Sell investment property to help clear debt?

D

Dumas

Guest
Not expecting to get much sympathy here but here goes...

I've had a number of significant outgoings over the past 3 years, including
- buying first home (with partner) and furnishing etc. same
- trading up to 2nd hand house (with partner) in poor condition, requiring fair bit of work (and hence expenditure)
- buying investment property and all associated costs in the interim between 1st house and 2nd
- changing car (not a luxury buy - had to practically scrap previous one as cost to get it NCT-worthy were prohibitive. In case you're wondering "new" car was 6 yrs old!)
- Getting married - typical Irish Wedding and all that entails.

As a result of the above and generally poor fiscal management, I am in debt to tune of almost 45K. Breakdown is roughly 18K credit union, 20K bank term loan, and 5K credit card (I know - really dumb). Naturally this is draining me badly and not good for my mental health (or my wife's).

So now we have 2 properties (1) the house we live in and (2) an investment property (apartment).

Home - Value €460k mortgage: €305k
Investment property - Value €160k mortgage: €104k

My wife has her finances under control, so it is just me that needs to be sorted out. We have discussed it and as far as we can see there appears to be only 2 options available to me to get the debts under some kind of control:
1) Sell investment property - this would provide approximately 20,000 each to myself and my wife after expenses. I would allocate the 20K to my debts. Rent on property is same as mortgage payment and value of property has increased by 35-40k since bought 2 yrs ago (was a new property). Mortgage outstanding is 104K

2) Remortgage home property or get a top up mortgage ( what are the actual differences?) for same to clear debts. Difference between mortgage outstanding and property value is ~150K. Balance on mortgage is ~305K. One concern here is that we are using equity built up which may be needed further down the line for home extension etc.

What to do? Probably a no-brainer just to sell investment property and throw the proceeds at the debt, but maybe not - hence this posting.

Really appreciate any help on this. Thanks.

PS: Anyone seen Shawshank Redemption should know how 'Dumas' should be pronounced in the above context...
 
Hi Dumas

Eddie Hobbs is looking for new "contestants" on Show Me The Money. You would be an ideal couple for his treatment.


It seems at first glance that the level of debt is not too large, given that you have just gone through a very expensive patch. Most people would not expect to finance their Irish wedding and moving into two new homes out of current income. If your general expenditure is less than your annual income, then I would not panic.

If your total borrowings are too high in relation to the value of the property or to your income, you should probably sell. I would think that the former home is the most likely candidate as the CGT bill would be low or zero.

I think you should probably put your investment mortgages on an interest only basis, so that your repayments are minimised and you get maximum tax relief on the interest paid.

As an initial step, you should remortgage. If you need to borrow more money down the line, you can sell one of your investments.

Brendan
 
Hi

I'm sure there is every sympathy for you and it really isn't as dumb as you think to get into debt as you are. Your priority needs to be to clear your debt. Everything else is irrelevant. This requires one quality from you NOW! - Discipline.
Selling your investment property is a no brainer as far as I am concerned. Once you have cleared your debts, only then can you think about investing money, as any debt you have is just eating into your returns.
Under no circumstances should you re-finance your house to consolidate your borrowings.
Once you've sold your property and receive funds (net of capital gains tax), start by paying off the most expensive debt first. This could be your credit card, but you should realise that you can negotiate your interest rate with the banks on credit cards. I have been able to receive 2.9% on my credit card for the last 18 months - I keep threatening to trasnsfer my balance to another one at 0% if they don't give it to me.
Also, look at your expenditure very closely. Do you each own a car? Is this necessary? Do you eat out in restaurants a lot? Where do you spend your holidays? Get the idea?
It really does come down to discipline. If you do the above, you'll be amazed at how quickly you can become debt free. Oh and lastly, if you are going to buy another investment property when your debt is clear, I suggest that you make sure the rent more than covers the mortgage payments. I don't believe in taking chances on price increases or decreases. Receive your income and relax.
Hope that helps you and I wish you all the best.

t
 
Theo

I don't think that your advice, despite its tone of certainty, stands up to any analysis at all.

Once you have cleared your debts, only then can you think about investing money, as any debt you have is just eating into your returns.
Click to expand...

If you can borrow at 3% and invest in an asset which is growing by more than 3%, then you can make serious money through debt. This is called leverage. Borrowing money is a good idea if you have the capacity to handle shocks.

Also, look at your expenditure very closely. Do you each own a car? Is this necessary? Do you eat out in restaurants a lot? Where do you spend your holidays? Get the idea?
Click to expand...

Dumas, you should be very careful about cutting your expenditure too much. It seems to me that your current problem arises from marriage and a few house moves all within a short period of time. I am not suggesting that you should be splurging your money, but there is no point in making sacrifices now and dying rich.

if you are going to buy another investment property when your debt is clear, I suggest that you make sure the rent more than covers the mortgage payments.
Click to expand...

What I don't like about your advice Theo is that you seem to think it is a "no brainer" to sell property now with a view to clearing some short-term debt and then buy back into property later. The problem with this is that there will be transaction charges of at least 10% when you take into account stamp duty, cost of furnishing, legal fees etc.
 
Interesting too, Theo, that you refer to "your" finances and those of your wife's as being seperate.

