Should I sell an investment property to pay down home loan?

Sarenco said:

Sorry Gordon, I didn't realise you were referencing your own situation.

There is no doubt that a, largely tax deductible, current borrowing rate of 0.5% is exceptionally low by any standards, historical or otherwise. That rate could rise of course but, as things stand, it's very cheap money. No doubt about it.

But it's still leverage - it still magnifies all capital gains and losses on the underlying asset. Even if the cost of credit was zero, you are still taking a leveraged bet on the future value of that asset. Whether the value of the underlying asset rises or falls, you still have to meet your loan repayment obligations and you still have to meet all other holding costs relating to that asset.

My point is simply that a leveraged bet on the future value of any asset always carries a higher risk than an unleveraged bet on that asset - regardless of the cost of credit.

I'm not suggesting that this is a particularly profound observation but it often seems to get lost in these conversations. It's always about trading risk for expected return.

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I wasn't referencing my own situation specifically. The OP has a tracker, and the interest should be deductible. That's an incredibly low rate, versus non-deductible funding at the rates offered by CFD or spreadbetting providers (typically 3%).

Plus, there are margin calls which is a key point. Barring default, the OP won't be carried out. The fact that direct property investments aren't marked to market is relevant.

My point isn't that leverage is good, it's that it may not be possible to replicate the terms of this particular leveraged investment.

Sarenco said:

But it's still leverage - it still magnifies all capital gains and losses on the underlying asset. Even if the cost of credit was zero, you are still taking a leveraged bet on the future value of that asset. Whether the value of the underlying asset rises or falls, you still have to meet your loan repayment obligations and you still have to meet all other holding costs relating to that asset.

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But in the case of property it doesn't matter if the property value goes up or down in relation to your funding costs as you ought to have factored in a purchase that means the rent will cover the mortgage. You then sell as Cremeeg says when the market is good, or at a time that suits you.

Folks, I think we are going off in a tangent here.

To be clear, I am not arguing that the terms of any mortgage on a residential property will be the same as the terms of any margin arrangement to gain exposure to equities. Nor am I trying to suggest that the terms of this particular leveraged investment can be replicated in the future.

I am just making the very simple point that leverage magnifies potential gains and losses on the relevant underlying asset and that's the case regardless of the cost of credit.

The OP has an equity stake in the property that could be partially or wholly lost if the market turns south during his holding period. He has on-going funding costs that he may not always be in a position to service and therefore the decision to retain or sell the property may not always be entirely at his discretion. The investment is subject to (undiversified) tenant default risk, interest rate risk, regulatory risk, tax risk, etc.

The OP asked how he should approach a decision to sell or retain his rental property. I agree with Brendan that he should ignore any possible future capital gains and should focus instead on whether the rental is sufficiently profitable on an on-going basis to justify the risk and hassle involved with retaining the property.

Taking a leveraged bet on short-term future house prices is a perfectly legitimate strategy. But let's be honest - that's a risky, speculative bet. It's not a one way bet and it's certainly not cost free.

Some interesting viewpoints, thanks for everyones time.
I think one q was my cost, 295k so a bit to go before worrying about CGT.

For what its worth I'm going to talk to tenants, if I can get another 1,500-2000 a year from them ill hold for a bit longer and see what their plans are. If not ill give them notice to vacate. they're entitled to 28 weeks so ill likely give them until Spring at which point its a better time of year to get on the market anyway. If conditions have changed I can always re-let at market rent.

As they have been good tenants, you can give them flexible notice. In other words, when they get somewhere else, they can leave and you can then put the place on the market.

Brendan

That sounds like a very sensible approach Dave - best of luck with it.