How are we doing- couple 3 kids

[misstealeaf]

Personal details

Age: 41
Spouse’s/Partner's age: 39

Number and age of children: 3 (8,7,4)

Income and expenditure
Annual gross income from employment or profession: 120K
Annual gross income of spouse: 64K

Monthly take-home pay c.€8.5K

Type of employment: e.g. Civil Servant, self-employed
Me- civil servant
Spouse- private company

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

Summary of Assets and Liabilities
Family home worth €550k with a €35k mortgage
Cash of €165k
Defined Contribution pension fund: Me public sector pension (pre 2013). Spouse- private pension c. €40K (employer does not contribute- currently contributing 600 per month which would hope to increase over next few years)
Buy to Let Property worth €300k with mortgage of €170k (accidental BTL owner due to purchase in 2008)

Family home mortgage information
Lender BOI
Interest rate 3%
If fixed, what is the term remaining of the fixed rate? c. 1.5 years

(No need to tell us the monthly repayments or what term is left)

Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Buy to let properties
Value: €300,000
Rental income per year: €18,600 (rent pressure zone so no material increase in rent in recent years)
Rough annual expenses other than mortgage interest : mgt fees c. €2.5K and misc maintenance c. €1.5-2k
Lender
Interest rate 3%
If fixed, what is the term remaining of the fixed rate? 2.5 years

Other savings and investments:

Do you have a pension scheme? Yes, public sector- 12 years service complete.

Do you own any investment or other property? See above re BTL prop.

Other information which might be relevant

Life insurance: Life insurance on both properties, separate life insurance through work (me) and husband has separate policy (c. €200K), health and critical illness insurance in addition to income protection (both).

What specific question do you have or what issues are of concern to you?
Looking for general advice in areas where we could improve.

We have capacity to put away c. €35K per year (excl child benefit) however that is reduced to net savings generally of c. €20k-€22K per year post annual holiday (c. 5K), income tax bill (c. €4/5K) for rental property and misc other expenses. Is this a good position/savings for our earnings? Should we be trying to save more? We plan on doing some renovations to house in a couple of years when mortgage is gone- using our savings which will replenish with what we currently repay on mortgage.

Rental prop breaks even most years- income minus mortgage/fees/misc expense/tax is c. nil each year so no 'cash profit' however consider getting benefit of reducing mortgage each year and any incremental increase in value (albeit this could be wiped out if another property crash). Consider should hold onto the property given in Dublin - close to everything /could potentially use for kids in the future. Is this the right decision/would welcome views?

 

[NoRegretsCoyote]

Is this a good position/savings for our earnings?

Yes. Extremely good. If you used savings to pay off debts (more below) you would have €40k of mortgage debt and housing assets worth €880k. That's a great position for a couple of your age.

We plan on doing some renovations to house in a couple of years when mortgage is gone- using our savings which will replenish with what we currently repay on mortgage.

I really don't think you need to wait. You have six figures in cash earning negligible interest. You get a much greater return from living in your wealth than looking at it in the form of a bank balance. You don't need six figures of "savings" that need replenishing either. You have two good incomes and health and lives already heavily insured. You don't need self insurance on top.

Life insurance: Life insurance on both properties, separate life insurance through work (me) and husband has separate policy (c. €200K), health and critical illness insurance in addition to income protection (both).

How much is this all costing you? How much would one or other stand to gain if the other suddenly passed away? You may well be over-insured.

Spouse- private pension c. €40K (employer does not contribute- currently contributing 600 per month which would hope to increase over next few years)

I think spouse's pension is the one thing that is on the low side . For age spouse could contribute 20% of their income fully tax-relieved, so €12,800 a year or a bit over €400 per month extra. I would increase this to the max and again to the higher maximum of 25% when they turn 40. You might want to reduce down the contribution rate in a decade or so when the kids are older and a bit more expensive. But you will have had the benefit of ten years of tax-free accumulation in the pension fund at that point. Don't be sucked into the idea of a hypothecated "education fund" - it's a false economy.

Do you have a pension scheme? Yes, public sector- 12 years service complete.

It's not essential but you could consider AVCs. I think it's too far off to be making concrete plans, but you could probably retire a bit early on current trajectory and a pension pot accumulated that way might help.

Buy to let properties
Value: €300,000
Rental income per year: €18,600 (rent pressure zone so no material increase in rent in recent years)
Rough annual expenses other than mortgage interest : mgt fees c. €2.5K and misc maintenance c. €1.5-2k
Lender
Interest rate 3%
If fixed, what is the term remaining of the fixed rate? 2.5 years

I think you need to think long and hard about the rental. On the one hand you are breaking even in cash terms and accumulating wealth as you pay down the mortgage. It generates rental profits of €5k p/a on your capital of €130k which is better than what you'd get on deposit. On the other hand you will be stuck with a sub-market rent forever, and interest rates may be higher when you go to re-fix in 2.5 years time. There is also some risk: tenants sometimes leave or stop paying rent but you still have to pay your mortgage. Beware of what is called the endowment effect - the setup makes sense because it's already there, but if you didn't own it would you borrow €170k to buy a €3k apartment that breaks even in cash terms? Almost certainly not. Finally I would say it depends a bit on where you live and where the apartment is. If you think one or two kids would use it during third level then it might be worth holding onto as it's likely to be far cheaper to you than paying their rent.

