Moving on - should I sell or rent my home

[revlator]

Hi,

I'm looking at moving home at the moment and I'm hoping for some advice on whether I am better off keeping my current family home and renting it, or selling. Any insight much appreciated.

Purchase price of property in 2006: €580,000
Current Value: €420,000
Outstanding Mortgage: €289,000 with 19 years remaining
Current Mortgage Rate: 0.95%, BOI tracker
Current Mortgage Repayments: €1,365/month of which interest €230
Expected Rent: €2,000

The options as I see them are:
a) keep the property and rent it. I've calculated that this will cost me €500/month at current interest rates (not 100% sure about my calculations);
b) sell and put (some or all of) the 130k equity into my pension (I'm 43);
c) sell and use the equity to reduce the size of the mortgage I'll be taking out on my new home.

If my €500/month calculation is correct, in case of options b and c I figure I could instead invest the 500+tax relief into pension every month.

Based on some similar threads I've read here, I think I'm right in saying that holding on to the property represents a good opportunity for potential growth, tax-free up to the original purchase price. I'm curious to know just how valuable I should consider this relative to the other options but I'm not sure that I'm informed enough to see all of the variables.

Any advice gratefully accepted!

 

[Brendan Burgess]

How much is the house you want to buy?
How much of a deposit do you have?
Do you have any other investments?
What is your current salary and how reliable is your job and future income?

Brendan

 

[Sarenco]

Are you (and your spouse if relevant) currently maximising your pension contributions and, critically, what interest rate do you anticipate that will you be paying on your new mortgage?

BoI is a bit tricky because their tracker mover offering is fairly poor.

 

[revlator]

Thanks for the replies.

I'm planning to spend around 700k on the new house.
Deposit of 270k (This is actually coming from the proceeds of sale of a second property bought in 2014. This sale will generate a capital gain of around 25k to complicate things)
No other investments.
I'm self employed with an annual income of €120k. Level of income is not necessarily guaranteed and we're a single income household.

I'm a director with occupational pension - not sure how maximum contributions work there? I haven't paid into it in a few years. Wife has no pension.
Best rate I've been offered so far is 3.1% based on keeping the property. However if I sell it, I'll likely stick with BOI to avail of the tracker mover and I don't have the specifics of the rate they offered to hand.

 

[cremeegg]

I dont understand where the €500 per month figure.

You would receive over 5% return on the €420k value of the property. You are financing €289k of this at 0.95%.

 

[revlator]

The €500 figure is the cash I would require monthly to add to the net rental income to make the mortgage payments. Maybe describing this a 'cost' was misleading as it obviously reduces the capital by €1000 each month. But in terms of cash flow I'd need to cover €500/month.

The 5%+ figure is an assumed annual increase in property values?

 

[Gordon Gekko]

Have you run the numbers in terms of tax?

 

[Brendan Burgess]

Hi Revlator

Is this summary correct?

It's very clear. You must sell your existing house and move the BoI tracker to the new house.

A mortgage of €430k with an income of €120k at age 43, is potentially devastating. If property prices fall and when interest rates rise, you could be in a very sorry position. Trust me, it's not worth it. Scan the Mortgage Arrears forum to see what happens.

If property prices continue to rise, you will still have a €700k stake in the market, which will be rising tax-free anyway.

If your income declines, you will have a small mortgage and will not be worried about losing your home.

And bad things tend to happen together - interest rates rise, your income falls and house prices fall.

Sure the BoI 5 year tracker mover is not as attractive as the other lenders, but after 5 years, it will be down to €220k, and it's likely that the gap between tracker and non-tracker rates will be a lot lower by then.

 

[Sarenco]

I would agree with Brendan's conclusions.

On a stand-alone basis, you could certainly make an argument for retaining your current home as a rental - reasonable projected yield, with an attractive financing rate. However, when you look at your overall financial picture, it would result in a high degree of concentration in a single asset class and a very significant exposure to interest rate increases.

The real clincher for me, however, is the following comment:-

Level of income is not necessarily guaranteed and we're a single income household.

That suggests to me that you shouldn't be taking on excessive investment risk.