Do you find having "seperate" finances to be helpful? You guys are married so as far as I know you jointly own your possessions -- and your debts!
 
Just an amateur opinion here!

At todays interest rates, and increase in property values, I would have thought remortgaging your house or houses would be the best way of releasing more equity. Are you charging enough rent, is it due to be reviewed? Perhaps extra rent income would cover your increase in mortgage. Why not rent a room in your home, if this is feasible, you could then take advantage of the rent a room exemption from CGT. Why not remortgage but extend the term of your mortgage in the shortterm, this will reduce your payments but also allow you to borrow more at lower costs than a high street loan. Although you are thinking of selling your investment property, you would have to consider auctioneers fees, legal, CGT as well not that remortgaging is exempt from fees either.
 
Thanks a million folks for your responses. Sorry if I wasn't overly clear in my initial explanation of the situation. I'll try and clarify here...

Firstly we only have mortgages on 2 properties (1) the house we live in and (2) an investment property (apartment). To list these as suggested by Brendan:

Home - Value €460k mortgage: €305k
Investment property - Value €160k mortgage: €104k

We hadn't planned on all this furious moving and buying of property in this short space of time. We moved into our first home in summer 2002 and a few months later put down deposit for investment property. We later experienced trouble with where we were living (including noisy neighbours, getting broken into and being ignored by desperately bad "property management" company). After a few months of this we decided to move. We did OK in terms of trading up but obviously had to pay higher price for new home and had stamp duty to contend with as well.

In the meantime we had bought the investment property and after about 2 months had managed to rent it. Initially, the rent received exceeded the monthly payments by E100, but then the new business rate elapsed (1 yr) and payment consequently went up by ~ 50 per month. Also, had to drop rent by E50 for second letting. Hence, payment =~ rent received.

Theo - you are right in terms of needing to get disciplined on the expenditure front big time. Also must look into moving credit card to a 0.0% - any suggestions as to what would be the best product to switch to?

Evelyn, have thought about renting room in home for a while to a friend - may look into that more closely now that you mention it.

Thank you all again for the advice and look forward to more of the same!
 
Thanks again Guys for the pointers. ;)

However, I'm still not sure what to do about the overall issue I have, namely whether to:

(a) hold onto the investment property and remortgage/consolidate loans or

(b) sell investment property and clear majority of loans.

With option (b) I would still have some debt left over (I don't expect my wife to have to pay for my debts with her "cut" of the proceeds, particularly when she put more money into it in the first place) but it would be more civilised/manageable.

With option (a) I would plan on paying the balance each month between our previous monthly payment and the revised one.

As further background, we only have the investment property for 20 months so there is not a huge amount paid off the mortgage, but it's gone up a bit as indicated in first few postings. I'm sure many people would think it mad to sell at such an early stage of investment, however there's obviously arguments for and against.

What do you think? :confused:
 
I think you are panicking a wee bit here. You have suddenly become the owner of two or more properties and you have just realised the commitment you have taken on. The thing to remember is property is a good investment in the longterm. You have only had your apartment less than two years and when you start out with anything, there are costs that take a while to recoup. I wouldn't rush into selling, as you may have to accept a lower offer and live to regret it later. I would start by looking at these loans you have, obviously you are on a higher interest rate than a typical mortgage rate. You may have to pay exit penalties to get out of these so weigh these up against extending the mortgage on your PPR. From my experience most loans are set up with the total interest payment upfront, ie paying less capital for a number of years. Personally, I would feel safer paying back an extended mortgage than a loan ( these are fixed payments, miss one and you incurr extra interest charges etc). Why not go for interest only mortgage for a while until you feel comfortable with your disposable income and adjust in the future. Best of luck!
 
Hi Dumas

If you sell your investment property now, you can't reverse the decision later when you sort out your finances.

If you are spending more than you are earning, then selling the investment property will be only a short term solution. Get your spending in order first.

But if your problems are due in part to the fact that you have had so much disruption, then just accept that it will take a bit of time and refinancing to recover.

So, start by refinancing to clear your expensive debt. Switch the investment mortgage to interest only or 40 years, to minimise the repayments and maximise the interest relief.
 
I'd agree with Brendan about sorting out your day to day expenditure and this is something that Mr Hobbs always advises. Any decisions can only be made when you've got a firm idea of how much its costs you to live on a day to day basis. Once you've done that you can then see if with a small and manageable readjustment you can afford to keep your investment property but this can only be done if you can commit to a budget.
I suspect that part of the reason you refer to the debt as yours and not your wife's is because it's not to do with joint expenditure for your wedding, car or the purchase/refurbishment of the properties. If you're in this level of debt because your day to day finances are out of control then nothing anyone can advise will help until you control your day to day.
If I'm wrong and you are able to live to a budget and are simply struggling to clear one-debt then remortgaging would be the way to go as it cost less to service and currently mortgage interest rates are lower than the yearly appreciation of virtually all property.
 
Once again, thanks to all of you for your "sage counsel".

We've decided not to sell investment property for now - we'll try and hold onto it for at least another 3 years, if not longer.

Meanwhile we'll consolidate debt, batten down the hatches a bit and I'll try and get a better paying job! (I forgot to mention that my salary over the last few years has not been great - obviously didn't help situation).

Regarding debt consolidation, are Prima Finance good people to deal with?

Cheers

D
 
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