money make-over - what to do with investment property

[geri]

Age: 45
Spouse’s/Partner's age: 44
Annual gross income from employment or profession: 110,000
Annual gross income of spouse: 70,000
Monthly take-home pay: 8,500

Type of employment: Private Sector, Public Sector

Saving per month 3,000

Rough estimate of value of home 400,000
Amount outstanding on your mortgage: 300,000
Interest Rate 4.5%
Years left 22
Repayment per month 1450

No other borrowings

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

Savings and investments: €40,000

Do you have a pension scheme? Yes

Do you own any investment or other property? Yes

Property 1: Value 280,000
Rent per month 1,000
Original Outstanding Mortgage: 164,432
Interest Rate 0.9% (tracker)
Mortgage repayment per month 1000
Years left 15

Property 2: Value 260,000
Outstanding Mortgage: 96,860
Interest Rate 4.73%
Rent 900 per month,
Mortgage repayment per month 829
Years left 13

Property 3: (Holiday home )Value 150,000.
Outstanding Mortgage – 90000
Interest rate 5%,
Monthly repayments 560.
Years Left 24

Age of child: 7 - childcare costs €440 per month

Life insurance: Yes

I think we should sell the variable rate mortgage investment property and pay down against either the Holiday home, or the home mortgage, but my OH thinks we should hold on to all properties. He is convinced that prices will rise steadily over the coming years and we should wait until retirement to sell. (I would love to retire by age 55 at the latest) Your advice would be greatly appreciated

 

[cremeegg]

No one can advise you whether prices will rise over the coming years or not. Its your money and your opinion.

The one definite advice I would have is to over pay the holiday home loan. You have a rainy day fund and secure jobs.

You would get a guaranteed 5% after tax return on overpayments on the holiday home. That is an excellent return, you will not get better.

You might emotionally prefer to overpay the home loan but the return is less and realistically speaking they will both have to be paid, there is no reason to favour paying the home loan.

 

[geri]

Thanks cremeegg - we dont rent out the holiday home - its for our own use only

 

[Brendan Burgess]

Even if your husband is right and property prices rise steadily, you will do very well as you would still have €830k of property.

If your husband is wrong and prices fall or interest rates rise, you will see a lot of your wealth reduced or you might lose some of your comfort.

So it's clear to me that you should sell Investment 2.

You should use the proceeds to clear the very expensive mortgage on your holiday home.
You should use the balance to reduce the mortgage on your home by at least 100,000.
You should then switch lenders and avail of a very cheap rate for LTVs below 50%.

With a very high income, high savings and low mortgage outgoings, you can afford to pay all your savings against the mortgage on your home.

You do not need a rainy day fund. You should only keep some savings if you are planning on buying a car or if you have some other short-term large capital expenditure.

 

[geri]

Thanks very much Brendan, appreciate your clear assessment,
Geri.

 

[cremeegg]

Thanks cremeegg - we dont rent out the holiday home - its for our own use only

I don't see the relevance of this. The mortgage is expensive, over paying it would get a good return.

View attachment 1321

So it's clear to me that you should sell Investment 2.

I cannot see how it is so clear cut, they have an income of €10,800 and costs of €4,600 on property 2. Yes its taxable but what isn't. They also have the potential upside of a capital gain.

 

[Brendan Burgess]

they have an income of €10,800 and costs of €4,600 on property 2.

This is a very common mistake people make.

You say her costs are €4,600. But she has equity of €160k! As you right point out, she can get a return of 5% on €90k of this and 3.5% on the balance. So her true costs are

€97 k@ 4.73% = €4,000
€90k @5%= 4,500
€70k 3.5%=2,500
Tax on rental profit= €3,000
Total "costs"= €14,000

They also have the potential upside of a capital gain.

Two counter-arguments.

Firstly,there is also the potential of a capital loss.

Secondly, they already have plenty of property - so they will benefit from any rise in property prices.

Selling is usually very clear when someone has a lot of equity but expensive borrowings elsewhere.

Brendan

 

[cremeegg]

You say her costs are €4,600. But she has equity of €160k! As you right point out, she can get a return of 5% on €90k of this and 3.5% on the balance. So her true costs are

€97 k@ 4.73% = €4,000
€90k @5%= 4,500
€70k 3.5%=2,500
Tax on rental profit= €3,000
Total "costs"= €14,000

You are right this is the true cost of not selling property 2. In fact I think the €70k should be at 4.5% by reducing the home loan.



On the potential for capital gain.

Two counter-arguments.

Firstly,there is also the potential of a capital loss.

Of course, this is why I say, it your money and your opinion.

Secondly, they already have plenty of property - so they will benefit from any rise in property prices.

Why is this relevant to the decision on property 2. If they sell property 2 they will loose out on any capital gain on that €260,000.

A 5% capital gain on €260,000 is €13,000


Finally we dont know what capital gains tax implications there might be to selling property 2 or indeed the other properties.