Moneymakeover Just took on vast mortgage

[hilhid]

Age:
late 30s
Spouse’s/Partner's age:
late 30s

Annual gross income from employment or profession:
E150,000 [currently paid in sterling £126,000]
Annual gross income spouse:
E94,000

Type of employment:
me private sector
spouse public sector

Expenditure pattern:
we are definitely spenders

Rough estimate of value of home
E1,100,000
Mortgage on home
E938,500 - we just drew down
Mortgage provider:
BOI
Type of mortgage: Tracker, interest only, fixed rate
30 year term with five year fix
Interest rate
3.55%

Other borrowings – car loans/personal loans etc
About GBP10k on interest-free card in UK

Do you pay off your full credit card balance each month?
Yes, when not interest-free

Savings and investments:
UK self-invested personal pension: E316k (£265k) in cheap global equity fund
US 401k/IRA: E35k ($40k) in US value stocks
Fintech shares, currently not liquid but worth ~£60k

Do you have a pension scheme?
I pay min 5% to get 11% match (total 16%). currently much higher personal payment (circa 30%) to keep salary below UK's 100k cap for childcare
Spouse pays into standard post 2013 civil servant scheme. no AVCs

Do you own any investment or other property?
Flat in London worth circa £330k. rent £1500 a month. currently in middle of 5-year btl fix at 1.62%, so currently making good return ~£12k a year post tax on £130k equity

Ages of children:
a two year old in incredibly expensive nursery

Life insurance:
4x from my work and I *think* 2x from spouse's work

What specific question do you have or what issues are of concern to you?
We just bought a home in Ireland. Currently working abroad, but will be moving back next year. The monthly payments obviously suck now, but if we keep working then inflation will slowly do its thing. My sense is that in the long run it makes clear sense for us to max out our pensions, rather than paying down the mortgage. The one big downside is that it means we must both keep working until at least 50/55 when we can access tax-free lump sum and reduce mortgage balance. but we both love our work and have secure jobs, especially spouse. So:

- maxxed AVCs for spouse or mortgage overpayments, or mixture?
- long-term (maybe even 30 year) fix once we're back and my salary is in euros? seems nice to eliminate rate risk while maxing out equities for pension growth (a good economist piece on this at: "How a mortgage transforms your investment portfolio")
- will i need to sell off the US 401k/IRA once we move or can i keep it there if i don't touch it? I am currently investigating whether I will be Irish tax resident, but non-ordinarily resident and not domiciled in Ireland when we move back. (we will stay for only a few years before heading off again). don't expect real legal or financial advice on this, but thoughts and maybe recommendations for firms that might provide

 

[Fibbernacci]

Kudos to you both on your great salaries.

On the mortgage, some people do say buy the best you can afford and there is something to be said for making savings by never having to move again however I would personally be terrified by that figure in case something were to go wrong. I'm currently in an 860k house with a 341k mortgage because I had a lesser house first and paid as much mortgage down as possible before moving to 'forever' home.

 

[hilhid]

thanks Fibbernacci for swift reply. Can I ask more about why the large mortgage terrifies? (I understand this is how most feel, but I want to figure out whether I'm an idiot for not feeling the same) Is it that you worry about losing job? Or perhaps just the prospect of all that work for all that time in the future?

 

[Peanuts20]

I presume you have done a tax comparison on salary and tax for when you do move back?. I know when I did it many years ago, I came back to a payrise before tax and a paycut after tax. Also child-minding/creche can be very expensive in Dublin as well unless you have family who can step in.

Secondly, are you renting or owning in London? Do you have a property to sell.?

You will need a budget to move back, are you bringing cars or buying them here etc?. Lots of things to consider that will get you into a 5 figures very quickly.

Worth checking to see if you can continue to pay a NIC contribution to maintain your UK state pension.

