Buying second home and rent out first home

AlmaMater

I don't understand mortgages at all and will go to bank in new year but can people give me a steer if the following is feasible at all please:

Bought house in 2014 for 188k, loan of 162k. House is now worth 240k approx. (26k deposit)

We have seen an amazing house for 380k, we have 35k in savings.

We would like to keep first home and rent it out.

Our salaries allow us to have a mortgage of 650k but I'm so confused about the deposit...

Is the deposit we have just our savings plus old deposit 35+26 so 61k (not enough for the loan for two houses)

Or is it 61k plus the rise in value in our house (another 50k)

A lot of numbers - sorry! Any advice would be very appreciated- thanks

liam7831

You will need a deposit of €76,000 which is 20% of buying price or more if price goes up

AlmaMater

liam7831 wrote: »

You will need a deposit of €76,000 which is 20% of buying price or more if price goes up

Thanks Liam.. so this increase in value in our current home is not relevant?

jlm29

Your old deposit doesn’t come into it- that’s gone, you spent it on your house???
Your deposit is whatever you have in the bank- you need 20%.

AlmaMater

jlm29 wrote: »

Your old deposit doesn’t come into it- that’s gone, you spent it on your house???
Your deposit is whatever you have in the bank- you need 20%.

Ah okay. Someone told me that our loan to value rate has changed so we would remortgage the first house and have a large mortgage for two houses. Maybe not possible after all. Thanks

liam7831

AlmaMater wrote:

Thanks Liam.. so this increase in value in our current home is not relevant?

No not relevant, if your applying for a second mortgage you need 20% of the value of the new house in savings to act as a deposit. The two mortgages will be viewed separately by the bank

AlmaMater

liam7831 wrote: »

No not relevant, if your applying for a second mortgage you need 20% of the value of the new house in savings to act as a deposit. The two mortgages will be viewed separately by the bank

Thanks. I might still talk to bank about "releasing equity" - once I figure out what that is!

Andrew Beef

Get your savings a little higher and then look for an exemption (the bank could go up to 90% Loan to Value).

It sounds like you’ve decent incomes.

liam7831

quote=AlmaMater]Thanks. I might still talk to bank about "releasing equity" - once I figure out what that is![/quote]


I doubt you can release any equity as the bank owns the majority at the moment

AlmaMater

Andrew Beef wrote: »

Get your savings a little higher and then look for an exemption (the bank could go up to 90% Loan to Value).

It sounds like you’ve decent incomes.

Thanks, motivated to save now!

AlmaMater

liam7831 wrote: »

quote=AlmaMater]Thanks. I might still talk to bank about "releasing equity" - once I figure out what that is!

I doubt you can release any equity as the bank owns the majority at the moment[/quote]

Okay- thanks for the advice!

liam7831

AlmaMater wrote:

Okay- thanks for the advice!

No worries best of luck

dingding

liam7831 wrote: »

quote=AlmaMater]Thanks. I might still talk to bank about "releasing equity" - once I figure out what that is![/quote

It might be worth speaking to a few banks and explain your plan.

Also consider why you are keeping your house. Once it is no longer the family home you pay hefty capital gains tax on any increase in value from that point.

You may need a buy to let mortgage which is more expensive.

Also if you are after rental income there might be a cheaper property which will give you the same income.

You need to look on it purely as a financial transaction not because you have an attachment to the house.

You are also very exposed to any rise in interest rate or fall in house prices.

AlmaMater

dingding wrote: »

liam7831 wrote: »

quote=AlmaMater]Thanks. I might still talk to bank about "releasing equity" - once I figure out what that is![/quote

It might be worth speaking to a few banks and explain your plan.

Also consider why you are keeping your house. Once it is no longer the family home you pay hefty capital gains tax on any increase in value from that point.

You may need a buy to let mortgage which is more expensive.

Also if you are after rental income there might be a cheaper property which will give you the same income.

