Increase pension or reduce debt?

dlmayo

Registered User
Messages
3
Age: 41
Spouse’s/Partner's age: 42

Annual gross income from employment or profession: 115K
Annual gross income of spouse: 60K

Monthly take-home pay : 8K

Type of employment: Private Sector , Civil Servant

In general are you:
(a) spending more than you earn, or
(b) saving? Saving around 2K/month

Rough estimate of value of home : 550K
Amount outstanding on your mortgage: 170K ( life of mortgage 18 years)
What interest rate are you paying? 2.5% ( Less than 50% LTV)

Other borrowings – car loans/personal loans etc Nothing

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

Savings and investments: Currently I have 65K to cash and 10K invested in stocks and 4k in peer to peer lending

Do you have a pension scheme? Yes, Employer pension since 17 years , I pay 8% employer pays 8% (fund value 320k). Spouse: Civil Servant pension with some AVCs (not much).

Do you own any investment or other property? Two Investment properies
Property 1 (owned 50% with sibling):
Value: 310k

Mortgage: 175k
Interest Rate (.85 tracker)
Rental Profit
: 11k

Property 2:
Value: 250k

Mortgage: 220k
Interest Rate (.90 tracker)
Rental Profit
: 12k

Ages of children: 5 and 3 years old.

Life insurance: Yes , for both.


Looking for advice on best to maximise financial position, options as I see it:
- Use some savings to pay down PPR Mortgage and continue to over pay
- Increase pension contributions
- Buy more equities or EFT's

Should I keep investment properties, conscious of over exposure to property market ? I have a resonable appetite for risk and would like to retire early if I could
 

Brendan Burgess

Founder
Messages
38,666
1) Investment properties
Yes, you should keep them as they are very profitable as you have trackers. Sure you have a bit of overexposure, but the trackers justify this and you will not be affected by any short term fall in values. You can also comfortably handle any reduction in rent.

2) Your home loan is at a very comfortable level - LTI ratio: 1 and LTV ratio: 25% .

Because you have such a low LTV you have got your mortgage rate to the lowest possible rate.

3) With two reliable salaries, you do not need an emergency fund of €65k so you should either pay down your mortgage with it or max your employer contribution. There is no right answer to this, but I will tease out the considerations in the next post.
 
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Brendan Burgess

Founder
Messages
38,666
On the pensions, you need to study this thread.


You have a fund of €350k
If you contribute for another 20 years at your current level of €20k a year, that will bring in a further €400k.

It would not take too much growth to exceed the €2m pot.

My very rough calculations would be that 5% growth would bring you to about €1.4m in 20 years.

So if you put in more now, you could well exceed the €2m. There are so many uncertainties though that it is impossible to know what to do
  1. The €2m limit could be increased or reduced
  2. You might earn more money and automatically contribute more
  3. You might earn less and thus contribute less
It's a close call, but on balance, I think I would pay down the mortgage now.
  1. There is a huge psychological comfort in being mortgage free and not having to worry about interest rates rising
  2. If you ever want to trade up, you will have much more equity with which to do so
  3. When your kids are going to college, you will be completely mortgage free
  4. As you will have no mortgage payments, you will be able to max your pension contributions later in life if it is still the right thing to do.
 

Sarenco

Frequent Poster
Messages
5,737
I would sell Property 1 and use your share of the net proceeds to pay down your PPR mortgage. The net yield is only 3.5% - around 1.75% after tax. That’s less than the PPR mortgage rate.

I would probably retain Property 2 for the time being.

I would definitely prioritise maxing your employee contributions ahead of paying down your PPR mortgage. The SFT, if it ever becomes an issue, is very easily managed.

Finally, I would use around €50k of your savings/after-tax investments to further pay down your PPR mortgage.
 

Brendan Burgess

Founder
Messages
38,666
I would sell Property 1 and use your share of the net proceeds to pay down your PPR mortgage. The net yield is only 3.5% - around 1.75% after tax. That’s less than the PPR mortgage rate.
Let's look at this in actual numbers.

JointYour half
Property value€310k
Mortgage€175k
Equity€140k€70k
Rental profit€11k€5.5k
After tax€3k
Net yield after tax4% (€3k /€70k)

Pay €70k off your mortgage and you would save €1,750 a year in interest

So it's marginal. dimayo - I am assuming that by rental profit you mean, rental income less costs less mortgage interest and before tax?

(Sarenco - how do you calculate the 3.5% net yield before tax? Have I got my figures wrong?)

As it's marginal, I would tend to hang onto it. After you have cleared your home mortgage, where are you going to invest your money to get a 4% net yield?

But as it's jointly owned, you might decide what to do based on your sibling's wishes. If it suits them to hold onto it, then hold onto it.

Brendan
 

Sarenco

Frequent Poster
Messages
5,737
(Sarenco - how do you calculate the 3.5% net yield before tax? Have I got my figures wrong?)
(11/310)100. Your calculation estimates the leveraged return on equity, net of taxes.

But the main point is that the OP is carrying a considerable amount of risk (interest rate, tenant default, etc.) for minimal return.

Also, assuming it's an amortising mortgage, Property1 is presumably cash-flow negative, which may be preventing the OP from maximising tax-relieved pension contributions.
 

dlmayo

Registered User
Messages
3
Thank you both Brendan and Sareco for you analysis and detailed responses. It looks like its relatively 50/50 in terms of paying back PPR or increasing pension contributions.

To answer a few questions
"I am assuming that by rental profit you mean, rental income less costs less mortgage interest and before tax? "
Yes, this is a rental profit for tax purposes

Property 1 is cash flow positive at the moment
Property 2 is cash flow negative

Have a long terms reliable tenant (family) in property 1 who takes good care of the property so minded to hang onto it as its doesn't cause me much hassle and I don't want to put the tenant in a difficult position (they would indure a significant increase in rent if they were to leave). The property is in a rent pressure zone so don't have much scope the increase rent.


On the PPR mortgage, its on a fixed rate 1.5 years remaining on current arrangement. I can can pay off 10% of outstanding value per year without impairing my contract so I'll look into doing this shortly.
 
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