In terms of reducing equity on the new house, can you sell the BTL? Do you really want to be a remote landlord?, Not sure what the tax implications would be but that could knock €200k off the new mortgage

 

[Brendan Burgess]

You have a €940k mortgage on combined salaries of €250k

Roughly speaking 4 times your gross combined salaries.
And it's 85% Loan to Value

While the economy thrives and you remain healthy and well paid and enjoying your jobs, you will be fine.

But you have no room for anything to go wrong.

- Interest rates rise when your fixed rate term is up
- One of you gets sick or needs to take a career break.
- One of you hates your job and needs to switch to a lower paid job.
- The next recession affects your job and reduces your earnings
- Interest rates rise again
- House prices fall and tilt you into negative equity. People will argue that as long as you can afford your repayments, this does not matter. But it has practical consequences. You won't be able to switch lenders if BoI up your rate. If you do get into difficulty, it is hard for the lender to restructure a very high LTV and high LTI mortgage

Your absolute priority now should be to reduce your mortgage from an extremely uncomfortable level to a less uncomfortable level.

 

[Brendan Burgess]

currently much higher personal payment (circa 30%) to keep salary below UK's 100k cap for childcare

Are you contributing 30% of £126k or £38k?
So you are building up a private pension and you are avoiding having to pay for childcare so this is justified.

But when you return to Ireland, you should make the minimum contribution required to max your employer's contribution.
You should put the net amount against your mortgage instead. (Check the calculations for BoI cash back)

 

[Brendan Burgess]

Your London flat is worth £330k with a mortgage of £200k

So your total borrowing is over €1m. Sell the flat and reduce the borrowing on your home.

The revised figure will be:

You have a €800k mortgage on combined salaries of €250k

Roughly speaking 3.2 times your gross combined salaries.
And it's 73% Loan to Value €800k/€1.1m

That would be less uncomfortable.
With an LTV of <80%, you would be able to switch to get a lower mortgage rate.

I would still be paying down the mortgage even further to maybe 3 times your salary or €450k. That means you could handle a period of unemployment, career break or illness.

That does not mean that you stop contributing to a pension. Between yourselves and your employers, you will still be building up healthy pension funds. In later years, your repayments will be a lot lower, so you will be able to pay more into a pension scheme then.

Or you just might like to have much lower repayments when your kids are teenagers or going to college. With your present plan of maxing pensions, you will both be working flat out to meet the mortgage repayments and the costs of running a family for the next twenty years.

 

[Blackrock1]

yes i agree, sell the london property when you move back, your mortgage is much higher than id be comfortable with personally at that income level so id be inclined to use the equity in the flat to decrease it.

You have one child, do you plan to have more? its not that easy maintain two careers with multiple children so one of you may end up taking a break for a period.

Do you have any income protection insurance? i think you need this as well.

 

[hilhid]

Thanks Peanuts, all good thoughts. Taking them in turn:

- very oddly, moving back will actually make cashflow much better. that is entirely because of the pension contributions I must make in order to keep my adjusted salary low enough to qualify for funded childcare in the UK. my contributions will go from ~30% to 5%. I will be paying more tax, yes, but overall will have much more money in pocket every month. our childcare in London is £2300 WITH the gov help (which goes up in sept thankfully), so home will be a good bit easier
- we are renting, but it is mostly covered by spouses allowances
- we'll be bringing a car. haven't bought it yet. will get the cheapest second hand thing we can. spouse will be able to walk to work and i will work from home, so won't need daily driver. having emailed revenue is seems import duties etc are not payable on personal vehicles owned for at least 6 months before returning to ireland
- will definitely be making NIC contribs to maintain UK pension
- could of course sell the BTL. we thought hard about doing it as part of the purchase to reduce our mortgage, but decided against. unlike many I have never struggled with being a landlord. my current tenants are a delight. I do the whole thing myself and manage it over whatsapp with them direct. they've been there for a few years and show no signs of leaving, and I show no signs of putting up the rent. so why give up 9% returns for 3.5% returns?! now of course if rates are so high when i go to remortgage that they eat all our profit then of course will sell. don't expect to get 1.62 again, but even if the return was 6% it would still be better than paying down mortgage

will come back on other thoughts in a moment (I am rate limited as a new account)