You need to look on it purely as a financial transaction not because you have an attachment to the house.

You are also very exposed to any rise in interest rate or fall in house prices.

We just are confident that the house we're in now will continue to rise in value (because of investment in the area) and would be a great investment to hold on to and sell at the right time. The market has moved on where we live a lot so we wouldn't afford anything as spacious or rentable as this as this. We know the County Council would take it for a long term rent- they contacted us before about this.

You're right to take emotion out, it's our first home so it's hard to separate the financials from the care we put in to doing it up!

dingding

AlmaMater wrote: »

dingding wrote: »

We just are confident that the house we're in now will continue to rise in value (because of investment in the area) and would be a great investment to hold on to and sell at the right time. The market has moved on where we live a lot so we wouldn't afford anything as spacious or rentable as this as this. We know the County Council would take it for a long term rent- they contacted us before about this.

You're right to take emotion out, it's our first home so it's hard to separate the financials from the care we put in to doing it up!

Once you rent it the tenants would not put the same care into it.

From this perspective it only works if it works financially. Also get an agent to manage it. Life is to short for dealing with tenants. Also remember that any gain will attract capital gains tax at I think 33%. A large house will not get much more rent than a smaller one. Well where I live anyway. I would sell it and buy the house you want now. If you put it off you might not be able to afford it when the time comes.

Caranica

Been there, done that. Advice: don't do it. Sell your first house. The hassle and expense and frustration and heartbreak of being a landlord cannot be anticipated. Cut and run, you won't regret it.

dingding

Caranica wrote: »

Been there, done that. Advice: don't do it. Sell your first house. The hassle and expense and frustration and heartbreak of being a landlord cannot be anticipated. Cut and run, you won't regret it.

Agreed. Have a look at some of the nightmare stories from a landlords perspective here and on ask about money.com You could have 100k when you sell your existing house. I would focus then on shorting the mortgage term.

I looked at myself and my wife’s salary and we would get a mortgage of that order as well but we would have no life making the repayments.

You need to be able to afford if the house is not rented for 6 months or longer and you also need a fund for repairs if it is damaged or vandalised. If the Tennant stops paying it can take ages and a lot of money to get them out. Don’t expect others to treat you the same way you would treat your landlord.

There are mortgage repayment spreadsheets and it might be worth buying the new house. Cashing in the profit on the existing house which will be tax free as it is your family home.

If you could even knock five years of your mortgage term it would make a big difference in the interest you pay.

Humour Me

If you sold your current home based on your figures you would be left with cash of €78k (240-162). With your savings of €35k, that gives you a substantial deposit to put towards the new property. You need to consider your priorities, the new property or staying put for a few years while saving and hoping that similar property come up at a price you can afford.

Have you calculated the costs of renting e.g. tax, registration fees, maintenance? You can't assume the rent you will receive will cover the mortgage and tax due.

Colonel Claptrap

I'm amazed this hasn't been said yet, but do you think you are experienced enough to be doing this?

Renting out your current home immediately makes you a property investor. Please don't take this the wrong way, but you dont seem to know much about mortgages, refinancing, leverage or equity.

Is there a particular reason you want to hold onto this property other than as a purely financial decision? If you want to invest in property as an asset class, are your other savings/pension diversified enough to protect you from a downturn?

If I was in your position I'd be asking do I want to put all of my eggs into this single basket. It's a huge risk.

April 73

The chips are stacked against the amateur landlord these days. Taxation levels are high, rental controls are strict & tenancy rights mean it’s almost impossible get tenants to leave - even when they stop paying rent.

Have you read up on what it means to be a landlord today & the laws that pertain to it?

In your shoes (and I did something similiar two years ago) - I would sit down & add up the costs of maintaining two houses, the rental tax bill, factor in your own lifesstyle costs - holidays, cars, household bills and see where the numbers fall. Until you’ve done this - it’s all just a pipe dream to hold on to the first house.
We did this and realised that although it was doable on the numbers, it would impact too much if something went wrong (non-paying tenants, one of us losing a job), and on our ability to save & invest in other non-property related investments. All of your financial risk will be in property.

