Should I use savings to start an AVC or pay down a mortgage?

C

CharlieMac

Registered User
Messages
91
Hello,

First post on askaboutmoney. Lots of information incoming, apologies, I didn't know how to make it more concise.

My situation:
I have an investment property...
Bought in 2006 (yes, I was one of those unfortunates).
Bought for €450k, €250k balance remaining, currently worth approx €320k (only exited negative equity around 2021/2022)
The mortgage is €1800/month.
It is let out for €1600/month gross.
It is in a rent pressure zone, the rent is not covering the mortgage, I estimate it won't until a few yrs after the mortgage is cleared in 17 yrs time.
It's a tracker currently 4.9% (ECB + 1.25%). Even when ECB was 0% the shortfall between rent and the mortgage was about €440/month after costs and taxes are paid on the rental income.

I'm 48 and have only been paying in to a HSE pension for 2 years. I don't have any other pension.
I will only have 24yrs of HSE service if I work until I'm 70. At the moment I hope to keep working until that age, out of necessity.
I have quite a bit of savings (> 100K) set aside over the past several years as a rainy day fund to prop up that investment property, if any emergency arose.
I really should have been investing it or putting in to an AVC but instead it has just been accumulating in my current account.
I'm not 100% sure about the fees and limits with AVCs, or how much I would need to put in to top up my HSE pension.

My question:
Should I plow all my savings in to an AVC and max out the tax benefits of that "going in" or put it all in to the mortgage?

Who I have spoken to so far:
Aside from worrying about this for the last 18 yrs of my life...
I spoke to a financial adviser, but the focus was on getting me to sign up for an AVC and to talk to a colleague in the mortgage dept without any interest in doing a deep dive of my situation.
I see no reason to change the mortgage. I called up the bank and worked out that if I put €135k in to the mortgage that would bring down the repayments to a sum that would be covered by the rent. I use rent generated by that property for that property only but I can only spare about €850/month from the gross rent even then, at least in recent years when ECB was 0% I still ended up with an annual tax bill of a few thousand. Altho, now that I am paying €100s more each month in interest I got a refund on my latest tax return.

What I am thinking of doing:
Put €135k in to the mortgage which would then be around €850/month and then at least the rent would cover it. But then continue to overpay about €40k more in to it over the next two years.
I estimate that would bring the monthly mortgage down to about €500/month which would finally give me peace of mind with affordability. After that I could comfortably manage that mortgage (as well as my own) any time it is temporarily unoccupied by tenants. I would then put everything I can in to an AVC until I retire.

The dilemma:
I am torn between doing the above vs selling it vs finding some way to hold on to it as things are currently and at the same time put all my savings and everything I can going forward in to an AVC. Selling would be hard emotionally but I want to make the right decisions now. I'm worried about having enough of a pension. I have left this very late but my assumption was that the property would be a pension... It might be worth around 500k by the time I reach 70. But then having a property costs money and would an AVC/pension (or another investment?) be a more cost efficient and financially gainful choice?

What I really need:
Is a nuanced analysis of the opportunity cost to me of choosing one option from a range of options. It was this thread that brought me to post this question on these forums. I'd really like to talk to people with the depth of knowledge that Brendan Burgess and Duke of Marmalade demonstrated in that thread.

Any advice from anyone much appreciated. Also, if someone knows a really good financial adviser I could meet in the real world I am happy to pay them for the service I need to make the best choice.

Charlie
 
Are you sure your overpayments will reduce the monthly repayment? Usually it just shortens the term.

Secondly, do you intend to keep the property in retirement with the rent providing an income stream, or sell to raise a lump sum?
 
You mention the rent shortfall at ECB rate of 0% being €440, but what was the shortfall at the peak of the rate cycle?
 
Tbh, you’ve let this investment dictate enough of your financial decisions, regrettably so. I would start paying AVC’s asap (might even get 2023 relief if you move fast enough!) and deal with the property on its own merits. It’s a sell or keep-while-underwater decision, after max’ed out ‘23/24/25 AVC’s have been taken from your cash pile.

