Start paying off BTL house or load pension

M

Middleoftheroad

Registered User
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4
Age:
50
Spouse’s/Partner's age:
43

Annual gross income from employment or profession:
E53,000 due increase 7k
Annual gross income spouse:
E36,000

Usually max out rent-a-room each year of 10-14k , we take foreign interns but obviously not at present but have done it for many years, an hopefully a source of income in the future too.


Type of employment:
Both private sector employees

Expenditure pattern:
We are both generally 'savers'

Rough estimate of value of home
E550,000
Mortgage on home
E430,000 - we've been paying 1980 pm - 20yrs left
Mortgage provider:
Ics
Type of mortgage: Tracker, interest only, fixed rate
Tracker +1%
Interest rate
1% above Euro rate.

Other borrowings – car loans/personal loans etc
no

Do you pay off your full credit card balance each month?
yes- don't use.

Savings and investments:
E10,000 savings.
Rolling vesting stock/bonuses of 6k from 2022 onwards tax free
Do you have a pension scheme?
Yes, I pay approx. E140pm into personal pension Employer pays 8% - fund only 30k at present
Partner no pension.

Do you own any investment or other property?
Yes 4 bed semi - Clonee D15
Has been on interest only for 10yrs was originally my home before buying new home and started to let out. - Will switch to full payments on feb 1st 2021
currently paying 600pm
principle = 308k
rate 2.25% tracker
Rent 1730 Euro pm - due to increase 4% sept but with freeze i'm not sure when or if it will happen. Good 6+ year tenants.
New payment will be 2850 Euro for 10 years.

Ages of children:
2 kids 15 & 12

Life insurance:
Yes.

What specific question do you have or what issues are of concern to you?
I go through our finances and realise that we will have spare cash every month going forward from 2021. For now I would feel comfortable funneling about E1200 of it into either

Not sure which scenario is best ?
a) My pension fund - sell BTL and funnel any equity into pension fun through AVC's( maybe 20k ) and max out monthly contributions to 22% + 8% employer
or
b) Leave pension contributions as is 4% me 8% employer and subsidise full mortgage on BTL by circa 1200 pm ie rent = 1730 + 1200 (my contribution) to make full payment - there will then also be tax on rental income.

b) overpaying our home mortgage each month by 1200 to reduce term and sell BTL

Would like to retire at 60 if possible that's why I was thinking the BTL would offer a stable income if mortgage free in 10 yrs

Any advice please ?

Thanks.
 
At age 50 you're allowed to put up to 30% gross pay tax free into pension

You're putting about 3% (140x12 /53000)

So yes i think increase your pension contributions

You say you will have spare cash in 2021

But you also say your btl repayment will increase in 2021 from 600 to 2820
 
Hi thanks for your reply,
Yes I am trying to decide is it better to load my pension over next 10 years and sell the BTL or to not load my pension and add that money to rental income I receive to pay off BTL house over next 10 years
Thanks.
 
Middleoftheroad said:
Yes 4 bed semi - Clonee D15
Has been on interest only for 10yrs was originally my home before buying new home and started to let out. - Will switch to full payments on feb 1st 2021
currently paying 600pm
principle = 308k
rate 2.25% tracker
Rent 1730 Euro pm - due to increase 4% sept but with freeze i'm not sure when or if it will happen.
Click to expand...
How much is the BTL worth? The amount of equity you've got should influence any advice you get.
 
In your shoes, I would sell the rental and start maximising your tax-relieved pension contributions - for 2019 and going forward.

To be honest, I think you need to be realistic about the likelihood that you will be in a position to retire in 10 years' time. You currently have a net worth of around €160k and you still have two kids to get through college, etc.

I think a more achievable goal might be to fund a comfortable retirement - albeit from 65.
 
Rental income€21,000
Less interest €308k@2.25%€ 6,000
Less other expenses€5,000
Profit before tax€10,000
Tax€5,000
Net profit after tax€5,000

Equity in property: €340k - €308k = €30k

This is a very profitable investment with good tenants.
I am guessing that you bought it for more than its current value, therefore any increase in value up to the price you paid for it will be free of CGT, so it's a very tax efficient investment.

Selling it will release only €30k now, so I don't think that is the right idea.

But I agree with the principle of funding your pension instead of directly investing in property. It's just now is not the time to do it.

Hold onto the property for another few years and you will be building up a lot equity and making a very handsome net profit.

Let's look at the probable situation after 5 years.
Assume house prices have remained the same.
Your mortgage will be down to about €170k, so you will have €170k equity in the property.
If you sell it then and invest in your pension.