On your incomes (assuming they must be about €185k a year to get mortgage approval for €650k) if you sold the first house, used the equity as a deposit for the €380k house, you’d have a very comfortable mortgage & should have the ability to save & invest in other areas. To be honest on that income & a relatively small current mortgage I’m surprised that your savings are only €35k. It could be money well spent to pay a financial advisor for a couple of hours & go through your finances & your understanding of mortgages & investment options.

Andrew Beef

The fact that you bought in 2014 means that you do not have a tracker.

On that basis, you’ll probably be better off with a smaller mortgage on the “new” property.

People often forget that repaying a mortgage (or having a smaller mortgage) at circa 3% is akin to getting a guaranteed return of circa 5-6%.

dingding

Humour Me wrote: »

If you sold your current home based on your figures you would be left with cash of €78k (240-162). With your savings of €35k, that gives you a substantial deposit to put towards the new property. You need to consider your priorities, the new property or staying put for a few years while saving and hoping that similar property come up at a price you can afford.

Have you calculated the costs of renting e.g. tax, registration fees, maintenance? You can't assume the rent you will receive will cover the mortgage and tax due.

Possibly evn a bit more as you would have paid some of the principal and not owe as much as the day you took out the mortgage

Subcomandante Marcos

OP, your plan might seem good in your head but the reality is you won't make a profit after taxes From the rental of your current home, your new mortgage will be as or more expensive per month and you'll have the headache or having to deal with tenants, potential costs of repairs and maintenance on the rental property, the time it takes to look after this new business, and so on.

Sell your current house, buy a new property which suits your wants/needs and carry on enjoying your life.

Don't become another amateur landlord who doesn't have a clue what they're doing, there's more then enough of them knocking around.

AlmaMater

dingding wrote: »

Agreed. Have a look at some of the nightmare stories from a landlords perspective here and on ask about money.com You could have 100k when you sell your existing house. I would focus then on shorting the mortgage term.

I looked at myself and my wife’s salary and we would get a mortgage of that order as well but we would have no life making the repayments.

You need to be able to afford if the house is not rented for 6 months or longer and you also need a fund for repairs if it is damaged or vandalised. If the Tennant stops paying it can take ages and a lot of money to get them out. Don’t expect others to treat you the same way you would treat your landlord.

There are mortgage repayment spreadsheets and it might be worth buying the new house. Cashing in the profit on the existing house which will be tax free as it is your family home.

If you could even knock five years of your mortgage term it would make a big difference in the interest you pay.

Thanks. The Council have a scheme where they rent the house for 10/15/20 years and are responsible for damage other than wear and tear. You're guaranteed rent but at 80% market rate and I think that's worth it. The house would rent for €1200 so if the council paid us a gauranteed €960 a month, it would cover our €650 mortgage and we would have a small tax liability.

I don't want to be strangled with a big mortgage, life is too short. Just trying to avoid making a mistake when were so lucky buying this house at a good time.

AlmaMater

Colonel Claptrap wrote: »

I'm amazed this hasn't been said yet, but do you think you are experienced enough to be doing this?

Renting out your current home immediately makes you a property investor. Please don't take this the wrong way, but you dont seem to know much about mortgages, refinancing, leverage or equity.

Is there a particular reason you want to hold onto this property other than as a purely financial decision? If you want to invest in property as an asset class, are your other savings/pension diversified enough to protect you from a downturn?

If I was in your position I'd be asking do I want to put all of my eggs into this single basket. It's a huge risk.

No offence taken- i agree, that's why we'd like to give it over to the Council to rent and not be involved day to day.