You could clear 70k tomorrow, or tbh you could easily spend 70k propping it up for the next few years.
 
Hi conor_mc,

I called up the bank and asked that question and was told the default situation is that overpaying reduces the monthly payment. You can make it reduce the term instead but have to specifically ask for that. In my case I would be happy for the monthly repayment to come down.

In an ideal world I would keep the property and it could supplement my rental income so I could leave it in a Will. But I don't really think that can be an option. It's in a rent pressure zone and my concern is only being able to increase the rent by 2% per year doesn't sound like rental income would keep up with inflation in real terms over the longer term. I think this was why a lot of private landlords sold their rental properties?

I don't know what is the exact shortfall between rent and mortgage now. Roughly speaking: the monthly rent is €1600/month gross, the mortgage is now €1800/month with the rate now at 4.9%. When ECB was 0% the rate was 1.25%, the mortgage was around €1350/month and the shortfall was around €450/month so I guess the shortfall must be €900/month now but that will come down a bit over the next two years as rates fall further.

I'm sorry but I didn't really understand what your advice was in your third comment?

Is there any way that it would make sense to keep the property? How about this opportunity cost assessment of putting €135k in to the mortgage today:

1. I miss out on the tax advantage of putting that in to an AVC. I pay income tax at the higher rate so would would a €135k lump sum in to an AVC end up being €225k? (60% of €225k = €135k)
2. Putting €135k in to the mortgage will bring the repayment down to €850/month and rent would cover that... as long as there is a tenant in there and then I might still have a year-end tax bill, not sure. But when I reach 70 maybe the property might be worth €500k.

Yes there will be other costs to keeping the property going until the mortgage is repaid and even after it is repaid but it seems hard to walk away from that potentially sizeable addition to a pension fund and it wouldn't be a huge financial burden on me to maintain that mortgage.... once I put the €135k in to it.

If I sell the property then how much will it cost me to get a pension fund from an AVC only that is equal to what the property could have added when I reach 70 plus any additional AVC contributions I could be making after I put in the €135k so the property could pay its own way?

It's certainly possible that I'm deluding myself but would appreciate insights about where I am wrong there? I think I need to get advice also from an actuary.

Charlie
 
Last edited:
Sorry if my third comment was blunt, but you’re letting this property dictate your investment decisions, to the point where you have 135k earning nothing for you, not even a deposit rate, just in case the property has a problem.

Looking at the numbers, 1600 a month against a 320k property is a 5% yield. Why would you buy 135k worth of a 5% yielding product with limited growth prospects due to a) existing elevated property prices, and b) rent controls? The alternative is buying 135k worth of bonds/equities via AVC for the knockdown price of 81k (assuming you are paying 40% tax and can max out contributions at a reasonable rate over a few years). Your AVC assets should conservatively yield at least the equivalent 5% after inflation, over the long term, without the risks/headaches involved in managing a property. That’s a no-brainer.

Having done that, what options do you have for your property? Take your 70k profit now and reinvest it, or keep ploughing money into propping up the investment by supplementing the mortgage?
 
Thinking forward to when the property is mortgage-free, it would generate an income of 1600x10 months (2 months for maint, etc) so €16,000 a year, in todays €’s. At 4% withdrawal from an ARF, you’d need a pot worth 400k.

I think if you can push that 135k plus the amounts you’re supplementing the mortgage by into a pension then you’ll easily have that pot and then some. But tbh, I don’t know what amounts you can avc due to not knowing your salary level.
 
Hi both,

This is really helpful thank you. Not at all, send me tough love but the more detail you can offer the better.

Thinking forward to when the property is mortgage-free, it would generate an income of 1600x10 months (2 months for maint, etc) so €16,000 a year, in todays €’s. At 4% withdrawal from an ARF, you’d need a pot worth 400k.
Click to expand...

So in this case I need 400k in an AVC just to replace what the property would offer.
But I feel like I would also need maybe the same again, at least, to have a decent pension overall?
I'm earning about 85k now and by the old-fashioned measure it would be great to have half my final salary when I retire.

