170k lump sum - Residential or commercial invest

Orla09

Hi there, in the next couple of months I will be in possession of an inheritance lump sum to the tune of 180k after tax. I'm 41, single, have a house with about 200k equity built up in Dublin. I have a balance of 320 on my mortgage. I'm not sure what the right move is with respect to the money. I am leaning towards investing and wonder what people's thoughts are on commercial vs. residential...?

mickmac76

Honestly my first piece of advice would be to find an independent financial adviser. Spending a few hundred euros before investing hundreds of thousands would be a wise move. Secondly if it was me I'd use the money to pay a lump sum off your own mortgage, being debt free should be everyones goal in life, within reason. There's nothing at all wrong with having a mortgage but if an opportunity like this arises to pay off a significant chunk of it I think most people should take it. Finally, if you are determined to invest in property I'd avoid the residential market for sure. The tax is ridiculous and no return is guaranteed and tenants can be painful to deal with.

Do also consider investing in ETFs in the stock markets. And one last idea is do you have a pension. Thats important these days.

Wheety

You could wipe out half your mortgage in one fell swoop. The equity would still be in the house too if you ever decided to sell.

But I agree with the above. get some professional advice.

Tombo2001

I'd take the IFA advice but wouldn't see it as gospel.

I would also buy some books about investment, about how you should be managing say a personal pension, look at amazon. Just educate yourself so you can spot bull****.

Its kind of unbelievable in a way that you are here on boards asking this question.

I wont tell you how to invest, but I will very much tell you that there will be heaps of people out there who will offer you 'advice', paid for or otherwise, that most of that advice will not be very well thought out, that a lot of IFAs and other professionals are 'tied' - that is to say there is a particular product they are trying to sell to everyone who walks in the door, and they will not be telling you the reasons why it might not be right for you. And most important, if their 'advice' leads you to losing half your lumpsum, they will not be forming a queue to take responsibility for it.....never mind redeem the loss, and that applies to advice on boards, an IFA, friends, the local bank manager, anyone.....

On what Mick Mac said - I wont say you should pay off your mortgage. But I will say the following:

- do you have a tracker or not, particularly if you don't have a tracker....

Take a close look at how much INTEREST you will pay between now and the close of your mortgage if you continue to pay monthly instalments.

There is a guaranteed return to you in paying your mortgage now, as you wont have to pay the interest (as I understand it).

Any alternative investment you make has to be benchmarked, not against keeping it in the bank on deposit, but against how much you can save by paying off interest.

The other key piece of advice is fees fees fees......anything you are investing in - how much are the fees. They eat away at the lump sum.

BrokenArrows

My personal opinion would be to pay off as much of the mortgage as possible. The money saved in interest will be huge.

Depending on your mortgage you can either remain paying off a reduced monthly amount for the full length of term or you can restructure the mortgage to repay it over a shorter number of years with the same monthly payments as before you paid the lumpsum.

Prezatch

To throw a few rough figures out there to help you understand some of the other posters comments:

Lets say your mortgage is 4% fixed, 320k to go over 25 years and you pay instalments of €1,692 per month. Total interest on this over that time would be 186k. If your instalment is less, than the interest is even more.

Now lets say you paid off 180k today and you kept up your instalments of €1,692 a month. You'd be debt free within 98 months (8 years) and would only have paid 24k in interest in that time.

So that's a saving of €162k. The alternative option is to invest the money and try and get a better return. It would take 6.7 years assuming you were able to make a return of 10% per annum to make come out of the investment with 342k ie. your initial 180k + 162k.

Bear in mind that the mortgage option is risk free. Investing most certainly is not and is something that can keep you up at night :eek:

The above figures are also rough estimates and don't take into account inflation, changing mortgage interest rates, fees etc. I would seek independent financial advice... preferably not from Eddie Hobbs!

aristotle25

Prezatch wrote: »

So that's a saving of €162k. The alternative option is to invest the money and try and get a better return. It would take 6.7 years assuming you were able to make a return of 10% per annum to make come out of the investment with 342k ie. your initial 180k + 162k.

That 10% would have to be net after taxes? Which of course isn't ever going to happen. I have been reading various sources saying in general equities will only return 4-5% at most before tax over next few years.

newacc2015

aristotle25 wrote: »

That 10% would have to be net after taxes? Which of course isn't ever going to happen. I have been reading various sources saying in general equities will only return 4-5% at most before tax over next few years.

If you look at the S&P500 long term, as in 10-20 years. It averages about 10% pa before tax. Tax is CGT which is taxed at 33%.