The tracker mover option looks like the right choice here.

Also, you should make sure you have appropriate PHI and life assurance in place and don't ignore your pension!

 

[cremeegg]

There are a number of ways to look at this. Lets start with the simplest,

Cashflow.

Option A. Sell the existing house and buy the new, and get a tracker mover with BOI you will have €1,780 monthly repayments, based on a 19 year term.

Option B. Keep the house rent it out and buy the new, get an additional mortgage at 3.1%. You will have monthly repayments €1,365 + €2,250 = €3,615 less €2,000 rental income = €1,615, based on a 22 year term for the new loan.


Balance sheet.

Currently

Option A. Assets €700k loan €300k net €400k

Option B. Assets €1,120 loans €720 net €400k

In 20 years time

Option A Assets €700k net. This asset is not free, it is needed to house you, you could free up some part by downsizing

Option B Assets €1,120 net. €400k of this assets is free, and as above for downsizing.

Risk

The risk to the above is that you might struggle to pay the mortgages but the cashflow on Option B is actually less than on option A. It also gives you a second income stream unconnected with your work. On balance i would say less risk.

Apologies if I have made any mistake in the numbers, and I have not looked at the tax implications, but it seems to me that the decision is clear.

I have also not referred to any prospect of capital appreciation. I will try to do so tomorrow, but just to say that I disagree with this.

If property prices continue to rise, you will still have a €700k stake in the market, which will be rising tax-free anyway.

Your home is not a stake in the market in the same way as an investment property.

 

[Sarenco]

I have not looked at the tax implications

Well, tax is a pretty significant consideration for anybody with an effective marginal tax rate of 55%! It has a radical impact on the cash flow analysis, for example.

I have also not referred to any prospect of capital appreciation.

Or the possibility of capital depreciation during the relevant holding period (bearing in mind that recent research indicates that real Dublin residential property prices in 1944 were lower than in 1744!).

Your home is not a stake in the market in the same way as an investment property.

Why so?

 

[Brendan Burgess]

Hi Sarenco

Surely it must be obvious to you why a home is not a stake in the market like an investment property?

1) If you sell a family home, you are not free to do whatever you wish with the proceeds. After paying the CGT on any gain, you must buy another family home with the proceeds.

2) Investment properties are much more likely to rise in value than family homes, because tenants tend to take much better care of properties than owner occupiers.

3) There is almost no regulation of investment properties. Landlords are free to rent the property to whomever they want. They can put up rents at any time. They can kick out tenants easily. They are free to sell the property. Whereas owners of family homes must comply with a mass of paperwork every year and must go through a long and tortuous process if they want to sell their home.

4) Mortgage rates are much lower for investment properties than they are for family homes.

5) There is no tax on rental income from investment property whereas owners of family homes must pay Benefit in Kind on the imputed rent on the family home.

6) Any increase in value of the family home is subject to CGT whereas any increase in the value of investment properties is tax-free.

7) If you get into difficulty paying the mortgage on your family home, the bank can appoint a Receiver without going to the court, whereas those with mortgages on investment properties are protected by legislation which makes it impossible for the bank to repossess it.

8) If you ever are unlucky enough to require a means-tested benefit, they will take your family home into consideration when calculating the benefit, whereas they will ignore any rent received from an investment property and its capital value.


Brendan

 

[aristotle]

ignore my previous comment. I see Brendans replies is firmly tongue in cheek.

 

[cremeegg]

View attachment 1935
Hi Sarenco

Surely it must be obvious to you why a home is not a stake in the market like an investment property?

1) If you sell a family home, you are not free to do whatever you wish with the proceeds. After paying the CGT on any gain, you must buy another family home with the proceeds.

Brendan

Or you can go live under a bridge with the other trolls

 

[revlator]

Thanks to everyone for your very helpful input.

Brendan, your summary is correct - your advice based on it is sobering and appreciated.

cremeegg, I have calculated (by looking at how similar examples were treated here for expenses and tax) that I'd actually be looking at a net monthly rental income of around €885, which changes the required cashflow for option B to more like €2730, a significant difference.