Pay off the mortgage or buy second property?

Spidereq

Hi Guys,

I need to ask for your opinion on my next financial move.
Our situation is as follows:

male 36, female 33 - mortgage left 29yrs - total income 52k per annum

I bought an apartment in Dublin back in 2014 ( paid 140k) Currently I see them selling 210k. As we speak I owe the bank 116k.

I have 80k of savings.

I always dreamt about living in a house, here are my 4 possible option that I consider:

1. Keep the apartment (rent it out current rent 1400 / costs 550 mortgage + 150 management / ) = 700 - tax and borrow more money to buy a house 250k with down payment of 80k. in this option my total debt = 116+170 = 286k
Here rental income part-pays my mortgage on a house and adds to equity of the apartment.

2. Sell apartment, use savings 80k + 94k(profit made from sale) =174k ( minus costs 8k ) = 168k and buy a house 250k leaving me with lower mortgage of 82k (384 per month ) I can add to monthly repayments to reduce the term and pain

3. Pay off 80k from my current mortgage, leaving 36k to go - can push myself and pay this off in 2 years and be loan free, however still in an apartment, not a house, I can then use the fact that I have no debt to save faster to buy a house in the future.

4. Remortgage apartment and release as much equity as I can to put towards my house. Rental on the apartment would cover increased mortgage costs and there would be less tax to pay. This would then give a slightly more expensive option 2 but with the added bonus of holding onto the apartment which would be paying for itself and hopefully I would be able to take advantage of any further price increases.

Rents can go down so it not guaranteed I will have a money making apartment forever. Also, I\'m thinking it\'s better to sleep well with as little debt as possible not being dependant on tenant payments.

Option 1 is tempting but risky, option 3 is safest, but no joy as I would love a house, option 2 is making me feel - am I losing out not taking option 1? Option 4 - a lot of debt but also tempting... hmm?

What would you do and why?

Any input will be much appreciated.

Thank you.

Spidereq

Hi Folks,

I'm considering buying a second property to live in and keeping my apartment as an investment.

Can you briefly advise of the costs included in this option ( a small tax calculation based on the below data would be nice )

- incomes: 29k + spouse 24k

- potential rent: 16,800 per annum
- Management fees: 1700 per annum
- mortgage: 543 per month (116k left to pay) interest 357, principal 186
- current interest rate 3,7% possibly to be increased, when the bank will learn that this is now rented?

apart from the potential winnings - in general, is the game worth the hassle?

Thank you

The Student

Spidereq wrote: »

Hi Folks,

I'm considering buying a second property to live in and keeping my apartment as an investment.

Can you briefly advise of the costs included in this option ( a small tax calculation based on the below data would be nice )

- incomes: 29k + spouse 24k

- potential rent: 16,800 per annum
- Management fees: 1700 per annum
- mortgage: 543 per month (116k left to pay) interest 357, principal 186
- current interest rate 3,7% possibly to be increased, when the bank will learn that this is now rented?

apart from the potential winnings - in general, is the game worth the hassle?

Thank you

You need to be a certain type of person to be a landlord. You need to remember its a business. If you are a push over then dont become a landlord. Some tenants if they can wipe your eye they will. With the anti landlord stance of the govt its only going to get worse. I have been a landlord for the last 10 yrs.

Spidereq

The Student wrote: »

You need to be a certain type of person to be a landlord. You need to remember its a business. If you are a push over then dont become a landlord. Some tenants if they can wipe your eye they will. With the anti landlord stance of the govt its only going to get worse. I have been a landlord for the last 10 yrs.

Were the 10 years sweet or sour - both financially and from the people let down experience? Back a few years ago I was renting and subletting rooms - I know that people come in different shapes forms and sizes and while some are nice and nonproblematic, others can make your life hell.

The Student

Spidereq wrote: »

Were the 10 years sweet or sour - both financially and from the people let down experience? Back a few years ago I was renting and subletting rooms - I know that people come in different shapes forms and sizes and while some are nice and nonproblematic, others can make your life hell.

During the recession I struggled big time. I am just about breaking even now although one bad tenant and I am screwed. I have had businesses being run from the property, I have had calls at all hours of the day and night for the simplest of problems. To be fair I have had some great tenants and was sad to see them go.

I am a bit worried about what the govt are going to do next. If you do decide to rent my advice is to choose the tenants yourself. Letting agents have no interest in the suitability of the tenants. All they want is to get the highest rent which is not always the best choice.

