New house question - large or small mortgage?

J

James_Mac

Registered User
Messages
6
Hi all,

Looking for some advice on an opportunity in from of us.
A new family home is available for us to purchase. Let's say price is €750k.
We have an existing family home worth approx €370k.
We have approx €250k in the bank and could get a mortgage for €550k as a joint mortgage on our PAYE incomes.

What is the most efficient way to fund the new purchase? Should we:
1. Rent out the existing property for approx €1600pm and get a mortgage for the full purchase price of the new property?
2. Sell the existing property and use the proceeds with a smaller, much more manageable mortgage mortgage (~200k)?

Key considerations are being able to plan for the future. My initial leaning is towards option 1 to keep a property that could be worth more in 10-20 years but the prospect of dealing with tenants etc doesn't appeal to me. Also I know the tax man will take a chunk since there is now BTL mortgage here to offset interest against. Selling the first property is against my instinct of keeping an appreciating asset for the future though. Any advice or experiences appreciated.
 
We don't have full details of income etc, but I would advise against for several reasons:
  1. A 5% yield is not great, you could get double this on an apartment for the same hassle.
  2. You will pay tax on your top marginal rate on all rental income
  3. You won't be able to offset the interest on your PPR mortgage against the rental income for tax
  4. Being a part-time landlord is a hassle, and recent legislative changes have tilted the balance of rights more in the tenant's favour
  5. You will pay CGT on any uplift
I don't know what your pension situation is but I suspect maxing contributions is a better use of your wealth.

I would avoid.
 
IWhen evaluating the options consider over 5 years, 10 years 20 years etc. For example

Option 1 : Sell Current house, results in small monthly mortgage, invest surplus cash in pension or other
Option 2: Keep house pay down mortgage

Over 20 years which one has the bigger benefits.

My gut on this one says sell your current house, you are in the lucky position where you don't need to sell before you buy if I am reading your situation correctly.

I am in a similar situation with an apartment and moving to a family home. I've done all the numbers and there is marginal benefit in keeping the apartment vs selling. The numbers will likely tell you the same.
 
Thanks for both of your replies.
Income wise we earn combined gross of €160k

Yes, we do not need to sell to cover the cost of the new property. An option I had not considered would be a variant of the above where we take the large mortgage to buy and then sell the existing property at our leisure and use that lump sum to pay down a chunk of the mortgage.
 
James_Mac said:
An option I had not considered would be a variant of the above where we take the large mortgage to buy and then sell the existing property at our leisure and use that lump sum to pay down a chunk of the mortgage.
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This may be easier said than done. You could lose your job tomorrow, but getting rid of tenants to sell the house could take a year.

A net yield of at best 2.5% after tax and expenses (with uplift taxed at 33%) is very low for the amount of work involved and risk inherent.
 
Another variation, if you do want to be a landlord.

Sell your house, and buy a different investment property. You might be able buy something more appropriate, with a better yield, less maintenance, and with a mortgage for tax relief. I know my former home would have been a nightmare as a landlord, although it was a lovely family home.

Do you need the hassle for a net return of about 100 per month, before potential capital appreciation?

Personally I'm not a fan of single property investments, as there are risks which are generally underestimated.
 

I often suggest this in this scenario. Sell a 3-bed semi and buy two apartments (with maybe 20% leverage) and you'll get a portfolio with double the yield. Apartments are also easier for a landlord, and the tenant risk is more evenly spread.

No one ever seems to think this is a good idea though. So many people stumble into being landlords.
 

thats excellent advice.

personally id sell the first property and have a smaller mortgage. or spend more on the PPR if that would result in a better family life.
 
Perhaps a factor to consider is that by renting the existing property, in the long term after the new mortgage is paid off, you have a steady rental income going on into your pension years. You could always use an agent to deal with the tenants.
 
scallywag said:
Perhaps a factor to consider is that by renting the existing property, in the long term after the new mortgage is paid off, you have a steady rental income going on into your pension years. You could always use an agent to deal with the tenants.
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An agent reduces the hassle of being a landlord, but it doesn't eliminate it by any means.

It wouldn't interest me in my 80s for sure. At that stage my investment will be very passive.
 
scallywag said:
Perhaps a factor to consider is that by renting the existing property, in the long term after the new mortgage is paid off, you have a steady rental income going on into your pension years. You could always use an agent to deal with the tenants.
Click to expand...

NoRegretsCoyote said:
An agent reduces the hassle of being a landlord, but it doesn't eliminate it by any means.

It wouldn't interest me in my 80s for sure. At that stage my investment will be very passive.
Click to expand...

I always think this topic is much more complex than just purely the numbers and even the financial options should be considered over time. There are a few options for the house over the long term:
  1. You want to use it as a source of income during your pension
  2. You want to sell it in 10, 20, 30 years and use the cash for another purpose
  3. You might move back into it or gift it to a child etc.
When looking at Option 1 and 2 specifically option 1, you should evaluate that path vs cashing out now and consistently over investing in your pension. In this example, there are two options (simplified)

  1. Keep Property: Mortgage = 550k, (26k per year) (2.5% 30 years) Rental Income per year 7.6k (assuming 4k expenses, 50% tax) = Net outgoings of 18.4k
  2. Sell Property: Mortgage = 130k (6k per year)
If option 2 is selected the OP will have roughly 12k additional cashflow per year. Assuming that is fulling invested in pension at 40% tax relief and an annual return of 3% results in a pension pot of ~800k, or ~25k per year.
 
Appreciate the advice here.
few years later and not much has changed bar the figures:
combined PAYE income is now 200k
old property value is now 470k. rental income is 3k per month.

Given the significant changes in gross rental income and subsequently yield has the advice of anyone changed in this time period?
 
Do you mean you purchased and now have a rental property? Or your still considering upsizing?


Q1) Is 3k that the maximum rent you can achieve, one can be very aggressive on rental pricing at the moment if the house is remotely up to liveable standard.
Q2) what would you mortgage be, with higher interest rates now compared to original post there is greater incentive to pay off mortgages/limit their size.

In simple terms , how I look at it; a mortgage close to 5% interest is comparable to a 10% ROI on an investment (due tax on the profit), but there is zero risk/guaranteed on paying off a mortgage/avoiding debt interest, so in reality a comparable investment needs to be 18-20% to warrant retaining or extending mortgage debt. Most people are not getting this return without personal time investment ( a business) or significant risk. As such if you can't make changes to the property to drive a capital gain then sell it, limit your mortgage
 
1. I think there is headroom to ask for more but the issue then becomes affordability for the average person/family.
2. repayments are approx €400 higher that the last time I ran the full calculations 2700vs3100 now. Not great but we are not in poor financial circumstance.

if I’m reading the latter part of your post right the rental yield needs to take a large leap or I need to run an illegal brothel / massive Airbnb let to make the investment workable. being in an RPZ I don’t think that works…
 
There are two main issues in my view…overexposure to a single asset class (property) in a single geography (Ireland) and the Shinners plans to wreck the property market and demonise landlords.

Personally I’d move but sell my existing property.
 
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