One option is you take some of your money to take a chunk of your mortgage and refinance at a lower rate ie variable rates are about 3%. Then take some of the remainder 80k (or even 40k as it is more tax efficient to have a mortgage on a BTL versus your own home). The buy an investment property with a mortgage. You could get a one 1 bedroom apartment in Dublin City for €170k that will yield about 9% pa before tax.

ixus

Clear any short term and expensive debt first.

If it was me, I would put 120k into the mortgage and get the best rate available. 2.99 with UB i think. I would also reduce term by 10/15 years. By doing this, you will save yourself at least 80k in interest payments (not counting the difference between UB rate and whatever your current rate is) over the life time of your mortgage. Maybe another 40-80k depending on your current rate.

Have you a pension? Consider maxing out contributions this year with a lump sum (and for last year too) to get back some of that tax you paid.

Now, you're looking at having your mortgage paid off in your early 50's and a potentially healthier pension.

The most important thing is that you don't have to act straight away. Take your time. This money is not a hot potato to be put into some leveraged fund. So many people are afraid to have a decent cash balance for some reason.

aristotle25

newacc2015 wrote: »

If you look at the S&P500 long term, as in 10-20 years. It averages about 10% pa before tax. Tax is CGT which is taxed at 33%.

That 10% average included dividends which are taxed at marginal rate plus USC and PRSI so that can be over 50%

The long term 10% also doesn't account for about 3% inflation so real return is 7% before taxes. Unless you can invest over a 20 year period I wouldn't invest after tax money into equities. Max out your pension contributions is what the OP should do instead.

newacc2015

aristotle25 wrote: »

That 10% average included dividends which are taxed at marginal rate plus USC and PRSI so that can be over 50%

The yield on the S&P500 is about 1.95%. US companies are paying less and less dividends and are engaging in more share buybacks. A sizeable amount of the top 100 companies in the S&P500 pay no dividends eg pretty much all the tech companies. If OP put €100k in the S&P500, even at the top marginal rate of tax he would pay €1000 per year on it. Most of his gain would be capital appreciation as a lot of stock dont pay dividends or only tiny ones as American firms prefer to return value in share buybacks usually.

Even if OP pays 1% of his shareholding in tax per year, that 1% is still less than paying for an actively managed fund

aristotle25 wrote: »

The long term 10% also doesn't account for about 3% inflation so real return is 7% before taxes. Unless you can invest over a 20 year period I wouldn't invest after tax money into equities. Max out your pension contributions is what the OP should do instead.

Inflation in the US has averaged less than 2% for about the last decade in the US. It is a lot less in Europe. I dont see anything about 2.5% becoming the new normal anytime soon especially with the FED hiking rates.

OP has a pension already. The fact is Irish pensions can be quite horrific. Averaging 4% pa over 10 years versus 10% for the S&P500. The horrific returns of Irish pension funds are made worse with their massive fees. You still pay PRSI and USC on pension contributions, so they arent even that attractive anymore.

IMO a €100k in a Vanguard S&P500 fund will significantly outperform an Irish fund actively managing to underperform the market with massive fees

aristotle25

I am not here to drum up Irish pension providers but for balance I will say:

1) 20 year return on irish pension providers is 7% average. Its 9.6% for S&P 500
2) fees are more expensive than the ultra low vanguard etf's e.g. 0.05% versus .65% Irish pension providers
3) you can always invest into S&P with an Irish pension provider and get tax relief on the contribution

I'd actually like to see the real numbers on a scenario like that. Someone investing say €1000 per month from their net salary into Vanguard ETF 20 years ago to today and someone putting €1400 per month into a pension (40% tax relief so cost to person is €1000 net).

Based on some rough excel calculations I see the Irish Pension having a bigger overall fund balance over 10 years but then the Vanguard one does better over 20 years. Or course you have tax coming out of the pension as well.

Pension does make sense if you have your employer contributing as well, the numbers look much better when adding that into the comparison.

BrokenArrows

aristotle25 wrote: »

I am not here to drum up Irish pension providers but for balance I will say:

1) 20 year return on irish pension providers is 7% average. Its 9.6% for S&P 500
2) fees are more expensive than the ultra low vanguard etf's e.g. 0.05% versus .65% Irish pension providers
3) you can always invest into S&P with an Irish pension provider and get tax relief on the contribution

I'd actually like to see the real numbers on a scenario like that. Someone investing say €1000 per month from their net salary into Vanguard ETF 20 years ago to today and someone putting €1400 per month into a pension (40% tax relief so cost to person is €1000 net).

Based on some rough excel calculations I see the Irish Pension having a bigger overall fund balance over 10 years but then the Vanguard one does better over 20 years. Or course you have tax coming out of the pension as well.

Pension does make sense if you have your employer contributing as well, the numbers look much better when adding that into the comparison.

I guess one of the considerations is that paying off a lumpsum on the mortgage is guaranteed to make you money, investing still contains the risk.