 

[Zion2022]

My sense is that in the long run it makes clear sense for us to max out our pensions, rather than paying down the mortgage

I think there can be an over obsession on funding retirement. Especially for high income earners (where the incremental benefit of tax deferral is significantly reduced due to likely paying 45%+ on drawdown anyway and apparent decision to not index the TFLS). Granted deferral in itself has significant value but many seem to treat like full tax relief.

I would wager the next 5 year could be the tightest financially of your life. Obviously crystal balling, but on balance of probabilities, based on your age and salaries. I expect you’ll be very wealthy in retirement.

Was in a similar situation to you a few years back. Thread here (https://www.askaboutmoney.com/threads/path-to-financial-freedom.228405/) , you’ll see I was a bit more stressed about the size of the debt.

We’ve aggressively paid down debt. Combined with strong inflation and it’s been a serious emotional weight lifted. Best decision I ever made (along with going all out for a one and done home).

Granted there’s a specific reason to contribute so aggressively in UK, but once back in Ireland I’d only contribute what is matched by your employer to your pension and direct the rest to your mortgage until you’re down to more like a 2-3x salary to debt multiple.

 

[NotPoodle]

we'll be bringing a car. haven't bought it yet. will get the cheapest second hand thing we can. spouse will be able to walk to work and i will work from home, so won't need daily driver. having emailed revenue is seems import duties etc are not payable on personal vehicles owned for at least 6 months before returning to ireland

Some food for thought here. Buying in the UK with the benefit of no import duties and VRT is huge. Ireland is much more car dependent and buying the 'cheapest' may not be a wise choice - if you need to buy a car sooner in Ireland due to bringing home an older car then you will be paying 20%+ more here for the equivalent.

 

[Persia]

could of course sell the BTL. we thought hard about doing it

My brother, against my advice, sold a 2 bed apt in a decent area of London, barely clearing the mortgage in mid 90s.He returned back to Ireland.
I even volunteered to arrange a good management company and deal with any interaction for him....gratis.

 

[Fibbernacci]

For me the large mortgage terrifies as things can seem rosy one day and then something happens the next and you don't have your good situation to support it. It's just that amount of debt is a bigger beast.

It's not that there is anything wrong on paper, more like it spooks me in a 'too big to fail' sense.

 

[_OkGo_]

Flat in London worth circa £330k. rent £1500 a month. currently in middle of 5-year btl fix at 1.62%, so currently making good return ~£12k a year post tax on £130k equity

How are you getting £12k net? It looks like it would be closer to £12k before tax

My understanding (limited and maybe incorrect) was that tax on UK rentals was treated broadly similar to here, i.e as income. So as a high earner, are you not paying 45% tax on the gross profit?

 

[hilhid]

How are you getting £12k net? It looks like it would be closer to £12k before tax

you are correct, I did it in my head. it is actually £9.4k (18k gross, 15.7k profit, 9.4k after 40% tax)

Are you contributing 30% of £126k or £38k?

30% of 126 (so as to get total adjusted pretax income including from rental below 100k)

Your London flat is worth £330k with a mortgage of £200k

So your total borrowing is over €1m. Sell the flat and reduce the borrowing on your home.

The revised figure will be:

You have a €800k mortgage on combined salaries of €250k

you are convincing on paying down the mortgage Brendan. my view had been that it would be more advantageous to put money into pensions and then use tax-free lump sum at 50 (new PRSA) and 55 (UK SIPP) and use that to bring our mortgage way down at that point if we chose to, but I agree that's quite late in the game, and we may want more freedom sooner than that. we both have very stable jobs that we love, with no layoffs by either employer during GFC, though of course who knows what the future brings. but the prospect of being able to spend more time with kid(s) when they're young is very much in line with what we want, and I actually don't think there's a way to do it with pensions, as PRSA is only accessible at 60, not 50 as I had that (that's occupational pensions in Ireland).