So in short: tilt your wealth away from cash and towards pension. You have good spending habits, but these may come under pressure as the kids age. It's not obvious whether you should hold or sell the rental, but keep it under review and if your tenant leaves of their own accord it might be a good point to sell. You're in a great position already (well done!) and a few changes will improve your long-term position even more.

 

[misstealeaf]

Thanks so much for your reply. You have raised some good points.
- spouse pension is something in mind alright and it’s on the list of things to address once mortgage goes on PPR but maybe we should bring that forward.
- on the rental I have been considering sale and totally agree I wouldn’t have purchased at those figures myself it’s just once of those post celtic tiger situations. It is based 10 min drive from us beside a university so it’s more taking a long term view with kids as they get older it could be one way to give them independence but I will keep it under review.
- risk of being over insured is a valid point- my spouse would be well covered if I died as public service (spouse and pension scheme) however I’d have nothing other than state pension if he died so we felt it was better to get a stand alone policy for him that would give me a lump sum on top of the mortgages being cleared. I could potentially use it to take a step back in work to spend more time with kids but defo one to think about.
- thanks for view on savings- I always wonder should we be saving more every month giving what we earn and sometimes stop myself spending on certain things/find myself worrying about money.

QUOTE="NoRegretsCoyote, post: 1817320, member: 106686"]
Yes. Extremely good. If you used savings to pay off debts (more below) you would have €40k of mortgage debt and housing assets worth €880k. That's a great position for a couple of your age.


I really don't think you need to wait. You have six figures in cash earning negligible interest. You get a much greater return from living in your wealth than looking at it in the form of a bank balance. You don't need six figures of "savings" that need replenishing either. You have two good incomes and health and lives already heavily insured. You don't need self insurance on top.


How much is this all costing you? How much would one or other stand to gain if the other suddenly passed away? You may well be over-insured.


I think spouse's pension is the one thing that is on the low side . For age spouse could contribute 20% of their income fully tax-relieved, so €12,800 a year or a bit over €400 per month extra. I would increase this to the max and again to the higher maximum of 25% when they turn 40. You might want to reduce down the contribution rate in a decade or so when the kids are older and a bit more expensive. But you will have had the benefit of ten years of tax-free accumulation in the pension fund at that point. Don't be sucked into the idea of a hypothecated "education fund" - it's a false economy.


It's not essential but you could consider AVCs. I think it's too far off to be making concrete plans, but you could probably retire a bit early on current trajectory and a pension pot accumulated that way might help.


I think you need to think long and hard about the rental. On the one hand you are breaking even in cash terms and accumulating wealth as you pay down the mortgage. It generates rental profits of €5k p/a on your capital of €130k which is better than what you'd get on deposit. On the other hand you will be stuck with a sub-market rent forever, and interest rates may be higher when you go to re-fix in 2.5 years time. There is also some risk: tenants sometimes leave or stop paying rent but you still have to pay your mortgage. Beware of what is called the endowment effect - the setup makes sense because it's already there, but if you didn't own it would you borrow €170k to buy a €3k apartment that breaks even in cash terms? Almost certainly not. Finally I would say it depends a bit on where you live and where the apartment is. If you think one or two kids would use it during third level then it might be worth holding onto as it's likely to be far cheaper to you than paying their rent.

So in short: tilt your wealth away from cash and towards pension. You have good spending habits, but these may come under pressure as the kids age. It's not obvious whether you should hold or sell the rental, but keep it under review and if your tenant leaves of their own accord it might be a good point to sell. You're in a great position already (well done!) and a few changes will improve your long-term position even more.
[/QUOTE]

 

[NoRegretsCoyote]

- spouse pension is something in mind alright and it’s on the list of things to address once mortgage goes on PPR but maybe we should bring that forward.

I really think it's the opposite. You have a 3% interest rate on your PPR. If you pay that down you get a 3% return on your savings. But if you put it in a pension you get the advantage of tax relief on the way in and tax-free capital gains. Over a decade or two it's far, far likely to exceed 3% p/a. In your shoes I wouldn't overpay a euro on the mortgage and instead load the pension. If you have some kind of financial disruption in future you can always reduce the pension contributions but there is headroom within the tax-free relieved ceilings that you really should be using.

- thanks for view on savings- I always wonder should we be saving more every month giving what we earn and sometimes stop myself spending on certain things/find myself worrying about money.

I rarely comment on spending habits in these threads once people aren't obviously living beyond their means. But my view you are living very, very far within your means already and there is no cause for anxiety.

 

[Jb1234]

More of a general question but could the rental not be used as a vehicle to top up spouses pension?

 

[moneymakeover]

I would say pay off the 35k home mortgage

Ring fence some funds for 3rd level fees

 

[noelÓm]

I really think it's the opposite. You have a 3% interest rate on your PPR. If you pay that down you get a 3% return on your savings. But if you put it in a pension you get the advantage of tax relief on the way in and tax-free capital gains. Over a decade or two it's far, far likely to exceed 3% p/a. In your shoes I wouldn't overpay a euro on the mortgage and instead load the pension.

Is the correct comparison not with the average expected rate over the remaining mortgage term, which is probably well above 3% at this point? But it won't really matter either way as mortgage interest on €35k is loose change.

 

[NoRegretsCoyote]

Is the correct comparison not with the average expected rate over the remaining mortgage term, which is probably well above 3% at this point?

Maybe, but you can only compare with what you are paying or what’s on offer if better.

A big recession could see retail rates back at 3% in 18 months BTW.