Too young to be mortgage free?

[LLB123]

Personal details

Age: 45
Spouse’s/Partner's age: 44

Number and age of children: 1 @ 11yrs


Income and expenditure
Annual gross income from employment or profession: 90k
Annual gross income of spouse: 35k

Monthly take-home pay We pay ourselves expenses as required as opposed to a monthly salary, and save the remainder.

Type of employment: Both self-employed directors of limited company. 50k of my yearly income is tax exempt (this goes straight into savings)

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving

Summary of Assets and Liabilities
Family home worth approx €800k with a €250k mortgage
Savings of €800k cash
Defined Contribution pension fund: €100k x 2
Shares : 15k approx invested in stock market


Family home mortgage information
Lender Pepper Finance - Interest only tracker
Interest rate ECB .05
If fixed, what is the term remaining of the fixed rate? Principal redemption date 2029.


Other borrowings – car loans/personal loans etc None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?



Do you have a pension scheme? Yes, as above

Do you own any investment or other property? No, but we sold one at a 200k loss six years ago.

Other information which might be relevant

Life insurance: Mortgage protection insurance


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

Thanks to our interest-only tracker, we've been saving aggressively for the last few years while our daughter is in primary school, with the intention of a PPR trade up once she starts secondary in a bigger town (next year.)
Our current PPR is according to estate agents an easy sell, a modern architect designed house on a good-sized plot, close to all amenities in a nice little village, but no longer as good a fit for our needs - we don't want a long and busy school commute to the bigger town and we can well afford an upgrade.

Seems straightforward except we've been looking and the cost of houses in the town we want to move to are imo excessive given the quality - mostly tired 90s construction with postage stamp plots on top of neighbours and needing a lot of remedial work - not at all what you'd hope for on a 1.2mish budget. The area is very sought after, lively seaside location with a thriving cafe/restaurant culture, good transport links to Dublin etc.

With a recession/downturn apparently looming, and having previously bought another property at peak in 2007 (since sold at a loss - effectively wiping out our savings at the time) my wife is adamant that we should sell our current PPR while the market is good, and use the 500k or so equity plus savings to buy the new place anyway.
We're all in agreement about a move and don't want to stay put, but to my mind it's a spend of 500k for basically a lifestyle move, since the house would in reality be a trade-down compared to what we have now.

My feeling is that it might be better to keep our current PPR, (could rent for approx 3k or more pm, which we would ring fence and use to pay off the balance at redemption in 7 yrs time) and use our 800k savings and some borrowing to buy a smaller place in the town we want, and maybe add value as we go, without necessarily throwing the kitchen sink (equity and savings) into one house, potentially at the top market cost.

But she is worried about past experience, the ongoing erosion of landlord rights and potentially delinquent tenants, and feels while the market is still good, we should just take the equity and run. Leaving us in the area we want to be, mortgage free with a more expensive, albeit inferior, home to the one we have now.

I just get the sense that this is not a great use of our money - we're still a bit young to be mortgage free, especially when we can easily afford to pay a mortgage, pension etc, and given our income setup, could probably do with more assets anyway? My career is well-established and my field largely recession-proof.

To me, buying a smaller place in the better area still suits our needs, feels like a safer use of our money, and depending on the house, we could even add value over time.
The risk of course is that we're again buying at the top of the market, with regard to renting landlord rights may well be eroded even further, or indeed the value of both houses, but at least we won't have all our eggs in one basket? Though perhaps I am being too cavalier about the risks in general.

I'd be grateful for the benefit of the forum's thoughts on the situation as outlined. Thank you.

 

[DublinHead54]

Renting your PPR is returning a gross yield of 4.5% before taxes, costs and factoring in risks of a landlord. That does not look like a good investment on a standalone basis. As a landlord you are still exposed to the recession i.e. your tenant may lose their job and stop paying rent.

Selling PPR and buying new house mortgage free leaves you only exposed to property prices. However, if the new home is going to be your forever home or at least for the next x years, it reduces property price risk.

It looks like you don't need to sell your PPR to buy your next PPR. I would get mortgage approved for the 1.2m which gives you the flexibility to shop around and if you find something you can then sell your PPR, and clear the mortgage on new PPR.

 

[LLB123]

Renting your PPR is returning a gross yield of 4.5% before taxes, costs and factoring in risks of a landlord. That does not look like a good investment on a standalone basis. As a landlord you are still exposed to the recession i.e. your tenant may lose their job and stop paying rent.