My brother, against my advice, sold a 2 bed apt in a decent area of London, barely clearing the mortgage in mid 90s.He returned back to Ireland.
I even volunteered to arrange a good management company and deal with any interaction for him....gratis.

this is part of what drives me to keep the flat. there's potential upside and in the meantime it generates a decent income stream. I suspect that rate movements over the next two years will make the decision for us.

Some food for thought here. Buying in the UK with the benefit of no import duties and VRT is huge. Ireland is much more car dependent and buying the 'cheapest' may not be a wise choice - if you need to buy a car sooner in Ireland due to bringing home an older car then you will be paying 20%+ more here for the equivalent.

good point. definitely looking for something reliable that will drive for many years and be cheap to maintain in Ireland. perhaps a Skoda estate. not going the be the very cheapest thing possible, but also have no interest in a new car obvs

Do you have any income protection insurance? i think you need this as well.

my work offers protection at 50%. spouse has none I don't think if she doesn't sign up with Cornmarket programme for civil servants, which seems very pricey to me (1.9% of income before tax). can get 50% cover for spouse for ~30 a month before tax. might also top mine up with 25% cover, though I need to talk to a broker to figure out the right amount

I think there can be an over obsession on funding retirement. Especially for high income earners (where the incremental benefit of tax deferral is significantly reduced due to likely paying 45%+ on drawdown anyway and apparent decision to not index the TFLS). Granted deferral in itself has significant value but many seem to treat like full tax relief.

I think you are basically right, and have convinced me. the trade off of paying down mortgage vs higher pension funding comes into play more when you still have a few hundred k but it's v servicable. then carrying the debt in order to make slightly better returns through pension contribs makes more sense as its not such a burden.

as you rightly point out, we are already both forecast to be v close to the higher bracket in retirement anyway. spouses civil service pension comes out at 35k. mine harder to say but almost certainly higher than e44k

part of me still thinks that making the full mortgage payment would be fine, especially if we got a long fix to eliminate rate risk. the downside of losing the house is very very unlikely, and the upside of a larger pension earlier with more time to compound tax free has lots of benefits (deposits for children's homes, money for care later in life). but basically I am convinced. helps that spouse is more in line with forum's view

 

[_OkGo_]

you are correct, I did it in my head. it is actually £9.4k (18k gross, 15.7k profit, 9.4k after 40% tax)

Again, is this correct? Are you doing it yourself or have you an accountant?

I would have expected it to be £18k gross rent, £3.2k interest and another £2-3k in allowable expenses, i.e £12-13k profit and £7-8k net of tax. Or €8.3-9.5k in Euro.

But you have to factor in the additional €155k (£130gbp) that you needed to borrow on your PPR to retain the UK property which is costing you €5.5k.

After all of that, the UK property leaves you better off by €3-4k in net income. Considering your combined income, the rental contributes a tiny percentage of your net income but comes a lot of risk.

Do you know how your tax situation changes when you move back to Ireland?

this is part of what drives me to keep the flat. there's potential upside and in the meantime it generates a decent income stream. I suspect that rate movements over the next two years will make the decision for us.

The income vs risk doesn't justify keeping the rental in my opinion but this is separate to its potential growth. If you are willing to speculate on the future value, that is very different to basing your decision on the rental income. You should at least be clear on that.

And the flip side is because it is highly leveraged you run the risk of needing to sell during a dip in prices which would very quickly wipe out the miminal income it is producing for you.

Personally I don't think you should keep it. It is a cash flow risk, adds minimally to your overall net income and more broadly, you have nearly €1.2m in mortgage debt which is nearly 5 times your already high income.

