Case study Stuck in Negative Equity Apartment - too small for our needs.

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regicarus

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6
Personal and income details
Net (i.e. after tax) Income: - Approx. EUR3,200 p.m.
Net income partner/spouse: Approx. EUR3,800 p.m.

Income history:
Children: 1 - 9 month old - starting in creche soon
Amount of child benefit received: Actually not sure - I never see it!

Amount of Mortgage Interest Supplement received: EUR150 p.m.

Home loan: EUR368k
Lender: AIB
Amount outstanding: EUR329k
Value of home: EUR180k-200k
Interest rate: Fixed - approx. 5% (Fixed for 5 years in 2011)
Monthly repayment: EUR1,720 p.m.
Amount in arrears: None

Other loans and creditors - none

Other savings and investments

Approx. EUR45k in Joint Savings

Backstory

Partner (now wife) and I purchased a shoebox 2 bed apartment in South county Dublin in 2006 for EUR400k. Now fallen to under EUR200k - think some recent sales around EUR185k (shudder). No excuses - we drank the koolaid and bought without much serious thought - biggest financial mistake of our lives!

Older and only very slightly wiser, we're now married and have 1 small baby who will shortly be starting creche - adding another EUR600 p.m to our outgoings.

We're very keen to get out of the apartment and into a house - I don't see us raising the child in this apartment - it's just too small - and we're also thinking of the future when another child might come along.

I see a few scenarios:

1.) Rent apartment and move to bigger rental property - I don't think the numbers on this option would work at all? Especially losing TRS etc.

2.) Sell apartment - take the hit on the NE and convert the balance to a personal loan and rent an alternative more suitable property - the wife spoke to the bank the other day and inferred that "lots" of people were doing this at the moment.

3.) NE Mortgage - this one might be possible according to the bank (after much poking) but it scares the hell out of me.

Right now, we feel pretty stuck and that none of the options above are all that great. I like the idea of no. 1 as we wouldn't yet to have to realise NE losses - but I think from a monthly cash flow perspective it won't work - we'd be lucky to get EUR900 - EUR1,000 per month for the apartment. Meaning we'd be at least EUR720 down (that's assuming we wouldn't lose TRS which we would, and not factoring in any other costs of managing a rental property).

No. 2 would mean realising losses now but at this point I do like the idea of getting out of debt asap (with the 120-140k Negative equity personal load) and hitting the reset button and saving for a new more appropriate property somewhere down the line when we can afford it.

No. 3 just feels like we'd be making a bad situation worse with a LOT more debt. Right now, the debt feels a bit like a vice around us so I don't want to tighten it further but wonder is it our only shot at getting a bigger mortgage in the short term.

One thing I do know is that we won't be just staying put, we'll be doing something to get into a bigger property sooner rather than later. Would love anyones advice.

Thanks
 
Hi Brendan,

Apologies for the delayed reply - thanks so much for creating your incredibly comprehensive and well explained key post! I'm going to study it this evening but you've already given me plenty of food for thought :)

I'll follow up asap.

Thanks.
 
Hi Brendan, All,

Been chewing this over since you posted the Key post - thanks again for that.

We're currently leaning towards a rent/rent scenario.

We can get approx. EUR1,000 per month for our 2 bed apartment.

We've spotted some houses nearby for approx. EUR1,400 per month.

We're now trying to understand the full financial impact should be decide to rent/rent and I'm a bit confused and hoping you can help.

Current mortgage - EUR1,720 per month (Fixed rate for another 3 yrs - not a tracker or SVR)
TRS - EUR150 per month

So I know the TRS will go if we rent out the apartment but wondering amount the Landlord tax reliefs will amount to.

e.g.

Mortgage: EUR1,720
Rent for house: EUR1,400
Gross Monthly Property Expenses: EUR3,120
Less Rent on apartment: EUR1,000

Net Monthly Property Expenses: EUR2,120

I know on top of this there is the PRTB EUR200 annual charge and the added expense/hassle of being both a tenant and a landlord - but I'm thinking that is the lesser evil of being stuck where we are now.

Does anyone know the approx. value of tax relief given my particulars?

To recap the mortgage details:
EUR329,000 remaining
Fixed rate (think it's approx. 5%)
Monthly repayments: EUR1,720

Assuming Rental income of EUR12,000 on this property - what would the relief amount to?

thanks.
 
Relief? You need to research the investmenty property key posts. There is no relief. Either you have taaxable profit or you have a loss, but no relief. If you are lucky enough to make a profit, even after paying tax on that, then thats your relief.... But not in yer scenario i think.
 
@regicarus

You reallly need to read more than one key post and consult revenue.ie for fuller information on tax on tental income before you decide to let the apt. (they have a really good guide) All the information you need is available here or elsewhere.

Your financials are way off the mark. Basicallly your mortgage consists of interest and captial-only the interest is a deductable expense, and at that only 75% of it is deductable. Capital repaid is not a deductable expense.

Crucially what you spend on renting another place is irrelevant-there is no relief on it. You would not be the first person to think it could be off set but there is no logic in that thinking.
 
You say you rushed your apartment buying decision, now you are doing exactly the same because you reckon you "need" a bigger property.

The simple fact is you don't, you want a bigger property.......its 2 beds we spent a no. of years in a 2 bed apt with a small child, now we have a four bed house where we want.

Yes it was tight, but it was what was required at the time.

Your child will not start school till at least 4, by then you could have 100k saved that's serious money.

I would say to you don't wreck your future for the here and now.......bite the bullet and in 3 or 4 years things should be much improved.
 
Trustmeh said:
Relief? You need to research the investmenty property key posts. There is no relief. Either you have taaxable profit or you have a loss, but no relief. If you are lucky enough to make a profit, even after paying tax on that, then thats your relief.... But not in yer scenario i think.
Click to expand...

bingo - that's what I was thinking - I had a read a few other threads suggesting otherwise so I was getting v. confused - thanks for clearing that up.
 
Luternau said:
@regicarus

You reallly need to read more than one key post and consult revenue.ie for fuller information on tax on tental income before you decide to let the apt. (they have a really good guide) All the information you need is available here or elsewhere.

Your financials are way off the mark. Basicallly your mortgage consists of interest and captial-only the interest is a deductable expense, and at that only 75% of it is deductable. Capital repaid is not a deductable expense.

Crucially what you spend on renting another place is irrelevant-there is no relief on it. You would not be the first person to think it could be off set but there is no logic in that thinking.
Click to expand...

thanks Luternau,
I'll be sure to checkout the rental guide on Revenue.ie
 
coolhandluke said:
You say you rushed your apartment buying decision, now you are doing exactly the same because you reckon you "need" a bigger property.

The simple fact is you don't, you want a bigger property.......its 2 beds we spent a no. of years in a 2 bed apt with a small child, now we have a four bed house where we want.

Yes it was tight, but it was what was required at the time.

Your child will not start school till at least 4, by then you could have 100k saved that's serious money.

I would say to you don't wreck your future for the here and now.......bite the bullet and in 3 or 4 years things should be much improved.
Click to expand...

thanks for the sobering advice coolhandluke. You do make some very valid points. It's not a decision I'm taking lightly - and thanks for your perspective.
 
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