Moneymakeover Pay off mortgage early or not

[razor842]

Personal details

Your age: 46
Your spouse's age: 48
Partner's age if not married:

Number and age of children: 1 aged nine.

Income and expenditure
Annual gross income from employment or profession: 60K
Annual gross income of spouse/partner: 80k

Monthly take-home pay: 7.5k

Type of employment - e.g. Employee or self-employed. Employed
Employer type: e.g. public servant, private company. Me Private and Spouse Public Service

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving 1k a month


Summary of Assets and Liabilities
Family home value: 560k
Mortgage on family home: 275K
Net equity: 285k

Cash: 10k savings
Defined Contribution pension fund: 200K
Company shares : None
Buy to Let Property value: 280k
Buy to let Mortgage: 110k

Total net assets:


Family home mortgage information
Lender PTSB
Interest rate 2.35%
Type of interest rate: tracker, variable, fixed. 5 years
If fixed, what is the term remaining of the fixed rate? 1 year remaining
If tracker, what is the margin e.g. ECB + 1%

Remaining term: (Original term is not relevant) 17 years
Monthly repayment: 1625

Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Pension information

Value of pension fund: 200k (Mine) Teacher Public service pension (Spouse).
I put in 3.5% of my salary a month which my employer matches.

Rental properties
Value: 260K
Rental income per year: 25k
Rough annual expenses other than mortgage interest : Mortgage payments 11k + Expenses 5k
Lender BOI
Interest rate 3.5%
If fixed, what is the term remaining of the fixed rate? Tracker Mortgage 12 yeas remaining


What specific question do you have or what issues are of concern to you?

Coming to the end of current fixed rate on the home mortgage next year and trying to figure out does it make financial sense
to sell the Rental property and use the 170k profit to pay off a big chunk of the family home mortgage?
Or would there be a better use for the money? Pensions etc
Or just leave the rental property as an asset for the future

Thanks

 

[Sarenco]

Quite difficult to follow your figures.

Is €170k the profit you would make on selling the rental or is it the equity in the rental?

 

[ClubMan]

Or just leave the rental property as an asset for the future

Rental properties
Value: 260K
Rental income per year: 25k

Is that rental income gross or net? I presume the former so the net is about half that c. €13K? Which is a yield of c. 5% which isn't great given the existing and increasing risks and restrictions involved in being a landlord. I presume that you're an "accidental" landlord and this property is maybe yours or your spouse's home before you started cohabiting? Few people are likely to advise you to stay in the property rental game as there are too many risks and restrictions for landlords.

 

[ClubMan]

Pension information

Value of pension fund: 200k (Mine) Teacher Public service pension (Spouse).
I put in 3.5% of my salary a month which my employer matches.

3.5% employee contribution seems to me to be low for someone your age and income.
You seem to be doing the bare minimum to benefit from the employer matching?
Should your spouse be doing AVCs to boost their pension cover?
Will either or both of you qualify for the state old age contributory pension based on your PRSI contribution records?

This key thread might also be worth reviewing...

Key Post - Overpay mortgage or contribute to pension or do something else?

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback. There are many options with your savings in excess of your emergency cash fund Pay down your mortgage Build up a fund to enable you to trade...

www.askaboutmoney.com

 

[ClubMan]

Your household net worth seems to be...

• Property: €455K (net of mortgages outstanding, €840K gross)
• DC pension: €200K
• Spouse's DB pension: not sure how to value this
• Cash: €10K

You're far too highly concentrated in Irish residential property in my opinion so should probably sell the rental.

After that it's a question of the best use of the net proceeds after CGT and expenses.

When was the rental property purchased and will partial PPR CGT relief be available?

Principal Private Residence (PPR) Relief

This page outlines Principal Private Residence (PPR) Relief

www.revenue.ie

Property acquired between 7 December 2011 and 31 December 2014

This page explains relief available for land or buildings acquired between 7 December 2011 and 31 December 2014

www.revenue.ie

 

[Brendan Burgess]

Buy to Let Property value: 280k
Buy to let Mortgage: 110k

Value: 260K
Rental income per year: 25k
Rough annual expenses other than mortgage interest : Mortgage payments 11k + Expenses 5k
Lender BOI
Interest rate 3.5%
If fixed, what is the term remaining of the fixed rate? Tracker Mortgage 12 yeas remaining

First of all, let's look at the profitability of the property.

Your investment is €170k ( €280k - €110k)
If you paid that off your home loan, assuming you have no CGT liability, you would save about 4% of €170k or €7k net a year.

What net profit are you making?
Rental income: €25K
Less interest: €4k ( €110k@3.5%)
Less expenses: €5k
Profit before tax: €16k
Profit after tax: €8k

So despite the high rental income, it makes very little difference to the answer to the question you asked. Keeping it or selling it won't be materially different.

 

[Brendan Burgess]

But it seems clear that you should sell the property.

You should gradually feed the proceeds into your pension fund where you will get tax relief and where it will grow tax-free. You will get about 25% back tax-free when you retire, and pay tax at your top rate on the balance.

All politicians seem determined to make life more difficult for landlords. So sell while you can. You might not be able to do so in a few years if you need to.

You are not in any hurry as the decision is close. So give your tenants notice and then sit back and see how long it takes. If they act the maggot because you forgot to dot an i or cross a t and you have to start all over again, so be it.

 

[geraldo2001]

I’d broadly agree with Brendan on this. Selling the rental and gradually using the proceeds to build up the DC pension looks like a sensible direction to me.

The only thing I’d add is that I probably wouldn’t put all of the proceeds straight into the pension. Given the cash reserve is only around €10k, I’d first use some of the rental equity to build up a stronger emergency fund. That would give the household a bit more breathing room and financial freedom, before directing the balance towards long-term pension funding.

I put together a quick visual analysis here showing the two scenarios: the current position, and a sell-the-BTL case. In the sell case, the BTL mortgage is cleared, cash is topped up to a more comfortable reserve, and the remaining proceeds are redirected towards the DC pension.

Planeir Client Session

Planeir client session viewer for secure read-only planning conversations.

planeir.ie

Important caveat: I couldn’t estimate the CGT on the rental property from the information provided, so CGT and selling costs are excluded from the analysis.

 

[ClubMan]

The only thing I’d add is that I probably wouldn’t put all of the proceeds straight into the pension.

To be fair, that's basically what @Brendan Burgess said:

But it seems clear that you should sell the property.

You should gradually feed the proceeds into your pension fund ...

In any case, it's unlikely that the full profits from the sale of the rental property could be put into the pension tax efficiently in one go.

BTW the link that you posted doesn't seem to make sense...

 

[geraldo2001]

Apologies ClubMan, if you click into the personal balance sheet you will find the analysis.

 

[Steven Barrett]

Boost your pension, 3.5% won't get you a big enough pot to have a good retirement.

Sell the property, max out pensions for both of you for 2025 and 2026. Increase cash savings to €50,000. Pay down some of your mortgage, invest some money for future medium term expenses that you will have coming up.

With your emergency fund looked after, you can redirect some of that €1,000 a month into AVCs. €1,666 can be invested into a pension out of €1,000 net.