Negative Equity on PPR, Need to move, Calculations as 1st time Landlord

T

tipping

Registered User
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Hi

Due to an expanding family and negative equity we are looking at renting out our apartment and then renting a house ourselves.
I am doing some calculations to see if this is feasible and would appreciate someone checking the maths and seeing if I am deducting too much/little etc. If this is more suitable to another forum please move.

Background Info:
Initial Purchase Price: €335000
Current Value (Estimate): €180000
Mortage Outstanding: €278000
Initial Term: 30 years
Term Remaining: 26.5 years

Current Mortgage Cost (Per Month) as Principal Private Residence:

Interest Rate: 3.5%
Interest Repayment: €813
Capital Repayment: €533
Total Repayment: €1346
Mortage Life Insurance: €75

Total Mortgage Cost: €1421
Less
Mortgage Interest Relief: €180
Effective Mortgage Cost: €1241


Now if I rent out the property.

Expected Rental Income Per Month: €900
Assume Occupied for 11 months
Annual Rental Income: €9900 (Updated)

Annual Mortgage Interest @ 3.5%: €9640

Deductibles
Deductible Interest Relief @ 75%: €7230
Management Fees: (Covers Bins, Insurance, Maintenance of Outside Common areas, Street Lighting): €700
Depreciation on Furniture etc: €300
Insurance: €300
Total Deductibles: €8530

Taxable Profit on Rental: €1370 (Updated)

Income Tax @ 41% €561.7
USC @ 7% €95.9
PRSI @ 4% €n/a
Tax Payable €657.6 (Updated)

Other Fixed Costs:
NPPR: €200
PRTB Registration: €70

Total Annual Liabilities: €947.6 (Updated)
Contingency: €500
Net Annual Rental Income: €8452.4 (Updated)


Overall Annual Cost of Renting out Property:

Interest Only = €9640-8452.4= €1187.6 (Updated)
Interest & Capital = (1346*12)-8452.4 = €7699.6 (Updated)
(or Approx €640 per month)

To Summarise
These are calculations based on data from a number of sources. If there are any ommission (glaring or not) please let me know and I will adjust accordingly.

The Interest only option if possible works out at close enough to cost neutral for the year. I have not spoken to the bank yet to determine if interest only is possible or not.

If not I am facing a shortfall of €600 per month to cover the interest and capital payments. This should work out at a net shortfall of approx €450 per month as rental on new house should be approx €1100 as opposed to current mortgage payment of €1241. I can afford to pay an additional €450 to move house but not a lot more. If the worst comes to the worst with problem tenants, non payment of rent etc etc we have savings that should cover us (although it would be a terrible waste of hard saved cash!)

If my calculations to date are correct I will update factoring in interest rate rises.

Thanks for any advice.
Tipping
 
Last edited:
Mortgage Interest Relief is not available to you as a landlord. You must inform the bank of this as it's deducted at source. They may or may not wish to put you onto a Investment Mortgage at that point which may be at a different rate and mess up your, pretty good, calculations.
 
"Expected Rental Income Per Month: €900
Assume Occupied for 11 months
Annual Rental Income: €10800"

That 10,800 is based on 12 months.
 
Howitzer said:
Mortgage Interest Relief is not available to you as a landlord. You must inform the bank of this as it's deducted at source.
Click to expand...

It's revenue you inform, not the bank. There is a form on revenue.ie for this purpose.
It's up to you whether you inform bank or not. Depending on the bank, they may or may not move you to an investment rate.
 
You must inform both bank and Revenue. No ifs or buts. And insurance company.

Your biggest problem will be that interest rates will increase over the next few years - you could be paying 6-7% in 2013. Maybe more if the bank charges you more on basically an investment rental property that your house will become

And there may not be any interest relief. Its already gone from 100% TO 75% and depending on the complexion of the next govnt may decrease or disappear.

.. and as any landlord will tell you, renting out is getting more and more of a costly hassle in so many ways....

Can you bite the bullet and approach the bank and get yourself a bigger house that you say you need ? Get rid of the apt.