Maybe I have a route to getting 400k in to an AVC quickly...
Put all my cash savings in (150k).
Sell the place for around 70k (I would not have to pay any capital gains).
Would 220k (150k + 70k) loaded in to an AVC become 370k by maxing out the tax benefits?
Then I just continue maxing out my contributions to the AVC and maybe start something like a Vanguard mutual fund as well?

Questions:
1. What is the max you are allowed to put in an AVC and I think there might be a percentage charge each time you load in? Plus an annual fee to administer the AVC? Then there is a max you can put in the AVC anyway I believe?

2. About my capital gains tax situation. If the place is worth 320k today and I bought for 450k by selling am I walking away from lots of capital gains tax, by selling, that I could have used to get tax free gains from the property going up in value (until it reaches 450K) or could I keep that CGT and offset it against something else in the future? Like selling my home house if I wanted to move or buy a different place in the future?

3. Another argument in favour of keeping the property is the wisdom of having a broader pension portfolio. Yes the property market is probably over-valued now but the stock market is also due a correction in my opinion. Equally, in 20 yrs time both of these will likely be far higher than they are today but there is the risk of a stock market correction right when I retire wiping out my pension gains. That risk would be reduced by having some of the pension in property right?

4. That other property is in Dublin, maybe it would be useful to have that as an option if the opportunity ever arose to move there for work. I could lock in affordable housing costs and switch to renting my current home out instead.

5. This is an old thread now but the advice in there was to NOT put any money in to an AVC and instead to pay off a mortgage so it's interesting that you are telling me the opposite. Of course my situation is probably different.

I am definitely over-thinking this but it is a big life changing decision which would commit me to a path and sever other options. No, you are both swaying me toward selling but I need to know more about the exact numbers of how much I can put in to an AVC and what the charges are. If I plan on keeping the property until I die then I agree it won't ever be a substantial source of income going forward, even when paid off, and it will always be costing me.

It would give me some peace of mind to know:
Can I use an AVC to get me to a pension, when combined with my HSE pension, that will be half my final salary? I guess that is an outcome that would be an OK outcome.

I'm happy to continue talking to someone in the real world for a fee if preferred. Otherwise any advice on here is really appreciated. I'm sure there are others in the same boat as myself.

Cheers,

Charlie
 
If (and it's not an insignificant if, btw) you can sink 220k into a pension, you get 40% (88k) back in tax. You've now got 308k before growth to build an income from, and probably with some smart tax planning you can offset your property CGT losses against any non-pension CGT gains in the meantime.

In terms of diversification, you're comparing your one property in Dublin with the entirety of global equity markets - just by being in an equity index tracker, you are far more diversified than your one property. But you can also get bonds, property, commodities exposure through your pension if you so wish.

AVC contribution limits by age
 
Thanks Conor. My next move will be to talk to those who arrange AVCs and get all the details.

Can anyone recommend a financial advisor? I would like to find someone really good, patient and interested in doing a deep dive with me about my finances. As you can see I am motivated and somewhat informed but I don't feel confident doing this alone.

Could PM me if posting here is not allowed?

Charlie
 
Seems a few reputable guys on here to choose from. Steven Barrett, GSheehy, Marc Westlake at Everlake, and then there’s LA Brokers at the more self-serve/discount end of the spectrum.
 
Age:
48
Spouse’s/Partner's age:
N/A

Annual gross income from employment or profession:
€84,000

Type of employment:
Public sector - HSE

Expenditure pattern:
I spend as little as possible.
Saving about €3500/month.

Rough estimate of value of home
€230,000
Mortgage balance remaining on home
€56,000
Mortgage provider:
BOI
Type of mortgage: Fixed, 2.95%
Monthly repayment: €440/month

Other borrowings – car loans/personal loans etc
None

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

Savings and investments:
€150,000 savings sitting in current account.

Do you have a pension scheme?
Joined HSE defined benefit Single Public Service pension scheme in 2022.
Total earned benefit as of 31/12/2023 is €1,120 per annum.
Not in any other pension scheme such as AVCs.

Do you own any investment or other property?
Have a rental property.