LirW

Option 2.
I don't think you'd really wanna be a landlord in this climate. You pay plenty of tax (you pay half of your rental income to the tax man afaik) and have very little rights, especially in a Rent pressure zone.
Personally I wouldn't want to take care of a second property really. Especially not renting it out, I just don't want that hassle. Bad tenants can leave you in a financial predicament, especially if you have to evict them and they won't leave.
Sell the apartment, buy your house and have a low mortgage, enjoy life.

FishOnABike

Spidereq wrote: »

Hi Folks,

I'm considering buying a second property to live in and keeping my apartment as an investment.

Can you briefly advise of the costs included in this option ( a small tax calculation based on the below data would be nice )

- incomes: 29k + spouse 24k

- potential rent: 16,800 per annum
- Management fees: 1700 per annum
- mortgage: 543 per month (116k left to pay) interest 357, principal 186
- current interest rate 3,7% possibly to be increased, when the bank will learn that this is now rented?

apart from the potential winnings - in general, is the game worth the hassle?

Thank you

Just remember that 16,800 will be subject to tax at your marginal rate after any allowable expenses have been allowed for.

VonBeanie

Spidereq wrote: »

Hi Folks,

I'm considering buying a second property to live in and keeping my apartment as an investment.

Can you briefly advise of the costs included in this option ( a small tax calculation based on the below data would be nice )

- incomes: 29k + spouse 24k

- potential rent: 16,800 per annum
- Management fees: 1700 per annum
- mortgage: 543 per month (116k left to pay) interest 357, principal 186
- current interest rate 3,7% possibly to be increased, when the bank will learn that this is now rented?

apart from the potential winnings - in general, is the game worth the hassle?

Thank you

First up, the bank will want to increase the interest rate. Buy2Let mortgages typically are 5-5.5%. This will increase monthly mortgage interest by circa €125 per month.

Next, you are not counting all costs. There's insurance, RTB registration, repairs, maybe a managing agent etc.

There is a chance that having the Buy2Let property may impact on an application for a mortgage on your Principle Private Residence.

If you are unlucky enough to get a rogue tenant that stays in the property without paying rent, the losses can run to many thousand Euro.

In my view, becoming LL is difficult to make the profits to justify the risk. Speak to a financial advisor. There may be less risky ways to achieve better returns with your money.

I guess the question should be, if you sold the apartment, would you choose to invest in a residential letting business with the capital you have, and would you think the apartment you currently have is an ideal property to start a letting business?

wench

Spidereq wrote: »

4. Remortgage apartment and release as much equity as I can to put towards my house. Rental on the apartment would cover increased mortgage costs and there would be less tax to pay.

Increasing the mortgage on the apartment wouldn't reduce your tax liability.
The use to which the money is put determines its deductability, not which property it is secured on.

VonBeanie

VonBeanie wrote: »

First up, the bank will want to increase the interest rate. Buy2Let mortgages typically are 5-5.5%. This will increase monthly mortgage interest by circa €125 per month.

First off you don't tell the bank (why would you voulenteer this information to them?) and secondly a lot of people have posted here where the bank have found out and they didn't change the rate.

tobsey

Are you married? Your combined income is about 15k short of reaching the top rate of tax so very little of your rental income would be taxed at 50% so from that point you wouldn't have the highest of tax bills on it. However once you rent it out you're no longer eligible for the capital gains tax exemption on the increase in value on the apartment. You might be exempt up to the current value now because it has been your principal private resigned until now, but you'd want to check that out.

If I were you I'd sell, take your profit and live happily with a very small mortgage.

VonBeanie

David Bumpy Crayfish wrote: »

First off you don't tell the bank (why would you voulenteer this information to them?) and secondly a lot of people have posted here where the bank have found out and they didn't change the rate.

Well, I would regard not telling the bank as fraud. I would also expect a question from the bank when the OP applies for a new residential mortgage, while still having the original apartment and mortgage in place. Maybe the bank wont charge excess interest - but I haven't found them to be that generous.

Spidereq

VonBeanie wrote: »

Well, I would regard not telling the bank as fraud. I would also expect a question from the bank when the OP applies for a new residential mortgage, while still having the original apartment and mortgage in place. Maybe the bank wont charge excess interest - but I haven't found them to be that generous.

Exactly, I spoke with them, they acknowledge that I but 2nd property to live in, they need 20% deposit for same, in opposite to 30% if I told them I'm buying an investment property and keep living in an apartment. As I cannot live in both places at the same time, they would know this. Also, they would take potential rental income as a leverage in calculating money willing to borrow on the second property. At the meeting, they did not mention the increase of rate on the apartment, but I would expect same closer to drawing of actual contract. I would be lucky if they would not change this.