O.K. you've lost a lot , but the new house will also be 40% cheaper than it was three years ago. Don't enter the rental thing at present - there'll be more anti-landlord measures coming soon.

Other than that I'd return the keys and shove off to Oz or NZ or anywhere else but here.
 
oldnick said:
You must inform both bank and Revenue. No ifs or buts. And insurance company.

Other than that I'd return the keys and shove off to Oz or NZ or anywhere else but here.
Click to expand...

You're been very sanctimonius on the one hand (having to inform bank - no ifs, buts etc.) but on the other hand you're telling him to skip off to Oz and leave the tax payer to foot the bill! Ridiculous advice.
If he can afford to pay his mortgage on the current interest rate, then i think the bank is doing alot better than him shoving off to God knows where!
 
oldnick said:
You must inform both bank and Revenue. No ifs or buts. And insurance company.
Click to expand...

Unless OP's mortgage contract specifically states that they must inform the bank if the use of property changes then there is no legal obligation to inform them.

Whether it's common practice or not or whether the bank expects you to or not is irrelevant. Every mortgage contract is different.
 
Legally and morally may not be the same thing - indeed, they may be the opposite.

Legally,or at least contractually, it is likely that he should inform the bank ,especially if the bank deducts MIRAS; and certainly legally he must inform Revenue and insurance company. Nothing sanctimonious about that advice.

Morally - if its a choice of feeding and clothing my kids or making sure that our beloved banks get every penny of a negligently given loan that will take for ever to pay then it's not much of a moral dilemma.

Anyway, the main point is to give advice to OP and it's more relevant to look at the downside of his proposed actions than nitpick and juxtapose quotes.
 
Handing the keys back and skipping off to Oz is pretty rubbish advice though old nick - best not to give advice if that's the best you can come up with.
 
tipping said:
Income Tax @ 41% €930.7
USC @ 7% €158.9
PRSI @ 4% €90.8
Tax Payable €1180.4
Click to expand...

Hey,

So good news - PRSI will not apply on your Rental Income.

Q. I am an employee paying Class A PRSI. What rate of PRSI do I pay on my investment rental income?
A. You are classed as an “excepted self employed contributor” and as such not liable to PRSI on your investment / rental income. This exemption applies to employed persons whose only source of non-employment income is passive income (i.e. income other than from a trade or profession). This exemption does not apply to the Health Contribution.
Click to expand...



I am unclear as to whether USC will apply either. From what I can see the answer is no. Does anyone else know?
 
For those who can't read properly...........................
..

... my advice to O.P. was that he should consider the strong possibility that interest rates may increase and that interest relief may diminish and possibly disappear depending on what type of govnt we have . Generally, the trend of govnts is anti-landlord.

Considering this, it may make renting out his apt less attractive and perhaps he should bite the bullet and approach the bank and consider buying the house he needs.
Getting rid of the apt will be a loss, but the new house will also be much cheaper than 4 years ago.

That was the thrust of my opinion, not the perhaps rather flippant remark at the end.

So, can anyone actually give him real advice.....
For example, confirm the real PRSI/USC figures which the OP had got basically right and which the previous poster got wrong.
 
I think we should go easy on Oldnick. Overall, it was an excellent post.

It is actually a viable option for some people in debt to default. Perhaps Oldnick's wording (re "skip off...", etc.) was a little blunt and could have been better.
 
oldnick said:
Anyway, the main point is to give advice to OP and it's more relevant to look at the downside of his proposed actions than nitpick and juxtapose quotes.
Click to expand...

I was giving advice, contradicting your incorrect statement.

I was pointing out that if you don't legally have to inform the bank then don't. It could potentially cost money in the long run as they try to wriggle out of a situation more beneficial to the homeowner than to the bank, eg tracker mortgage.

I never mentioned the Revenue or the insurance company
 
oldnick said:
For example, confirm the real PRSI/USC figures which the OP had got basically right and which the previous poster got wrong.
Click to expand...

Here they are discussing that they were considering making PRSI payable on other "unearned income". They did not bring this in.