OK thank you, I'm not entirely sure how to calculate yield, but my thinking was that on 260k balance remaining interest-only tracker with such low monthly repayment cost even at higher interest rates, (circa 250 pm) that the yield would be far higher?
And we'd still have a debt-free income producing asset after 7 years once mortgage redeemed/repaid.

 

[NoRegretsCoyote]

Renting your PPR is returning a gross yield of 4.5% before taxes, costs and factoring in risks of a landlord. That does not look like a good investment on a standalone basis. As a landlord you are still exposed to the recession i.e. your tenant may lose their job and stop paying rent.

I agree that is just not a very good gross yield. There is no way you would consider buying and letting a property like that if you didn't already own it (even with that kind of rate) and you should really discard this idea. As well as lower yield a large, standalone house is just going to need more repairs which will eat into your cost.

Defined Contribution pension fund: €100k x 2

To me this is the elephant in the room. You have a decent joint income and are very well housed, but your pension provision is really low for a couple of your age. You will be looking at a huge hit in income at retirement if you have a low six figure pension pot, two state pensions, and a very big house to maintain. To me you should be maxing out tax-relieved pension contributions, including by adjusting your salaries to make sure you both have enough headroom to take advantage of relief at the higher marginal rate.

a 1.2mish budget.

Even in the nicest seaside town on the east coast this is a very big house for a couple and one child, like a minimum of 4 bedrooms and 160sqm. Your typical neighbour of a similar age will have a household income and pension fund well in excess of yours. There is value in a large house of course if you both work from home but there is a risk that you are being "overhoused" with respect to your level of income. These big houses can soak up a lot of effort and expenditure over time too.

But she is worried about past experience, the ongoing erosion of landlord rights and potentially delinquent tenants, and feels while the market is still good, we should just take the equity and run. Leaving us in the area we want to be, mortgage free with a more expensive, albeit inferior, home to the one we have now.

Just ignore all this. No one has a unique insight. You should buy a property you are happy to live in for decades. The market value of your PPR will go up and down along the way and is irrelevant. What matters is whether you can afford it and are happy to live there.

Sorry if this is too candid. You have a good income and a lot of wealth for your age, but are looking at having too much house. Your wealth should be working for you much more than it is now. There are tax issues beyond my level of knowledge here (especially as your have a limited company and tax-exempt income). But in my view your goal for the next ten years should be to convert as much cash as possible into pension wealth over the next ten years, at a very minimum by maximising age-related contributions (25% for people in their 40s.)

 

[LLB123]

To me this is the elephant in the room. You have a decent joint income and are very well housed, but your pension provision is really low for a couple of your age. You will be looking at a huge hit in income at retirement if you have a low six figure pension pot, two state pensions, and a very big house to maintain. To me you should be maxing out tax-relieved pension contributions, including by adjusting your salaries to make sure you both have enough headroom to take advantage of relief at the higher marginal rate.


Sorry if this is too candid. You have a good income and a lot of wealth for your age, but are looking at having too much house. Your wealth should be working for you much more than it is now. There are tax issues beyond my level of knowledge here (especially as your have a limited company and tax-exempt income). But in my view your goal for the next ten years should be to convert as much cash as possible into pension wealth over the next ten years, at a very minimum by maximising age-related contributions (25% for people in their 40s.)

Agreed. We prioritised savings over all else for the last while, but also realised this was something we needed to address and actually only started the pension last year. According to our provider can only contribute a certain amount per year at the moment, but the plan is to accelerate once we've sorted our living arrangements.

 

[NoRegretsCoyote]

According to our provider can

I would really recommend talking to a tax specialist or accountant, and not just the person selling you the product.

The way your income is set up you may have more scope than you realise to tailor your income to take advantage of tax relief.

In your shoes there is even merit in making contributions that don't attract tax relief. Over 20-30 years the CGT-return on equities inside a pension is almost certainly going to be better than cash deposits after DIRT - you'd have a lot of cash even after an ambitious house purchase.

Shares : 15k approx invested in stock market

This is something you should review at some point. It most likely relates to an inheritance or previous employment. You should get as much of your equity wealth inside the pension wrapper as you can.

 

[Blackrock1]

Personal details

Age: 45
Spouse’s/Partner's age: 44

Number and age of children: 1 @ 11yrs


Income and expenditure
Annual gross income from employment or profession: 90k
Annual gross income of spouse: 35k

Monthly take-home pay We pay ourselves expenses as required as opposed to a monthly salary, and save the remainder.

