Moneymakeover Should we pay off a tracker mortgage on a buy to let?

Me (50) and Husband (58)
Three kids - 15, 13 and 10
Combined salary - €300k per annum
DC pension funds - me €1.3m and spouse €1m
No mortgage on family home - worth circa €1m
Rental property - bought in 2007 for €475k, currently worth about €400k. Outstanding mortgage of €260k. Tracker rate so monthly repayment is €1,900. (decreasing all the time thankfully but not back to what it used to be (margin is 2.25%)). Rental income is €2,050 pm. Was PPR for first three years of ownership. Rented out since.

Have cash on deposit of €240k. Have sufficient in current account for 3-6 months.

We have maxed pension contributions for 2024 and will do same for 2025.

Does it make sense to pay off the mortgage on the rental property? I am torn between investing outside of pension (which is maxed out) or paying off the mortgage. The benefit of the mortgage is the reduction in income tax on the rental income so the net interest cost is effectively half.

I would appreciate any thoughts. Thanks in advance.

So, you are paying 2.4% + 2.25% = 4.65%

Let's say that the ECB rate falls to 1.4%, you will be paying 3.65%

You are getting tax relief on this, so the net rate after tax relief will be about 2%.

So the question is whether you can get a risk-free rate of return after tax of 2%?

You probably would get 2% over the long term from a basket of equities, but it would not be risk-free.

It's very close. On balance, I think you should probably not repay the mortgage and invest the money in equities.

• You will have access to cash if you ever need it - e.g. to take a career break.
• Even if the stock market crashes, you can handle the risk comfortably.

A more fundamental question is whether you should continue to hold the buy to let.

If you have a very good tenant paying a good rent and it's no hassle, by all means, continue to hold onto it.

But if the tenant leaves, then I think you should sell it. With your level of wealth, you don't need the potential hassle of being a landlord.

If it's potentially useful for the kids in college, then maybe hang onto it.

But don't hang onto it because you would get less than you paid for it if you sold it. You can use the CGT losses against future gains.

Ah, that is another, albeit minor, reason for investing rather than paying off your mortgage. With an unrealised €70k CGT loss on the property, you might be able to set it off against gains on any equity investments.

Thanks Brendan

Yes I had hoped to hold it to help the kids move out of home when they go to college/ get their first job. It is fairly centrally located in Dublin.

We had run the numbers at the end of 2020 when the long term tenants moved out and it made sense at that point to hold it.

We have been actively saving in pension/ paying down PPR mortgage for years and are now at the next stage of trying to determine best way forward.

I know that we are in a very fortunate position. I also know that my children are becoming increasingly expensive during teenage years! In some ways it is easier to put money out of reach for the longterm or it will be spent easier on the day to day right now.

Thanks

@Kerrygrrrl

In your particular circumstances, I think it makes sense to hold onto the rental and pay down the associated mortgage.

It’s producing a decent yield and any capital appreciation up to €475k would be tax-free, with a partial shield above that figure as your former PPR.

Besides, you don’t really have an obvious home for the equity.

I wouldn’t personally invest outside a pension while carrying debt - our tax regime skews the risk/reward ratio too much.

So, pay down the mortgage on the rental and keep maxing out your pension contributions.

I would be inclined to keep a substantial allocation to global equities within your pensions and any after-tax savings on deposit.

You are in excellent financial shape BTW and can look forward to a very comfortable retirement.

Thank you Sarenco. Apologies for delay in acknowledging response!

When you say "substantial allocation" to global equities -mine is 75% invested in risk 6 (Indexed Global Equity Fund Series 2) and 25% invested in risk 5 (Consensus) funds. Other half is invested in 63% in Irish life navigate high growth fund and 37% Irish life navigate medium growth fund. Would this agree to your "substantial allocation"?

You have no money worries. You could have a big worry in a few years if/when your kids are in Dublin for college/work and need a place to live. You have a ready made solution.

I presume you live outside of Dublin. So do we. We bought in Dublin when our eldest went there for college. His siblings naturally followed him knowing there was a ready made solution. 10 years later: happy kids, non-stressed parents. Isn’t that what it’s all about ?. Your finances are already in rude health.

@Kerrygrrrl

Those allocations look broadly fine to me for your ages.

I guess the point I was trying to make is that if you pay off the mortgage on the rental property, you will inevitably start building cash savings again. That’s fine but maintain a moderately assertive position in your pensions for balance.

It’s important to look at your overall position and not focus on any individual account in isolation.

Thank you Sarenco! Have a good weekend.