The more I think about it - the more it comes to me that, there's a lot of uncertainty and stress involved for a risky way to gain some cash.

Spidereq

wench wrote: »

Increasing the mortgage on the apartment wouldn't reduce your tax liability.
The use to which the money is put determines its deductability, not which property it is secured on.

You can deduct up to 75% on the interest - the bigger the loan on investment the bigger the interest part.

VonBeanie

VonBeanie wrote: »

Well, I would regard not telling the bank as fraud. I would also expect a question from the bank when the OP applies for a new residential mortgage, while still having the original apartment and mortgage in place. Maybe the bank wont charge excess interest - but I haven't found them to be that generous.

It's not fraud and I'd lose no sleep over not telling them even if it was. Why people care about what banks think is beyond me. Get your second mortgage from a different bank and there will be no questions from your original bank.

listermint

Sell get a small mortgage. Put money into pension scheme.

elperello

Get mortgage free ASAP.
The secret of a happy life.

Spidereq

tobsey wrote: »

Are you married? Your combined income is about 15k short of reaching the top rate of tax so very little of your rental income would be taxed at 50% so from that point you wouldn't have the highest of tax bills on it. However once you rent it out you're no longer eligible for the capital gains tax exemption on the increase in value on the apartment. You might be exempt up to the current value now because it has been your principal private resigned until now, but you'd want to check that out.

If I were you I'd sell, take your profit and live happily with a very small mortgage.

Yes we are married, but I hope to earn more as the years go by, so the tax bracket should be reached and therefore I would leap over to larger portions of 50% tax

The apartment was purchased 2014 so even if investment qualifies for capital gains exemption if kept for 7 years

Living stress-free with a smaller mortgage and having more joys of life rather than stress is I guess a luxury that can outbid the potential profit. Thank you for your valid points.

Pawwed Rig

Spidereq wrote: »

You can deduct uto 75% on the interest - the bigger the loan on investment the bigger the interest part.

80% or 100% if you let it to welfare tenants. Budget should be increasing the 80 to 85.

Hack12

Run as fast as you can away from being a landlord. It's not worth it,

- Only allowed deduct 80% of interest you pay as expense.
- Management fees
- LPT
- RTB
- Zero rights compared to tenants
- Taxed at your marginal tax rate

It's not treated as a business by the state and the above is just the tip of the iceberg. I am out ASAP like so many.

padjo5

Nice dilemma to have. I run a wee non profit blog/podcast....the info in below might be useful in weighing up the landlord idea for yourselves.

My take, for what it's worth, is to figure out which will give highest probability of success, factoring in some 'worst case scenarios'....because things can change quickly!

phormium

Wench is correct, increasing the loan on the apartment to release equity to buy the new house will not increase your tax relief.

Tax relief against the rental income will only be allowable against the portion of the loan used to buy the apartment and not the extra equity released/mortgage increase to fund the new house. That's if you could even get an equity release these days.

Spidereq

padjo5 wrote: »

Nice dilemma to have. I run a wee non profit blog/podcast....the info in below might be useful in weighing up the landlord idea for yourselves.

My take, for what it's worth, is to figure out which will give highest probability of success, factoring in some 'worst case scenarios'....because things can change quickly!

<snip>

Tuned in, interesting - thanks

Spidereq

phormium wrote: »

Wench is correct, increasing the loan on the apartment to release equity to buy the new house will not increase your tax relief.

Tax relief against the rental income will only be allowable against the portion of the loan used to buy the apartment and not the extra equity released/mortgage increase to fund the new house. That's if you could even get an equity release these days.

Thanks for clarifying this.

padjo5

Hey. It's a big decision, everyone will have an opinion one way or the other.

If it's the financials you want to find out about I hope the link below might be of some help (it might not!!). It's a non-profit blog/podcast I've been creating every week. Paddy.

<snip>

Delphinium

Depends on your life plan. Option 2 or 3 will give you a chance to have a house either now or in the future. Do you plan on having children? Apartment living might not suit as they grow but not having huge debt will make life so much easier. No reason not to plan on buying an investment property in the future when your mortgage is paid off. You are still very young and probably have some pension savings also. 29 years is a long time to pay and overpaying monthly probably makes good sense when rates are so low.
Managing a rental property is not easy. Remember you will still have to pay management charges. Could you live there until seven years are up and take advantage of tax free capital gains?

Rackstar

Surely you don't earn enough to be able to get a second mortgage?