Type of employment: Both self-employed directors of limited company. 50k of my yearly income is tax exempt (this goes straight into savings)

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving

Summary of Assets and Liabilities
Family home worth approx €800k with a €250k mortgage
Savings of €800k cash
Defined Contribution pension fund: €100k x 2
Shares : 15k approx invested in stock market


Family home mortgage information
Lender Pepper Finance - Interest only tracker
Interest rate ECB .05
If fixed, what is the term remaining of the fixed rate? Principal redemption date 2029.


Other borrowings – car loans/personal loans etc None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?



Do you have a pension scheme? Yes, as above

Do you own any investment or other property? No, but we sold one at a 200k loss six years ago.

Other information which might be relevant

Life insurance: Mortgage protection insurance


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

Thanks to our interest-only tracker, we've been saving aggressively for the last few years while our daughter is in primary school, with the intention of a PPR trade up once she starts secondary in a bigger town (next year.)
Our current PPR is according to estate agents an easy sell, a modern architect designed house on a good-sized plot, close to all amenities in a nice little village, but no longer as good a fit for our needs - we don't want a long and busy school commute to the bigger town and we can well afford an upgrade.

Seems straightforward except we've been looking and the cost of houses in the town we want to move to are imo excessive given the quality - mostly tired 90s construction with postage stamp plots on top of neighbours and needing a lot of remedial work - not at all what you'd hope for on a 1.2mish budget. The area is very sought after, lively seaside location with a thriving cafe/restaurant culture, good transport links to Dublin etc.

With a recession/downturn apparently looming, and having previously bought another property at peak in 2007 (since sold at a loss - effectively wiping out our savings at the time) my wife is adamant that we should sell our current PPR while the market is good, and use the 500k or so equity plus savings to buy the new place anyway.
We're all in agreement about a move and don't want to stay put, but to my mind it's a spend of 500k for basically a lifestyle move, since the house would in reality be a trade-down compared to what we have now.

My feeling is that it might be better to keep our current PPR, (could rent for approx 3k or more pm, which we would ring fence and use to pay off the balance at redemption in 7 yrs time) and use our 800k savings and some borrowing to buy a smaller place in the town we want, and maybe add value as we go, without necessarily throwing the kitchen sink (equity and savings) into one house, potentially at the top market cost.

But she is worried about past experience, the ongoing erosion of landlord rights and potentially delinquent tenants, and feels while the market is still good, we should just take the equity and run. Leaving us in the area we want to be, mortgage free with a more expensive, albeit inferior, home to the one we have now.

I just get the sense that this is not a great use of our money - we're still a bit young to be mortgage free, especially when we can easily afford to pay a mortgage, pension etc, and given our income setup, could probably do with more assets anyway? My career is well-established and my field largely recession-proof.

To me, buying a smaller place in the better area still suits our needs, feels like a safer use of our money, and depending on the house, we could even add value over time.
The risk of course is that we're again buying at the top of the market, with regard to renting landlord rights may well be eroded even further, or indeed the value of both houses, but at least we won't have all our eggs in one basket? Though perhaps I am being too cavalier about the risks in general.

I'd be grateful for the benefit of the forum's thoughts on the situation as outlined. Thank you.

if you are moving sell the house you have and buy the house you want imo, being mortgage free at your age would be great and you can start loading excess cash in to your pension.

im guessing its greystones from what you are saying (maybe im mistaken)

 

[mustang01]

Even in the nicest seaside town on the east coast this is a very big house for a couple and one child, like a minimum of 4 bedrooms and 160sqm. Your typical neighbour of a similar age will have a household income and pension fund well in excess of yours. There is value in a large house of course if you both work from home but there is a risk that you are being "overhoused" with respect to your level of income. These big houses can soak up a lot of effort and expenditure over time too.

Yeah but if he’s in a big nicer house now, nobody would realistically want to make do with a semi. Those prices sound crazy, Blackrock or Dalkey I’d say.

 

[LLB123]

Yeah but if he’s in a big nicer house now, nobody would realistically want to make do with a semi. Those prices sound crazy, Blackrock or Dalkey I’d say.

Yes, this is the crux of the issue - what we're looking at aren't outlandish trophy homes by any stretch of the imagination, just fairly standard detached estate houses commanding eye-watering prices, because of high demand and very limited supply.

