Review with goal of reducing Tax by transferring mortgage from home to investment

aam514

New Member
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5
Age: 47
Spouse’s/Partner's age: 49

Annual gross income from employment or profession: 90,000
Annual gross income of spouse: 48,000

Monthly take-home pay: 7200

Type of employment: e.g. Both are private sector

In general are you: Saving. it varies between 250 and 750/month

Rough estimate of value of home: 405,000
Amount outstanding on your mortgage: 278,000 and 16 years
What interest rate are you paying? 2.3% Fixed for next 18 months; will then change to 4.3% Variable

Other borrowings – car loans/personal loans etc: None

Do you pay off your full credit card balance each month?: Yes

Savings and investments: 65,000 in a few different accounts between the 2 of us.

Do you have a pension scheme?: Yes, 170,000 in my scheme ; I pay 5% and this is matched by the company; Spouse has about 100,000 in her scheme; she pays 6% and this is matched by her company. 5 and 6% are the maximum both companies match.

Do you own any investment or other property? Yes, approximately valued at 300,000 with mortgage of 26,000 outstanding; repayments are 912/month; Interest rate is 0.6% Tracker with about 2.5 years left. We rent it out at 1650 per month. The annual tax bill is about 7000.

Ages of children: None

Life insurance: Yes, not sure on the details but I think it's about 4 times our salaries

What specific question do you have or what issues are of concern to you?
1. Looking for an overall review and comments on the above so see if we have the "right" balance between savings and pension contributions. Also feel that the right thing to do for diversification is to hold onto the investment property.
2. Specifically looking for advice on how to reduce tax bill for the investment property e.g. should we move the mortgage from the home to the investment property?
3. How soon can we expect to retire? We won't have children and college funds.

Thanks
 

Brendan Burgess

Founder
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40,706
You get tax relief on the interest on money borrowed to buy an investment property.

You can't transfer another loan to your investment property and claim tax relief on it.

Brendan
 

Sarenco

Frequent Poster
Messages
6,176
What profit are you making on the rental after all expenses and taxes (including LPT)? If it's not materially more than €6,300 per annum, I would suggest selling the rental and clearing the PPR mortgage.

I'm afraid you can't move the mortgage on your PPR to the rental. To be deductible, interest must be on a mortgage that is used to purchase, improve or repair your rental property.

You have ample scope to increase your tax-relieved pension contributions. That's the most tax efficient way to save for retirement so I would suggest you dramatically increase your AVCs.

€65k in cash seems a bit on the high side. I'd throw at least €20k at the mortgage or make AVCs.
 

aam514

New Member
Messages
5
Income
Rent Received
€19,023​
Expenses
Mortgage Interest
€224​
Repairs & Maintenance
€1,255​
Agent Fees
€1,872​
Management Fees
€1,450​
Insurance
€105​
Mortgage Protection
€75​
PRTB
€90​
Other
€295​
Accounting
€250​
Total Expenses
€5,616​
Net Rental
€13,407​
Capital Allowances
€0​
Rental Profit
€13,407​
 

Sarenco

Frequent Poster
Messages
6,176
Thanks.

So €13,407 rental profit less income tax, PRSI and USC @52% is €6,435. Less LPT @€315 is €6,120.

If you cashed out the €274k equity in the rental and paid it off the PPR mortgage, you would save €6,302 in interest (€274k@2.3%).

In your shoes, I would sell the rental, pay off the PPR mortgage and significantly ramp up your pension contributions.
 

David1234

Frequent Poster
Messages
232
What are your financial goals?

I would be looking to maximise pension contributions for last year and this year with the cash available. The tax relief on this is the best you will get. It will also gives you some diversity as a lot of your net worth is tied up in the Irish property market.

What are you spending the rest of your money on? With €7,200 take home your monthly savings seem light. If you want to retire early you will need to get a handle on your spending
 

aam514

New Member
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5
That's interesting @Sarenco. As the mortgage rate increases to 4.3% in 18 months, over the course of the remaining 16 years of the mortgage on our PPR, this amounts to a saving of about 100,000 in interest which as you say could be re-directed to the pension fund. However, in 2.5 years time when the investment property mortgage is paid we will have approximately 11,000 per annum in extra disposable income (i.e. the current monthly mortgage repayment of 912 X 12). This extra income could be used to pay off the PPR mortgage or directed towards pension AVCs and we'd still hold the investment property asset.
 

Sarenco

Frequent Poster
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6,176
Be careful not to confuse profit and cash flow.

Paying off your PPR mortgage will save you more in interest than the projected after-tax profit that you will make on your rental. So, paying off your PPR mortgage is a better use of the capital you currently have tied up in the rental - regardless of the impact on your cash flow.

As it happens, it will also dramatically improve your cash flow position, which will allow you to maximise your tax-relieved pension contributions.
 

Gordon Gekko

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4,321
Surely you’re going to fix again or switch provider rather than accept a ridiculous rate of 4.3%?

Is it a decent property (the rental)? Did you live there, so is there some sort of CGT shelter from the PPR Relief? What did you pay for the place?
 

aam514

New Member
Messages
5
Surely you’re going to fix again or switch provider rather than accept a ridiculous rate of 4.3%?

