Pay lump sum into 2nd property?

Discussion in 'Property investment and tenants' rights' started by Foodie1, Mar 6, 2017.

  1. Foodie1

    Foodie1 Registered User

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    Question for prudent investors. I was advised a few years ago by my accountant not to pay lump sums into my 2nd property mortgage for tax purposes. Does this still apply please? I do full tax returns etc
     
  2. cremeegg

    cremeegg Frequent Poster

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    If you reduce your mortgage then you reduce the interest which is tax deductible at 75%. That is why it may not be a good idea to reduce the mortgage. Of course to incur a cost, interest, just to get tax relief is ridiculous.

    There are many other variables, the rate of interest on the mortgage, your pension situation to name 2.

    No one can advise you on the little you have posted.
     
  3. Foodie1

    Foodie1 Registered User

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    Thanks Cremeegg.
    mortgage of 170k at 4.3 interest rate. Worth 170k .21 years left. Payment 1050 p/m.
     
  4. Eddie Peters

    Eddie Peters Frequent Poster

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  5. cremeegg

    cremeegg Frequent Poster

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    Ok so if you pay a lump sum off your mortgage you get a return which is guaranteed and is 4.3% (to be adjusted for the loss of interest deduction) after tax.

    You definitely should look again your accountants advice.

    If you have the lump sum available, the question is, what should you do with it. You need to pick the best option, leave it on deposit, invest in equities, invest in a pension, reduce this mortgage. Certainly a blanket suggestion not to reduce the mortgage is wrong. It may not ultimately be the best choice, but is is definitely to be considered.

    For proper advice go to the makeover forum.
     
  6. huskerdu

    huskerdu Frequent Poster

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    cremeegg is right, its might be the best thing to do with your lump sum, but it might not.

    It needs to be considered as part of your overall long term financial planning

    Here are few issues to illustrate my point.

    If you pay off a lump sum, you save on interest at 4.3%. If you reduce the term, you will save you money but you will not see a return until the end of the mortgage or you sell the house. This money is now locked away and will be almost impossible to liquidate until you sell the house. Are you likely to need this money in a few years time ? Will you need to borrow to replace your car , which will be a higher rate than 4.3%

    Do you have an adequate pension fund ? Putting a lumpsum AVC may be more advantageous.
     
  7. JoeRoberts

    JoeRoberts Frequent Poster

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    I don't think it is that simple.

    Paying a lump sum off should be considered as an investment to reduce the capital balance.
    As the 4.3% loan interest rate applies to the reducing capital balance over the life of the loan, over 21 years the effective return on a lump sum investment to reduce the capital is much lower than 4.3% unless the reduced or eliminated monthly mortgage payment ( net after paying the extra income tax) is reinvested at 4.3% guaranteed return during the 21 year period. This is not possible.
     
  8. Brendan Burgess

    Brendan Burgess Founder

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    You are paying a net of 2.7% after tax relief on this mortgage.

    If you might need the money in the immediate future e.g. to move home or to buy a car, then you should probably not pay down your mortgage.

    If you have a mortgage on your family home at 3.5%, then you should pay down your family home mortgage first, as the savings are higher.

    If you have no mortgage on your family home, you have to ask yourself if your can get a risk-free return of 2.7% net by investing your money. You can't.

    So paying down your investment mortgage is better than leaving it on deposit or investing directly in shares.

    By reducing your mortgage, it's also possible that you will be able to negotiate a lower mortgage rate or switch lenders.

    As has been pointed out, it may make sense to contribute to a pension fund instead of paying down your mortgage. Unless you are close to retirement, I think that it's not worth the risk and uncertainty. 2.7% guaranteed after tax is a huge return.

    Brendan
     
  9. Brendan Burgess

    Brendan Burgess Founder

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    I don't follow this argument.

    I have a mortgage of €100,000 at 2.7% net after tax.
    I have a lump sum of €10,000 in my current account.

    If I don't pay the money off my mortgage, I will be charged 2.7% net for a long time to come.
    If I pay if off my mortgage, I will save 2.7% this year and each and every year.

    It's best to judge financial decisions on a one year basis. Talking about 21 years, makes it too complicated and results in errors of reasoning.

    Would it make any difference if Foodie had a mortgage of €100k and €100k in his current account? I don't think so. Paying it off his mortgage saves him the 2.7% he would have paid for the foreseeable future.

    Brendan
     
  10. JoeRoberts

    JoeRoberts Frequent Poster

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    His investment to pay off the mortgage is 100k.
    It doesn't save him 2.7% of 100k each year. After say 15 yrs it is 2.7% of a much lessor sum. So we can't simply say he gets a return of 2.7% on his investment in paying off the mortgage, unless he can get 2.7% return on either his savings from a reduced monthly mortgage payment or the shorter period for which he has no mortgage payment
    There are 2 cashflow streams to consider, but the returns are very different on them.
     
  11. Brendan Burgess

    Brendan Burgess Founder

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    Hi Joe

    Do you agree that if he pays €10k of a €100k mortgage with 21 years left, he gets a return of 2.7% for at least the next 10 years?

    Brendan
     
  12. JoeRoberts

    JoeRoberts Frequent Poster

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    Yes, as long as the capital balance on the loan exceeds 10k.