 

[PGF2016]

Seems straightforward except we've been looking and the cost of houses in the town we want to move to are imo excessive given the quality - mostly tired 90s construction with postage stamp plots on top of neighbours and needing a lot of remedial work - not at all what you'd hope for on a 1.2mish budget. The area is very sought after, lively seaside location with a thriving cafe/restaurant culture, good transport links to Dublin etc.

I am amazed that 1.2m doesn't buy a very nice house outside of Dublin for 3 people.

But yes - your pensions are very light.

 

[NoRegretsCoyote]

Yes, this is the crux of the issue - what we're looking at aren't outlandish trophy homes by any stretch of the imagination, just fairly standard detached estate houses

You are actually looking at the very top end of the market. There were 57389 dwellings sold last year, 56324 at or below €1.2m.

€1.2m is more expensive than 98.3% of all dwellings sold in 2021 and is outside the wildest dreams of most people!


You have a good income, low outgoings, and a healthy cash position. But I think your ambition is a little out of kilter with your overall income and wealth.

 

[LLB123]

You are actually looking at the very top end of the market. There were 57389 dwellings sold last year, 56324 at or below €1.2m.

€1.2m is more expensive than 98.3% of all dwellings sold in 2021 and is outside the wildest dreams of most people!


You have a good income, low outgoings, and a healthy cash position. But I think your ambition is a little out of kilter with your overall income and wealth.

Oh I hear you, but not by choice unfortunately. Anything in this location around the same price as our current place at 800k would be a pretty big downgrade AND require a lot of additional spend to bring it up to scratch. But this is where the school is, which is why we're in a bit of a quandary...

 

[LLB123]

I would really recommend talking to a tax specialist or accountant, and not just the person selling you the product.

The way your income is set up you may have more scope than you realise to tailor your income to take advantage of tax relief.

Sorry, just remembered something else in this regard. Our accountant has it set up that we can wind down the company in our fifties and take large tax-free lump sum payment (500k or so?) from it, which was another reason we de-priortised the pension.

 

[mustang01]

Yes, this is the crux of the issue - what we're looking at aren't outlandish trophy homes by any stretch of the imagination, just fairly standard detached estate houses commanding eye-watering prices, because of high demand and very limited supply.

Which would suggest that they are vastly overpriced then. Like you say it’s the guts of 500k for a move to more salubrious area, but it would nearly want to be Vico Road to be that worthwhile!

 

[Zion2022]

One point worth considering. Assuming you have a capital gain built up in your existing home. If you retain it and rent it out - assuming static house prices, every year you will be accruing a capital gains tax liability on your home as the proportion of time it is not your PPR becomes taxable.

Add that to the fact that €800k homes generally have a terrible yield. I can’t see the sense in holding onto. As others have said you’ll be far too concentrated in terms of Irish property, but if you really insist on having all your wealth in property, you’d almost certainly be better off selling the current home and buying 3 apartments for a higher yield, more diversification and avoiding the CGT issue.

 

[NoRegretsCoyote]

Oh I hear you, but not by choice unfortunately.

Of course it's by choice! I have a fair idea where you're moving and it is the place with the most expensive property in Ireland outside county Dublin.

There are lots of other seaside towns on the east coast with a very similar quality of life and equivalent schooling for your daughter. You're choosing to pay something like €400k more for an equivalent house in any of these other places. It's your money, and your choice, but you are framing it as some kind of inevitability and it's not. It's a big, long-term financial commitment to a place with a quality of life you really want and that's no bad thing, but there are lots of other options even still.

Our accountant has it set up that we can wind down the company in our fifties and take large tax-free lump sum payment (500k or so?) from it

I don't really get this logic. Even if you can accumulate the funds in the limited company and pay out tax free in your 50s they will still have been in bank deposits where interest rates are below inflation, so earning a negative return. Maybe there is some tax angle I don't understand here but I don't see why you aren't making the maximum tax-relieved pension contributions possible already. The value of a pension fund will go up and down but will almost certainly outperform bank deposits over the decades you have until retirement age.

 

[LLB123]

One point worth considering. Assuming you have a capital gain built up in your existing home. If you retain it and rent it out - assuming static house prices, every year you will be accruing a capital gains tax liability on your home as the proportion of time it is not your PPR becomes taxable.

Add that to the fact that €800k homes generally have a terrible yield. I can’t see the sense in holding onto. As others have said you’ll be far too concentrated in terms of Irish property, but if you really insist on having all your wealth in property, you’d almost certainly be better off selling the current home and buying 3 apartments for a higher yield, more diversification and avoiding the CGT issue.