Why not make life simple, sell it, reduce your PPR mortgage to €800k and then overpay it for a few years. Considering your already healthy pensions, you would be in a good position at €600k if either of you wanted to take some time out of work in the future (e.g. more kids)

 

[Annieindublin]

I kept a flat in London for a few years after moving back here. I bought it for 70k back in Thatchers era. Couldn’t give it away 6 years later when I needed to move. Eventually it came good, maybe 7 years after I moved, it washed its face in the meantime. Rents were ok, covered the mortgage and maintenance and gave me a few quid after tax. I let it unfurnished so had 2 or 3 tenants and a good management company. Redecorated between tentants and sold it later for about 190. Even after cgt I made a decent sum and a fair chunk of the mortgage had been repaid (it was a fairly short mortgage, 18 years I think can’t remember why).

To be fair I didn’t have any equity to take out when we were moving, actually had negative equity so there was zero incentive to sell it when we moved. But it wasn’t any hassle and came good in the long term, I kinda regret not keeping it longer but we had a use for the equity at that stage. Flats there are over 300k now and still sell almost instantly. I occasionally look to see if it’s on the market again.

 

[hilhid]

Again, is this correct? Are you doing it yourself or have you an accountant?

I would have expected it to be £18k gross rent, £3.2k interest and another £2-3k in allowable expenses, i.e £12-13k profit and £7-8k net of tax. Or €8.3-9.5k in Euro.

But you have to factor in the additional €155k (£130gbp) that you needed to borrow on your PPR to retain the UK property which is costing you €5.5k.

After all of that, the UK property leaves you better off by €3-4k in net income. Considering your combined income, the rental contributes a tiny percentage of your net income but comes a lot of risk.

Do you know how your tax situation changes when you move back to Ireland?

wow, this alone makes my post completely worthwhile (as do many other useful comments), thank you OkGo. I was not factoring in the full cost of interest as the full cost is not deductible under UK rules, only a portion of it. but of course I still have to pay the full cost! so you are completely correct on the numbers, it's doing much less well than I thought. i will sell and put it into the house

 

[Brendan Burgess]

you are convincing on paying down the mortgage Brendan. my view had been that it would be more advantageous to put money into pensions and then use tax-free lump sum at 50 (new PRSA) and 55 (UK SIPP) and use that to bring our mortgage way down at that point if we chose to, but I agree that's quite late in the game, and we may want more freedom sooner than that. we both have very stable jobs that we love, with no layoffs by either employer during GFC, though of course who knows what the future brings. but the prospect of being able to spend more time with kid(s) when they're young is very much in line with what we want, and I actually don't think there's a way to do it with pensions, as PRSA is only accessible at 60, not 50 as I had that (that's occupational pensions in Ireland).

the upside of a larger pension earlier with more time to compound tax free has lots of benefits (deposits for children's homes, money for care later in life).

You raise an interesting issue here which I have not seen before.

Your strategy seems to be or seems to have been to max your contributions to max tax relief. Many here would agree with you despite the size of your mortgage.

My strategy would be to get the mortgage down to a comfortable level or at least down from an uncomfortable level first. You will have lower mortgage repayments later so you will have more free to contribute to your pension.

But you plan to cash out at 50! I doubt that this makes any sense. It's much better to leave your pension accumulating tax free until you actually need it which might well be in your late 60s.

Or do I misunderstand you?

 

[Dr Strangelove]

Your London flat is worth £330k with a mortgage of £200k

So your total borrowing is over €1m. Sell the flat and reduce the borrowing on your home.

I'd second that. Rental is a low return on its own never mind in the context of overall very high level borrowing. It's beside the point but I'm surprise you got a mortgage of that level from an Irish lender given that your income is currently in GBP.

Back to the rental being a landlord in a different country (I've done it) is a hassle and not the kind of thing you want with a busy job and a young child.

Finally - when you leave the UK make sure to make voluntary national insurance contributions to get a UK state pension at 68. It's the best investment return of them all.