an interest only mortgage? Then you should consider the amount of capital that you are paying off your mortgage each year as savings.

Look at it another way, you could switch your home mortgage to interest only and the deficit between your income and expenditure would be reduced.

Brendan
 
Thanks everyone very much for your posts.

Re the investment property:

The investment property is on an interest only tracker variable rate mortgage, currently 4.9. At present, after management fees, building fees, insurance etc we're losing money on it - around 200+ euro a month. Based on my sums we'd roughly break even if we could raise the rent by 50 euros (i think its pretty cheap right now) and if we didn't have a manager looking after it for us but the property will not in the same town as us and we've had issues in the past. I think though that some of this loss is partially offset in some way as it reduces our tax?

It seems kind of crazy to be losing 200+ euros a month on a property that is also worth probably 30K less than its valuation when we remortgaged it. As we are paying interest only we can't even pretend we're saving and the fear is that we are throwing good money (our treasured savings) after bad. Or is this what happens in cycles with investment properties and the theory is that over time we will recoup the loss and start to get ahead again? Its confusing.

Our home is also on a tracker variable rate mortgage. I have to check the exact rate, I think its 5%. (I'm confused by interest rates as opposed to the APR.) It has been interest only for the past two years and reverts to a repayment mortgage in a couple of months (we've done our sums based on it being a repayment mortgage). If the bank will agree to extend the home as interest only that would be great, although I guess it makes the home more expensive over the life of the mortgage?

The key problem, not in my original post, is that in fact we not going to be able to live in our home for much longer as we are moving out of our home town for a couple of years for my husband's job. So we'll have to rent out our home and then rent another elsewhere. This is not particularly financially efficient - another set of managers fees, insurances etc. We will only get a rental income of around 1500 on our own property (conservatively about 1250 per month after agent, insurances, gaps between tenants etc I guess). This leaves a big jump between our mortgage payments and incoming rental (around 700 shy on a repayment mortgage or 300 shy on interest only IF we can persuade the bank to extend this).

I see your point though that we need to look at this in a long term rather than short term way. This was always going to be the painful part!

One other question - when working out LTV, what figures should we be using? The valuations at the time of purchase or the approximate market value now? We leveraged from first property to buy the second around 18 months ago. We remortgaged the first at a value of 365K, it's probably now worth 340K I'd guess based on myhome. We paid 570 for the second, I'd say its now worth 540K, again based on myhome.
 
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