Thank you and yes, we had considered the PPR taxation issue but felt the 200k loss would be helpful in offsetting. But thanks to the forum, it's apparent that keeping it truly is a non-runner, which is great information to have.

Of course it's by choice! I have a fair idea where you're moving and it is the place with the most expensive property in Ireland outside county Dublin.

There are lots of other seaside towns on the east coast with a very similar quality of life and equivalent schooling for your daughter. You're choosing to pay something like €400k more for an equivalent house in any of these other places. It's your money, and your choice, but you are framing it as some kind of inevitability and it's not. It's a big, long-term financial commitment to a place with a quality of life you really want and that's no bad thing, but there are lots of other options even still.

Completely take your point and you are right, there are indeed other locations. I suppose what I mean is that this area is not somewhere we decided upon a whim, or in isolation - we've been saving and working toward affording a move there for a long time (we couldn't afford to when she started primary school) and are thus guilty of looking at it from a singular perspective.

Where we are now, while lovely, is just too far into the sticks and requires a lot of driving to go anywhere, whereas a move to a more contained town with better transport links means my daughter could have some more independence as she gets older, (and her parents more of a social life!) removes the necessity for a second car, and also allows us to be that bit closer to ailing parents in Dublin and further down the N7.

Over the last few years, we've saved hard and thanks to some carefully considered and cost-effective home improvements (plus heat in the market obvs) have managed to add a lot of value to our current PPR, though sadly not enough to close the price differential gap between the two locations.

The feedback from here has prompted a lot of food for thought thank you. Lifestyle aside, our thinking also was that this location, given its obvious desirability, seems like a 'safe' place as any to put our savings and to be during a recessionary period, but for me the quality of house even at the higher end is truly disappointing, hence my hesitation about selling up our own place and putting everything we have into it.

 

[DublinHead54]

@LLB123 You've chosen your area and now you just need to work out what you can afford and manage expectations. It sounds like you live in a recently built house to your own design? New build houses tend to offer that open plan living (kitchen / living space. kitchen island, big sliding doors etc), which is not how the older housing stock was designed. I am surprised that 1.2m will not get you a renovated house that can offer you a similar style of living.

I am in Blackrock and I am pretty sure there aren't 'regular' houses in an estate for 1.2m that are of poor quality. My rule of thumb is 700-900k for a 4 bed house that needs renovation and 1.1-1.3 for renovated houses. Anything above 1.2m is generally on a big plot of land, or georgian type style houses.

The market has heated up, but I assume your own home has also increased in value, as 800k in a rural location is a hefty price tag as well.

 

[LLB123]

It's truly been a bit of an eye opener since we started looking, to be honest. For example, we recently went to view a 4-bed place 1600 or so sqm circa 1m which on paper looked decent enough, needed windows, kitchen and bathrooms replaced but on a tiny plot and a garden with barely space for a shed, very tight to neighbours and overlooked on all sides etc. Last I heard, bidding on it was 30% above ask...

**I understand discussion of property prices is not allowed, and above is for illustrative purposes only.**

 

[Blackrock1]

@LLB123 You've chosen your area and now you just need to work out what you can afford and manage expectations. It sounds like you live in a recently built house to your own design? New build houses tend to offer that open plan living (kitchen / living space. kitchen island, big sliding doors etc), which is not how the older housing stock was designed. I am surprised that 1.2m will not get you a renovated house that can offer you a similar style of living.

I am in Blackrock and I am pretty sure there aren't 'regular' houses in an estate for 1.2m that are of poor quality. My rule of thumb is 700-900k for a 4 bed house that needs renovation and 1.1-1.3 for renovated houses. Anything above 1.2m is generally on a big plot of land, or georgian type style houses.

The market has heated up, but I assume your own home has also increased in value, as 800k in a rural location is a hefty price tag as well.

i think thats a little optimistic price wise, this is what i imagine is the kind of the thing the OP is referring to,

12 Grove Lawn, Blackrock, County Dublin - Mason Estates Dundrum - 4637125 - MyHome.ie Residential

12 Grove Lawn, Blackrock, County Dublin, 5 Bed, asking price €975,000, brought to market by Mason Estates Dundrum, Residential - 4637125 (rated C3)

www.myhome.ie

needs plenty of work, not sure you would have this refurbished for 1.2m