Thinking of buying second home - whats the chances?

B

bigladd

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Im thinking of buying a second home to move closer to my wife's family and more facilities for the kids etc than the village we are in now.

We have a mortgage at the moment, 8 years old and while once in seriously great equity ( house once worth 500k plus ) we are now at breakeven with our mortgage € 247k owed versus approx 250k value. Also because we are so far into our mortgage, we are now over the interest heavy hump and clearing some of the original capital down with our payment each month.

While obviously we could look to sell house 1, but its on a .8 ecb tracker and as i said we are clearing capital from the mortgage now so i see it as a good long term investment. Inflation alone will make the house good value in the long term. Also its a large house in an ideal location for schools and amenities etc but still very private so renting should be good. I'd like to avoid selling this if i could.

What i want to know is how likely we are to get a second mortgage, my wife cares for our sick son so is in receipt of carers allowance etc ( 10k per year total ), i make about 80k a year in a permanent and long standing job, never missed a loan and up to date with everything etc. and currently debt servicing is 45% of our total take home- (I know, we are one of the lucky ones !!), 3 kids all at school, we plan to clear 15k of personal debt, freeing up 700 euro per month and are looking to mortgage 210k against a 270k house. we are also young ( 31 yrs old ) in the end with the extra rental income from our current house, we would be still at roughly 45% debt service from our incomes.

what should i look out for and what should i be telling the bank?


Thanks
 
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Normally -even today - you should get a mortgage if you are putting 60k deposit on a 270 house considering your salary (blimey -80k at 31 yrs !).

But your present house -in which you have no real equity- represents a risk to the bank. A few nonpayments of rents ,combined with the still falling value of property means that you actually are a riskier proposal than if you had no other property.

Anyway, rent from houses does not represent great return on the value- even at todays low value ,especially when someone is losing 50% of the nett rental income from tax.

I've yet to see many houses at value of 250k produce more than 13-14k gross.Deduct mngt fees (you surely won't want to look afetr the tenants yourself), insurance,property charges,NPPR,-look at other threads for details of costs of renting - and you may be looking at 10 k maximum.

With your top rate of income tax that means about 5k nett post-tax rental income
-assuming that you do get rent every month, that nothing expensive goes wrong, that you never spend a penny refurbishing, that interest rates won't rise, that property charges won't increase.
There's a possibility you'll make nothing renting out your home.

You may be right that house prices will increase.(From my selfish point of view I hope so) But nobody believes by much in the next few years .

I'm only stating what any lender will -or should -tell you.
 
Thanks Oldnick, I appreciate the advice.

The risk side of the current property is something that had occured to me, but surely we are all taking a risk when we buy anything whether it be a car, TV, house, insurance etc, there is always a chance that the expected result wont materialise. On the basis that I've owned property since i was 21 and had in excess of 10 car loans, personal loans, credit cards etc and never missed a payment and in most cases cleared the loans early, surely personally, i should be seen as some one who can handle my own finances?

On the current house, the rents locally are roughly 850 per month so i had assumed with NPPR, PRTB, extra insurance and other tax write offs, i would be subsidising the mortgage by 300 per month up to 450 if rates increase by a couple of per centage points. I dont really mind that as i see it as inversting to have an asset at the end.

on my point re keeping house 1, my point is that, assuming there is no value increase, in fact i feel there is still scope for the market to depress more, we are still in a position where we will be paying off the loan and in 27 years,we should be looking at a very rentable property with little or no over heads, it will be a nice top up to my pension in my opinion. would you not agree?

I know the buzz word is reduce debt at the moment but in the long term, having this house and having it pay for some of its own cost ( remember, we bought outside the boom years so arent losing money on the original price at the moment ) means that i am effectively getting a refund of half the value of my property over the 27 years. and at the other end, I've got a property worth a decent wedge that has no outstanding debt on it. There are no quick ways to get financially secure - as we all know now !!- but property , if its the right one still makes long term sense to me, would you not agree?
 
I gather Ulster Bank allow owners in positive equity to transfer their trackers. This may be followed by other banks. If you do keep the present home and buy a new one then you will be paying quite a high variable or fixed rate on the new loan compared to your present tracker.

A clever accountant will tell me if I'm wrong in making the following claim.....

By paying perhaps 3% more on the new mortgage instead of transferring the tracker you will be ,on 250k, paying an extra 7.500 p.a. That is, the "opportunity cost" of not transferring your tracker will be 7.500 p.a. You must calculate that in your rental income figures.

Yes, the interest portion will slowly diminish on both houses but until it disappears you will have paid an extra 50k interest (it depends on how much/how quickly you pay off the loan).
To me, that 50.000 euros is an extra cost of having two homes over and above other costings. At the moment you have an almost free loan; -trackers were an amazing gift, and I've always borrowed on trackers. But they've gone now.

If there is no way your bank will allow you to transfer your tracker then, fine, go ahead with the inevstment. But if youcan transfer the tracker to your new home then you must calculate the real interest rate cost on your old,now rental, home at 5% or whatever is the loan interest cost.

There are, for homeowners and for investment owners , loan interest reliefs. I may be alone in believing over the forthcoming tough budget years ahead these will disappear or greatly diminish so i didn't bring them into the calculation.
I'm not alone in believing that there'll be higher property charges and higher intyerest rates (which the Germans are increasingly pushing for)

Seperate from these risks is the attitudinal change regarding property.
People, especially in ireland & uk, long believed that property will always increase in price- at least in the long-run and in inflationery terms. Today people know this ain't true. the Germans have known it for some decades. This new realisation will stymie the growth in proeprty prices, regardless of economic or demographic factors.

I know you'll probably still go ahead. Good luck.

But one last word from an old man...... As you have three kids, one of whom is not well, and you'll be paying for two houses it would be wise to have a liquid emergency-fund to cover well, an emergency.
 
I don't see your thinking on why your current home is a good long term investment. Are you making the assumption that over the next 10 years it will go up to it's original purchase price (a lot of people are a bit delusional about that based on my reading of the situation).

You are on mostly capital repayments so effectively most of the rent will be taxable at your higher rate of tax. NPPR + household charge + universal social charge + only 75% interest relief would want to be calculated to see if this makes sense. The government wanted to reduce the 75% last budget so be warned.

Loving the house because it is your home is another falsity. Sometimes one has to let it go.

Being a landlord is not for the faint hearted. You might regret the day you ever go down this route, especially if the house is far away from where you plan on living.

Do out all the figures and post on here and maybe others will have other ideas.
 
we are now over the interest heavy hump and clearing some of the original capital down with our payment each month.
Click to expand...

Sorry to go off topic and ask a silly question, but how does that work?
 
Neither silly nor off topic!

Can the op explain what he means by this statement "interest hump"?
 
What he probably means is that in normal repayment mortgages when you make your monthly repayments in the first few years most of what you pay back is interest and very little capital. But after a certain number of years you reach a point where you are paying more capital than interest and eventually mostly capital.
 
Thanks bronte,

I think this (interest/capital break point) is an irrelevancy and should have no bearing on the ops decision to buy a second house or not.

aj
 
Maybe AJ Bigladd might come back on his thinking on this as I too cannot see it.
 
I think if most of your repayment is capital, rises in interest rates don't have a significant impact on your monthly repayments. If interest rates go up, only the proportion of your monthly repayment that is interest is affected.

At least that's how I understand it.
 
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