[broken link removed]
 
If ,really, one is not obliged to advise the lender who provided the home mortgage that the property is no longer the main residence and is used for rental purposes , then i am surprised - but sorry for incorrect information.

If, really, there are no charges on rental income (other than income tax) then ,again, I am surprised - but sorry for stating that, basically, there are.
 
Thanks everyone for the useful contributions. I have corrected the Original Post for 11 months rental and removed PRSI based on the input above.
The overall resulting change is fairly marginal at about €40 per month.

I have recalculated for stress tested interest rates of 4.5% and 5.5%. No need to show all the maths this time but the figures now come out at.

For 3.5% APR
Interest Only Annual Cost: €1187.6
Interest and Capital Annual Cost: €7699.6

For 4.5% APR
Interest Only Annual Cost: €3562.12
Interest and Capital Annual Cost: €9130.72

For 5.5% APR
Interest Only Annual Cost: €6533.8
Interest and Capital Annual Cost: €11330.44

This does indicate that the higher interest rates will turn this from a manageable (for me) annual loss on the rental to something much more significant. Also if interest and capital repayments are required increasing interest rates will push us out of our comfort zone financially.


On the other points raised. I will have a scan through the mortgage agreement and see if I am obliged to tell the bank if it is no longer our PPR. However they will probably pick it up anyway as the Mortgage Interest Relief will no longer be deducted at source so it is probably irrelevant in the real world.
Anyway my general approach to these things is to be upfront and discuss these things in a frank manner so in all likelihood regardless of being obliged to or not I will inform the bank anyway.

I don't blame the banks for giving us a loan on the property in the first place. We made a (now) bad decision to purchase a property at the time but that's what you do when you are settling down and starting a family. At least we bought a property and took out a loan that was well within our means, significantly less than the maximum mortgage amount that we would have qualified for, the only problem is that the property no longer suits our needs.

Oldnick I don't see a way of getting rid of the apartment. If I could I would. I would prefer for it to be gone but to sell now would leave us approx 100k in personal debt, which would probably wipe us out financially and ruin our standard of living for years to come. If I had 100k in the bank I would sell, take my loss, move on and be done with it.
There is no good reason for the bank to do a deal with us as from their point of view the loan is being paid and currently there is little risk of issues with it.

Moving to Oz etc is not an option, I have no interest in abdicating my responsibility to my debt and even in these days I like living here (a whole other thread).

Reluctantly becoming a landlord is probably the best/only way to deal with this situation. Other than that it is to stay put in an unsuitable apartment, whatever is the lesser of the 2 evils..

I will also re-calculate for scenarios of the interest relief being reduced from the 75%, cos you're probably correct, landlords may be a tax target for the next few years..

Thanks
Tipping
 
If you do decide to become a landlord, try to get rent insurance, i.e. insurance that would pay rent to you, if your tenant defaults. It will cost you extra, but at least will protect you if you get a tenant who stays in your property but doesn't pay rent. I think this is your biggest risk, as, if you have difficulty renting a bigger house and renting out your apartment, you can always move back in (subject to giving your tenants required notice). It's not ideal to live in the apartment that is too small for you, but at least you won't be ruined in the same way as if you have to spend 2 years evicting a bad tenant, all the while getting no rent. You said you can cover that from your savings but rent insurance may still be very useful:)
 
I didn't mean sell the apartment full stop. I said approach the bank to look at trading up from the apartment to a house.

If you are going to pay a few hundred extra for your plan (i.e. letting the apt and renting a house) why not use those extra few hundred on top of your present mortgage ,but live in your own house ? ( with none of the ever increasing hassle of renting ,which cannot be arithmetically calculated ? Assuming of course the bank is willing to help.

Anyway, your calculations are impressive ( I note that you have removed PRSI, but not USC which you rightly said at start is applicable). I hope that I'm wrong in my feeling about your idea. Good luck.
 
Tipping - I admire your sense of responsibility and your ethical conduct in your difficult situation. In recent times it is unusual to come across somebody who is not trying to blame somebody else for their predicament and then trying to find an easy way out.
 
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