I'd concentrate on paying off the existing mortgage.

Spidereq

Rackstar wrote: »

Surely you don't earn enough to be able to get a second mortgage?

I'd concentrate on paying off the existing mortgage.

80k in savings should convince the bank.

Spidereq

padjo5 wrote: »

Nice dilemma to have. I run a wee non profit blog/podcast....the info in below might be useful in weighing up the landlord idea for yourselves.

My take, for what it's worth, is to figure out which will give highest probability of success, factoring in some 'worst case scenarios'....because things can change quickly!

<snip>

Paddy, this was awesome, super informative and clearly explained - once again thank you for sharing your podcast here.

Spidereq

Delphinium wrote: »

Depends on your life plan. Option 2 or 3 will give you a chance to have a house either now or in the future. Do you plan on having children? Apartment living might not suit as they grow but not having huge debt will make life so much easier. No reason not to plan on buying an investment property in the future when your mortgage is paid off. You are still very young and probably have some pension savings also. 29 years is a long time to pay and overpaying monthly probably makes good sense when rates are so low.
Managing a rental property is not easy. Remember you will still have to pay management charges. Could you live there until seven years are up and take advantage of tax free capital gains?

Our decision is to live children free. I thought, however, that if I sell the apartment to upgrade to a house, I will not pay capital gains regardless? I would pay them only if the investment property is sold in under 7 yrs. Can I live here another 4 years? - perhaps I can, once I will evict tenants upstairs with 3 kids running around and making my ceiling wobble.

Pkiernan

Spidereq wrote: »

Hi Folks,

I'm considering buying a second property to live in and keeping my apartment as an investment.

Can you briefly advise of the costs included in this option ( a small tax calculation based on the below data would be nice )

- incomes: 29k + spouse 24k

- potential rent: 16,800 per annum
- Management fees: 1700 per annum
- mortgage: 543 per month (116k left to pay) interest 357, principal 186
- current interest rate 3,7% possibly to be increased, when the bank will learn that this is now rented?

apart from the potential winnings - in general, is the game worth the hassle?

Thank you

Your tax bill will be about 5 to 6 k per annum.

The_Conductor

OP- you have two very similar threads- I've merged them together.

LaLa2004

Will €250k buy you a forever home?

If you sold the apartment, you would be in a position to buy a house either with less of a commute or nearer to transport links.

When buying in Dublin you may need to look at how nice the area is.

Are you looking at duplex or terraced or semidetached?

Lumen

You currently have 36k of net debt. On a salary of 52k your maximum debt load is 156k before exemptions. You therefore have only 120k of spare debt capacity which is insufficient to buy a house in Dublin.

So keeping the apartment and buying a house is not possible, the equity doesn't help in this case.

ouxbbkqtswdfaw

Don't become a landlord. It's a nightmare scenario. You have no rights. The tenant takes over your property. Pay off your mortgage and have an easy life.

py

My main concern around you taking on a 2nd property is that your base income isn't a lot so if you run in to trouble with a non paying tenant, it's going to seriously impact your day to day life. If your income was double what you currently earn then it would be a different scenario. At this point in time, I'd suggest paying off your mortgage.

Rackstar

Spidereq wrote: »

80k in savings should convince the bank.

You didn't mention that in this thread. It was in your separate thread, which was merged here.

I'd sell up and buy a nice house.

adam88

tobsey wrote: »

Are you married? Your combined income is about 15k short of reaching the top rate of tax so very little of your rental income would be taxed at 50% so from that point you wouldn't have the highest of tax bills on it. However once you rent it out you're no longer eligible for the capital gains tax exemption on the increase in value on the apartment. You might be exempt up to the current value now because it has been your principal private resigned until now, but you'd want to check that out.

If I were you I'd sell, take your profit and live happily with a very small mortgage.

Are you sure this is correct. I thought the only stipulation was that you had to keep it till 2019

AmberGold

I’d sell, buy the house you want now to take advantage of the rising prices. I’m a reluctant landlord and can’t wait to get out.
You’ve made some good moves so far, is there any way of getting your incomes up?

The Student

Spidereq wrote: »

80k in savings should convince the bank.

Can I suggest a slightly different slant on this. Buy a property with a garage, convert the garage to a self contained unit. Avail of the rent a room scheme you earn tax free income. Then either sell apartment, rent it to council under long term leasing.

Spidereq

The_Conductor wrote: »

OP- you have two very similar threads- I've merged them together.