Rough estimate of value of Dublin Investment Property
€320,000
Purchase Price
€450,000
Mortgage balance remaining on property
€250,000
Mortgage provider:
BOI
Type of mortgage: Tracker, ECB + 1.25%, Currently: 4.90%
Monthly mortgage repayment: €1800/month
Property is generating €1600 gross rent per month. Is in a rent controlled area.

Ages of children:
None.

Life insurance:
Only for mortgage protection on both properties.

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

I did ask on this forum already a few months ago a more specific question about AVCs but now I am hoping for broader insights.
Am 48 but have only been paying in to a pension for 2.5 yrs.
I want to make the best pension and investment choices now and try to make up for lost time.
I am planning on working until I am 70 when I will have made 24 years of HSE pension contributions.
I don't know what my HSE pension will be worth when I am 70, perhaps €18k/yr in today's money? though it will adjust for inflation.
I am emotionally invested in keeping the rental property and struggle with contemplating selling it which is clouding my decision making.
It can contribute to a pension by building equity over time and also give me the option to move back to Dublin.
It has practical and emotional value to me.
In time it could also be an addition to a pension fund but for now it is not paying its own way and is costing me money.

Here are options I am considering:

Option 1:
Use 100k-150k of savings to pay down the rental property mortgage.
If I did then that property would pay its own way entirely from rental income and give me peace of mind.
In time I could potentially sell it to part fund a pension and in the meantime it could provide an option for me to relocate to Dublin.
With my income I can also start and afford to max out AVCs.
Use remaining income to start monthly contributions to other investments such as an ETF.

Option 2:
Sell the rental property.
Max out AVCs from my salary.
Put all my savings in to an ETF and continue to contribute to this each month with income left over after maxing out AVCs.
But eight-yearly deemed disposal at 41% is a dis-incentive to starting an ETF.
Alternatively Berkshire shares with 33% CGT.
But the stockmarket is over-valued and we could be in for a lost decade so again a reason to keep the investment property?

Option 3:
Rental property mortgage interest is tax deductable and no CGT on it until it gets back to €450k. Interest rates are falling.
Continue to fund the rent over mortgage shortfall myself (amounting to several thousand a year).
Start and max out AVCs each month from salary.
Put my savings in to some type of investments such as ETF/Berkshire and contribute to this each month with income left over after maxing out AVCs and shouldering the rental property mortgage shortfall (likely far less income will be left over in this case compared with Option 2).

Gut feeling:
I am pretty sure financially it makes less sense to keep the rental property compared with choosing other investment options but no investment is guaranteed and I really think equities are currently over-valued.
Property has value in diversifying an investment portfolio if I sell it and put everything I can in the market is that safer?
I have played with compounding interest calculators. Starting something like an ETF from zero will be less likely to grow to a usable pension income for me by age 70 compared with starting from €150k!

I don't know what to do, hoping for some advice please?

Thanks.
 
Last edited:
CharlieMac said:
Property has value in diversifying an investment portfolio if I sell it and put everything I can in the market is that safer?
Click to expand...

You’re trying to convince yourself with statements like this but a) you have no other investments to diversify away from, and b) your situation is the poster child of why property investment is not a good diversifier.

Almost certainly, even at these lofty valuations, a passive fund of world equities over a 22-year timeframe (48 to 70 years of age) is safer than your one under-water, rent-controlled property. Better yet if you can dollar-cost average into them over a “lost decade” or so instead of sinking your cash into this property investment.
 
CharlieMac said:
I don't know what my HSE pension will be worth when I am 70, perhaps €18k/yr in today's money? though it will adjust for inflation
Click to expand...
Based on your current salary you are in the correct ballpark with that estimate for your occupational pension. You are probably on an incremental scale which will adjust this a little bit. As will any promotion - provided it comes relatively early in your career.
Also there is whatever you get from the State Pension (PRSI). Based on your projected HSE service that is a minimum of 24/40 of the maximum rate but it could be up to the full rate if you have sufficient previous PRSI.
 
Hello,

I'd put 90% of the savings against the debt on the residential investment property, immediately (leave the remaining 10% as a rainy day fund).