If you are on the same combined salary, you will be able to put about €30k a year into the pension. That will be used up in 10 years or so when you add in contributions from your current income.

Even if you don't use up your maximum amount, your spouse can use theirs for another 7 years or so if they work until 65.

If you sell it now and realise €30k equity, you will have only one or two years of maximum contributions.

Brendan
 
I am also a little bit worried about your cash flow.

You have a €430k mortgage on your home and two children aged 15 and 12.

As it's a cheap tracker, if all goes well, you should be able to manage.

But if there is a recession or loss of a job or a non-paying tenant in your investment property, you will be glad to have access to the cash through selling the property rather than having it untouchable in a pension fund.

Brendan
 
Brendan Burgess said:
This is a very profitable investment with good tenants.

Selling it will release only €30k now, so I don't think that is the right idea.
Click to expand...
I was thinking the same, but the cashflow is a major barrier. Repayment is increasing by 2,250 per month. That's an extra 27k a year to come up with compared to how they've been living. It looks difficult based on current salary / savings.
 
RedOnion said:
I was thinking the same, but the cashflow is a major barrier. Repayment is increasing by 2,250 per month. That's an extra 27k a year to come up with compared to how they've been living. It looks difficult based on current salary / savings.
Click to expand...

Would the OP be in a position to refinance on another interest only deal? The return on equity is great.
 
Itchy said:
Would the OP be in a position to refinance on another interest only deal? The return on equity is great.
Click to expand...
They're currently on a 2.25% tracker. Refinance interest only at c.5%, and there's not much return left. Plus they'd need to put in 100k cash to bring the LTV to a level that anyone would refinance.
 
RedOnion said:
but the cashflow is a major barrier.
Click to expand...

But the OP says that they are comfortable with the increased cash flow from next year?

Middleoftheroad said:
I go through our finances and realise that we will have spare cash every month going forward from 2021. For now I would feel comfortable funneling about E1200 of it into either
Click to expand...

I took that to mean that they had €1,200 left over after paying the higher repayments.

If they can't meet the higher repayments, then there would be no issue.


Brendan
 
Brendan Burgess said:
But the OP says that they are comfortable with the increased cash flow from next year
Click to expand...
Yes, but they must have another income source they haven't mentioned!..
I think the 1,200 is before the capital repayment starts on the BTL. I can't make much sense of it, so I might have completely misinterpreted the post.
 
I thought the point was the OP could afford to either commence principal repayments or maximise pension contributions.

Meeting the principal repayments looks very challenging to me and if it limits the OP's ability to maximise pension contributions then it looks clear to me that selling the rental is the better option.
 
Hi Sarenco.

I agree with you in principle, but not in timing.

If they sell it now, it will give them only a couple of years of maximum pension contributions.

Whereas if they keep it for 5 years he keeps a very profitable investment and will still not use up their contribution limits.

Brendan
 
Brendan Burgess said:
If they sell it now, it will give them only a couple of years of maximum pension contributions.
Click to expand...
Yes but it would also improve cash flow so that contributions could be maximised out of income going forward.

Retaining the rental will squeeze the household's cash flow (once the principal repayments kick in) to a very significant degree. Is it worth it to make a €5k after-tax profit every year? I don't think so.

Add in the fact that they couldn't afford to maximise tax-relieved pension contributions for a further 5 years (bear in mind that the OP is 50 and only has a pension pot of €30k) and it looks clear to me that selling the rental now is the right move.
 
OK
Rent received after expenses: €15k
Less tax: €5k
Less repayments: €34k
Cash flow "cost" of keeping property: €24k

So they can make the €30k contribution in the year they sell the property
And €24k a year thereafter.

Paying capital off the mortgage now is really deferring the pension contribution for a few years.

But they will have an additional €50k to contribute after 5 years of profits.

I think it's still right to hold onto the property.

Brendan
 
Hi Brendan

By retaining the rental for 5 years the OP would have to skip making €103k in pension contributions (€13k for 2019 (25% of €53k) and €18k (30% of €60k) for the next 5 years).

That's €103k relieved @40%, that can subsequently be drawn down effectively tax free. Net, after-tax return of €41k (ignoring any potential investment growth within the pension).

Keeping the rental would produce a net, after-tax return of €25k (€5k pa for five years) and would create a greater cash-flow squeeze.

Your argument might make sense if there wasn't an annual limit on tax-relieved pension contributions.
 
Last edited:
Sarenco said:
Keeping the rental would produce a net, after-tax return of €25k (€5k pa for five years) and would create a greater cash-flow squeeze.
Click to expand...

Yes, but they then contribute it to their pension fund? And they then have more money to contribute so they would be better off.

Brendan
 
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