Negative Equity - Sell or Rent my House

Cheney

Hi

Just looking for opinions from anyone who might have been in a similar situation regarding trying to move house but carrying negative equity. I'm currently in the process of applying for planning permission on a site gifted from family. The intention is to put in place a budget of 275k to build and furnish the house and I currently have 75k in savings to put towards this. So the mortgage balance for this would be 200k.

I am currently living in a house I purchased in 2006 on a 35 year mortgage, so 25 years left. The house was purchased for 245k and the current value is probably in the 160-165k bracket, so say 160k. The current mortgage balance is 195k so I have approximately 35k of negative equity.

The mortgage is with BOI on a tracker rate of 1.1% so mortgage rate is 1.1% and monthly repayment is 735 euro

I am very undecided about whether to sell the house and carry over the negative equity into the new build (new mortgage of 235k) or apply for a brand new mortgage and rent my existing house. A house near me has recently rented out for 800 a month. I am aware that because the interest rate is so low at 1.1%, I am taxable on a significant part of the rent I would receive (marginal rate is 52%). On the other hand, if I keep the house any appreciation in it over time is tax free from cgt.

I think on the negative equity mortgage, I would have a new rate of 2.1% (tracker would cease after 5 years) on 195k and a fixed rate of 3.3% on 40k with BOI

On the one hand, my head is telling me selling my existing house and getting out of negative equity is the way to go. It would mean not been exposed to the property market with borrowings of approx. 400k. On the other hand, there is an opportunity to keep my existing house as an investment financed at a very low interest rate and tax benefits arising on any appreciation in value.

Anyone any opinions on what way to go here ? Am I better off selling the house and putting any spare money going forward into lower risk savings/investment products rather than been exposed to a property market fall/correction ?


Thanks for any feedback.

audi12

Do you want to be a landlord and the work that goes with it if not sell it and clear the negative equity with savings

Sleepy

Where is the property?

Location is going to determine the potential for capital appreciation. If it's on the outskirts of a city, there's a good chance that it'll appreciate heavily over 10/20 years as that city grows. If it's in Ballygobackwards where the only options for employment are to wait on the local public servants to retire or to move to Dublin, it could be worth even less over that time period...

riclad

Depends on where its located ,if its in a city it will go up in value .
IF its in a rural area it,ll probably be worth slightly more in 10 years time.
You are lucky your interest rate is low,
your neg equity is low.
maybe go to a mortgage broker get advice.
Will selling the house make it easier to get a new loan of 200k.
How much rent could you get if you rent it out.

boege

Cheney
I was in this position about 19 years ago when the sale of our home fell through in the middle of buying a new home. I was left trying to decide if I could afford to proceed with purchase, and have two houses (one rented) with two mortgages.

I am handy with numbers so i ran figures on a spreadsheet to see if I could make repayments and factored in some contingencies, such as interest rate increases and periods without rent. I also went to an accountant for advise but did not share the numbers as I wanted to see how their calculations stacked up. In the end the advice was I could proceed on the basis that if the assumptions did not hold I could still sell out the rented property. The calculations pretty much matched what I had figured.

There are many variables here including your future property value, future income, family arrangements (i.e. kids) and possibly even Brexit impacts.

My advice is go to a financial adviser to calculate cash flow based on a few scenarios. Walking away from a low interest loan should not be done lightly.


Regards

riclad

Does the rent mostly cover the mortgage ,
do you think in 10 years time it will rise in value.

Floodzie

riclad wrote: »

Does the rent mostly cover the mortgage ,
do you think in 10 years time it will rise in value.

Does the rent cover the mortgage PLUS tax on rent, management fees/upkeep etc? Some of this can be written off, but the tax on your rent is the big one, even if you are not making any profit (AFAIK - please correct me if I'm wrong!)

For example, I believe a property with a mortgage of 1000 p.m., would probably need about 1400 p.m. in rent to cover everything.

Hopeful2016

Cheney wrote: »

Hi
. On the other hand, if I keep the house any appreciation in it over time is tax free from cgt.
.

What relief is this you are referring to? Be aware that the PPR relief will not apply for any period the house is rented out and ceases to be your PPR.

Edit: which obviously won't be an issue if it remains in NE.

Michael D Not Higgins

Floodzie wrote: »

Does the rent cover the mortgage PLUS tax on rent, management fees/upkeep etc? Some of this can be written off, but the tax on your rent is the big one, even if you are not making any profit (AFAIK - please correct me if I'm wrong!)

For example, I believe a property with a mortgage of 1000 p.m., would probably need about 1400 p.m. in rent to cover everything.

All rent minus expenses is profit. Paying the capital on the mortgage is not a business expense, it's a capital investment.

It's probably closer to 1800 a month rent to cover a 1000 a month mortgage after tax and expenses.

audi12

boege wrote: »

Cheney
I was in this position about 19 years ago when the sale of our home fell through in the middle of buying a new home. I was left trying to decide if I could afford to proceed with purchase, and have two houses (one rented) with two mortgages.

I am handy with numbers so i ran figures on a spreadsheet to see if I could make repayments and factored in some contingencies, such as interest rate increases and periods without rent. I also went to an accountant for advise but did not share the numbers as I wanted to see how their calculations stacked up. In the end the advice was I could proceed on the basis that if the assumptions did not hold I could still sell out the rented property. The calculations pretty much matched what I had figured.

There are many variables here including your future property value, future income, family arrangements (i.e. kids) and possibly even Brexit impacts.

My advice is go to a financial adviser to calculate cash flow based on a few scenarios. Walking away from a low interest loan should not be done lightly.


Regards

Finacial Advisor are clueless work it out yourself

ixus

First major question. What is your ability to service both mortgages in the event current property has an extended period of vacancy or that you are without work for a period of time? A circa 2-2.5k pm mortgage.

If you can manage both scenarios comfortably, i would consider holding onto both.

There are negative equity mortgages and, with your deposit, the potential to have a a relatively small mortgage on your new property with no burden of being a landlord.

Keep in mind construction costs usually are more than expected.

blindside88

A big thing to consider is your ability to borrow the new amount while holding on to the existing mortgage . Under new central bank guidelines you can borrow a maximum of 3.5 times combined income, they don't take rent into account so you would need to have a combined income of just under €113k per annum to be able to keep both mortgage. The other points to note have been stated already. The other option is save sell the house, clear the NE from your savings and be able to move on free of NE

BnB

blindside88 wrote: »

A big thing to consider is your ability to borrow the new amount while holding on to the existing mortgage .....

100% - This is the first thing to check - Talk to the bank and see if you can actually get the mortgage you are looking for now without clearing your existing one first.

2 friends of mine have struggled recently to get a mortgage. They both have an existing mortgage and house each (bought a good few years ago when single). When they went looking for a mortgage to build a house (same as the OP) they were extremely limited in what they could borrow by the fact that they had two houses already. Both houses are in busy urban areas and are rented out with the rent more than covering the existing mortgages. But the bank had to calculate how much they could loan them as if neither house was rented out and the mortgages for them had to be paid out of their regular income.