I'd then go and speak with a property agent in January, and get the residential investment property on the market, and sell it in H1, 2025.

You've no real worry here, with regards to potential loss of employment.

You've no visible reason to need to retain €150k in cash. €1.5k cash is sufficient, in the short term, and you'll grow that over time.

Forget relocating back to Dublin, even if work does change in the future, you won't need to be in Dublin, 7-days a week (in fact, it'll highly likely to be only 1-2 nights a week, with flexible working etc.)

Stop chasing losses, with regards to the investment property - it's costing you money, on a monthly basis, and there's no guarantee that it'll ever increase in value, at least not over the next 5-7 years, when you consider where residential property values currently sit, and the likelihood that the next Irish Goverment will build more houses (directly, or indirectly).

Bump up the pension contributions from early next year, using AVCs, and let the small remaining homeloan continue to paydown over the coming years (you can reconsider speeding up repayments in future years, if rates go up).
 
@ClubMan
Thanks for that link, yes it was very useful. I ended up reading dozens of posts on AAM about keeping a rental property vs ETFs!

@conor_mc
But I'm thinking I don't have to choose between property OR equities. I think I could afford to have both don't you think?
For instance, let's say I put €150k in to the rental mortgage. Now the mortgage is €730/month (4.9% on €100k over 17 yrs). At that point the rent will fund the apartment and anything due in the annual tax return as it appreciates in value until I am 70. I won't be liable for CGT until it gets to €450k. So couldn't I reasonably expect €450k to add to my pension fund at 70 and in the meantime maybe that property was costing me little to nothing to realise those gains? What's risky about that? I have a letting agent and in 15 yrs have never had problems with tenants. I know landlords have horror stories and indeed the rental property is a Celtic Tiger era apartment and I don't know what surprise costs could be headed my way so yes those are risks.

You say I have "no other investments to diversify away from" but I have the income to afford to:
1. Pay in to occupational pension scheme.
2. Maximise AVCs.
3. Hold on to the rental property and get €450k from it when I retire at 70.
4. Also have something left over (albeit small) from monthly income to add to a separate ETF type investment and contribute to that over the next 20+ years.
So I don't have those investments now but I think I can start them and need help deciding what mix to choose.

I wonder why are you so dismissive about the rental property? I suppose you are looking at this purely about how to maximise my investment returns? Whereas I am complicating things by wanting the option of keeping the rental property potentially for my own use in retirement or to move there altogether in which case I would then rent out my "home" house instead. I have to read up what "dollar cost averaging over a lost decade means".

@Ruffian
Cheers for that. Unfortunately I am in the Single Scheme so cannot buy back DB pension years. I won't have built up the full 40yrs of state pension either, another reason I plan on deferring taking it until I'm 70.

@MrEarl
I suppose you mean to put the money into the rental mortgage to reduce related costs until I sell it?
Do you really not see value in me having both the rental property AS WELL AS maxing out my AVCs?

I might be very wrong, and fated to make another huge financial mistake as I did in 2006, but I think the negativity around rental properties is exaggerated. I feel like my rental is very likely to appreciate to €450k over my time horizon to age 70. Yes I have incurred massive opportunity cost getting to where I am now but taking now as the starting point: by "investing" €150k in to it now I can "buy" a €450k tax free return in 22 years at little additional cost in the meantime. If I sell the property now I will get a paltry €50k-€60k "profit" after 18 years and then I'm out and will never get back to having the option of accommodation in Dublin at a price I could afford if the need ever arose in the future. I will also forgo the tax free €450k at age 70. Maybe I'm lacking ambition to see €450k as a good-enough lump sum to add to my pension when I am 70 when there are easier ways to make even more?

I live a frugal and basic life I am not trying to fund anything beyond a modest life for myself but of course I want to be able to take care of myself in retirement and it might not be cheap managing that solo with various life costs that could arise in the future. If I could retire before 70 of course that would also be nice to have that option.

Thank you for your insights, any others are very welcome.
 
Last edited:
You must log in or register to reply here.
Back
Top