The house is really close to my parents so that's a factor (heart not head)

Pension pot is a good idea - will have to talk to someone about options. Thanks

AlmaMater

Humour Me wrote: »

If you sold your current home based on your figures you would be left with cash of €78k (240-162). With your savings of €35k, that gives you a substantial deposit to put towards the new property. You need to consider your priorities, the new property or staying put for a few years while saving and hoping that similar property come up at a price you can afford.

Have you calculated the costs of renting e.g. tax, registration fees, maintenance? You can't assume the rent you will receive will cover the mortgage and tax due.

We've done calculations based on now and currently we could manage fine but if anything changed with our jobs, I'm not sure. Thanks

AlmaMater

April 73 wrote: »

The chips are stacked against the amateur landlord these days. Taxation levels are high, rental controls are strict & tenancy rights mean it’s almost impossible get tenants to leave - even when they stop paying rent.

Have you read up on what it means to be a landlord today & the laws that pertain to it?

In your shoes (and I did something similiar two years ago) - I would sit down & add up the costs of maintaining two houses, the rental tax bill, factor in your own lifesstyle costs - holidays, cars, household bills and see where the numbers fall. Until you’ve done this - it’s all just a pipe dream to hold on to the first house.
We did this and realised that although it was doable on the numbers, it would impact too much if something went wrong (non-paying tenants, one of us losing a job), and on our ability to save & invest in other non-property related investments. All of your financial risk will be in property.

On your incomes (assuming they must be about €185k a year to get mortgage approval for €650k) if you sold the first house, used the equity as a deposit for the €380k house, you’d have a very comfortable mortgage & should have the ability to save & invest in other areas. To be honest on that income & a relatively small current mortgage I’m surprised that your savings are only €35k. It could be money well spent to pay a financial advisor for a couple of hours & go through your finances & your understanding of mortgages & investment options.

Thanks, will do.

dingding

AlmaMater wrote: »

Thanks. The Council have a scheme where they rent the house for 10/15/20 years and are responsible for damage other than wear and tear. You're guaranteed rent but at 80% market rate and I think that's worth it. The house would rent for €1200 so if the council paid us a gauranteed €960 a month, it would cover our €650 mortgage and we would have a small tax liability.

I don't want to be strangled with a big mortgage, life is too short. Just trying to avoid making a mistake when were so lucky buying this house at a good time.

Note, you can only write of a portion of the interest not the entire mortgage payment i think it is 75% of the interest the spreadsheet below might be useful in understanding the interest component

https://www.vertex42.com/ExcelTemplates/loan-amortization-schedule.html

Also a good article from the indo below

https://www.independent.ie/business/personal-finance/accidental-landlords-face-sizeable-tax-bill-for-rental-income-29436047.html

AlmaMater

dingding wrote: »

Note, you can only write of a portion of the interest not the entire mortgage payment i think it is 80% of the interest the spreadsheet below might be useful in understanding the interest component

https://www.vertex42.com/ExcelTemplates/loan-amortization-schedule.html

Thanks for this, will have a look.

Bigus

If you sell your existing home as your principle residence since 2014 , all the uplift in price is tax free if you sell now . Once you move on to another residence this tax free status is clawed back by revenue. So you're potentially giving up 60k net that you could release now in cash tax free to lower you new mortgage.

antoinolachtnai

There is some pretty bad advice on this thread.

Most importantly, the CB rules don’t say anything about cash deposits. What they care about are loan to value ratios.

It sounds to me like you would potentially be able to borrow to get the money you want. I can’t see why you couldn’t use the equity in your existing house (which will become BTL) to buy the new property.

Whether you can make money in renting is another question. If you don’t mind the work and substantial costs involved and if you believe in the prospects of the area where the house is, then this could be a good move for you.

You would benefit from some good independent financial advice.

Andrew Beef

Plus some other bad advice above...interest is 100% deductible for those long-term council lets and you don’t lose your tax-free gain when you move out.

The OP will have lived there for circa 4 years. A bonus year is awarded. If the OP then sells after (say) 10 years, 50% of the gain is tax exempt. After 11 years, 5/11ths and so on.