Thanks. Didn’t want to mess up the forum, just thought that one topic is related to financial decisions while other to rather personal preference. Thanks for the cleanup

Spidereq

LaLa2004 wrote: »

Will €250k buy you a forever home?

If you sold the apartment, you would be in a position to buy a house either with less of a commute or nearer to transport links.

When buying in Dublin you may need to look at how nice the area is.

Are you looking at duplex or terraced or semidetached?

I’m thinking to move out to somewhere in Kildare area. The total amount I could avail to fund a forever home is (24+29)*3.5+80(savings)+94(from apt sale) = 360k but I’m far from idea of increasing debt to the limit. I could increase a bit as selling apartment will get rid of management fee 1700 per year that can be used to pay as bigger mortgage. Semi detached, end of terrace, detached would be on my search list.

Spidereq

AmberGold wrote: »

I’d sell, buy the house you want now to take advantage of the rising prices. I’m a reluctant landlord and can’t wait to get out.
You’ve made some good moves so far, is there any way of getting your incomes up?

We could both switch jobs. Recently all the leavers in the company I work in got approx 5k more for jumping ships and taking their experience with them

But this will delay things for a minimum of 6 months to please the bank with a permanent contract

evolving_doors

Sell.. buy... save like the clappers, try to pay mortgage off quickly at same time. Move up ladder. Easy life.
2 mortgages with no safety net esp. if market changes or tenant gives trouble. Not easy life.

For 250k in dublin it sounds like you might be buying something that'll need a bit of upgrading... think twice about throwing all yer savings into a deposit. Although if yer handy enough with some things and ye don't mind upgrading very slowly then it might be doable.
That'd give you a good sense of achievement when it comes time to sell again.

Remember that people might pay €300k for the same house whether it's immaculate or in a bad state so keep an eye on all the money yer putting in vs. how much it'll get you. e.g. spending 80k on a swish extension might only net you an extra 60k when you sell. Have a look at how much different quality houses sell for on the same road.

The_Conductor

adam88 wrote: »

Are you sure this is correct. I thought the only stipulation was that you had to keep it till 2019

Depends on *when* you bought it- you have to hold it for 7 years- so if you bought it in 2012- then 2019 is appropriate. 2019- is not a magic year- other than its the earliest the first people who availed of the CGT exemption can sell their units (the scheme was launched in 2012).

The CGT exemption on property- ended on the 31st December 2014- and there were more properties bought under the exemption between 1st March 2014 and 31st December 2014- than in the 2 and a half previous years. Thus- the bulk of units that are being held onto for tax reasons- could reasonably be expected to hit the market in the period March 2021 to December 2021- and not from the get go in 2019.

Edit: Scheme formally came in on 7th December 2011- so units under the scheme will drip onto the market from 8th December 2018.

Grumpypants

It is an easy choice, sell the apartment and buy your forever house and have a small mortgage.

In theory, it sounds great to have the apartment rented out. In reality when the tax man takes up to 60% on the rental income, with a mortgage of 6k, around 4K on management fees and maintenance, and 1k on insurance and other random bills. You are prob looking at a 3-4k loss per year.

Granted you are building equity, but anything you build in the apartment is offset by the interest on the 250K mortgage on the house.

Sell the apartment and pay down the mortgage on your house. Get rid of that and live rent/mortgage free and start building cash.

evolving_doors

You could do rent a room for up to 14k tax free every year OP!

Lumen

evolving_doors wrote: »

You could do rent a room for up to 14k tax free every year OP!

Only while the current tax regime prevails. It's not a great idea to make a 20+ year financial commitment on the basis of an annually reviewed scheme, particularly on a marginal income.

"Have we learned nothing!" is screaming in my head.

__..__

I'd sell. I've been a landlord for more years than I can remember and up to this year I would recommend it. But since this year I'm getting out altogether. Seriously you don't want to be a landlord now.

ouxbbkqtswdfaw

Totally agree with the above. Being a landlord with a few properties, I can tell you it's a mugs game now.

Lumen

Lumen wrote: »

Only while the current tax regime prevails. It's not a great idea to make a 20+ year financial commitment on the basis of an annually reviewed scheme, particularly on a marginal income.

"Have we learned nothing!" is screaming in my head.

Current trends would show it's far more likely to increase this amount than reduce or get rid of it.

In any case the rent a room scheme is here for good. It would be a pointless exercise getting rid of it as people will still do it and just not declare the income (in fact many doing it now don't bother to declare it as it's all cash). The government brought in the scheme to try encourage people to declare the income but they know well if they got rid of the scheme people would still rent rooms and still pay no tax so it would be a waste of time.