Is it a decent property (the rental)? Did you live there, so is there some sort of CGT shelter from the PPR Relief? What did you pay for the place?
That's very true. If I estimate that I will get a 2.3% rate over the course of the remaining 15 years of the PPR mortgage, according to Karl's mortgage calculator I would pay approximately 46,000 in interest (i.e. 250,000 for 15 years at 2.3%).

The property is "decent" yes. I paid 300,000 for it in 2007 and yes lived there for about 3 years.
 

Gordon Gekko

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4,321
The tax question is clear-cut. You can only get a tax deduction if the loan is for the purchase/upgrade/repair of the rental property.
 

Gordon Gekko

Frequent Poster
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4,321
Okay, so the amount of any gain that would be sheltered is ‘4/13 x the gain’ today, but right now there isn’t any gain. Which could be a good reason to sell now. The numerator in the above formula will always be ‘4’ but the denominator will increase by one as each year passes, thus reducing the value of the shelter. Having said that, 11 years from now, 1/6 of any gain will be tax-free so it’s not to be sneezed at.

I’d look at your overall position first. You have too much cash and your pension are underfunded. I struggle to see the merits of saving more cash given your overall situation.

I would keep the property. I would stop saving. I would set aside 6 months worth of expenditure in cash from your €65,000. That’s probably €35-40k.

Then I’d take the balance and immediately make AVCs for last year; based on your incomes and the 5/6% you’re doing now, a top-up of around €27k would be allowed. That’ll trigger a tax refund of around €11k via this year’s return (net circa €5k if you offset against tax on the rental).

You both need to start maxing your AVCs from now. The max of circa €27k a year would cost you circa €1,350 in lost net income per month. If you can’t manage that, do whatever the €750 a month you previously saved would equate to (i.e. €1,250 AVC) and then increase to the max when the extra cashflow from the property kicks in.

Your pension funds are way behind wheret they should be; for me, they’re the red flag.
 

aam514

New Member
Messages
5
Thank you. I really appreciate the advice.

Some reasons I am hesitant to sell...
(1) As the tracker rate is so low and we only have 2.5 years left on the mortgage, the money borrowed is very "cheap".
(2) It will be a source of income in 2.5 years - even though I have to pay approx 50% tax every year - I'll still clear about 11,000 after tax every year.
(3) Suppose we never sell it and see it as a pension source when we retire, we won't be liable for CGT.

In summary, it seems like we only have to invest 2.5 years of borrowing cheap money to have an asset that will generate 11,000 every year.
 

Gordon Gekko

Frequent Poster
Messages
4,321
Thank you. I really appreciate the advice.

Some reasons I am hesitant to sell...
(1) As the tracker rate is so low and we only have 2.5 years left on the mortgage, the money borrowed is very "cheap".
(2) It will be a source of income in 2.5 years - even though I have to pay approx 50% tax every year - I'll still clear about 11,000 after tax every year.
(3) Suppose we never sell it and see it as a pension source when we retire, we won't be liable for CGT.

In summary, it seems like we only have to invest 2.5 years of borrowing cheap money to have an asset that will generate 11,000 every year.
1) The amount outstanding is so small relatively speaking that it’s just noise; you’ll note that I didn’t even reference it.

2) It will be around 4% gross per year, 2% net. I don’t know where you’re getting the €11k figure, it’s €6.5k per your own analysis.

3) Correct, but if it’s an apartment, will it still be there?
 

Sarenco

Frequent Poster
Messages
6,176
In summary, it seems like we only have to invest 2.5 years of borrowing cheap money to have an asset that will generate 11,000 every year.
After tax, you are currently netting around €6k on the rental. That won't change materially after you pay off the small remaining balance on the rental mortgage. Again, it's important not to confuse profit and cash flow.

The interest payments on your PPR mortgage are higher than your after-tax rental profits. The only reason to retain the rental is to speculate on future capital appreciation. Well, you haven't had any capital appreciation over the last 13 years...

A pension is a far more tax-efficient way of saving for retirement. Maximising your tax-relieved contributions should be your focus.
 

SPC100

Frequent Poster
Messages
544
If you were retiring now. You'd have income of roughly 22k =13k rental + 3-4p.c. of 270k pension.
You wouldn't be paying much tax on that.

How much will you need per year to live on when you are retired?

Like others I'd also increase pension contributions to get maximum relief from your pensions. I would use some of your 60k to do that. And I'd suggest taking a look at your spending. I imagine you could cut back a lot.

I'd likely try to keep the rental.

If you wanted to reduce rental tax. You could do the maths on selling this rental, buying another one with a mortgage, and (using any excess funds to paydown some of ppr mortgage).

The rental mortgage rate would be higher, but maybe it would make financial sense, but it would also be a lot of hassle.
 

jim

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Messages
530
"Having said that, 11 years from now, 1/6 of any gain will be tax-free so it’s not to be sneezed at"
Hi gordon, can you explain this statement please as I dont understand it?
thanks.
 

RedOnion

Frequent Poster
Messages
4,458
"Having said that, 11 years from now, 1/6 of any gain will be tax-free so it’s not to be sneezed at"
Hi gordon, can you explain this statement please as I dont understand it?
thanks.
It's specific to the OPs circumstances: "yes lived there for about 3 years."

In 11 years time, they will have owned the property for 24 years. So 4/24ths of any gain would be sheltered from tax.
 
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