Property Investment versus Mortgage Payoff

Mirsob

Hi everyone,

First time posting here, so hoping there might be a few wise souls out there who can help with some decision making on property and financial matters! As it is currently driving me insane contemplating all scenarios, and not having a crystal ball etc!

At present, myself and my partner are contemplating paying off the balance of our 25 year mortgage 10 years early, however this will deplete savings considerably, that we had been saving on the off chance that we might spot a property bargain that we could purchase with a view to rental income and as a nest egg for retirement etc. So we really don't know what the best thing do do is in the current market, but here are the options as we see it, and some of our reservations on some of the options:

1. Pay the mortgage off and get rid of the debt for good
2. Save the money, and continue to pay off the mortgage and all associated interest as before, and potentially invest in property in the near future with the money saved, before prices potentially get out of control.
3. Pay off some or most of the mortgage, and if the current rise in house prices stabilizes or even falls, supplement any remaining savings with a new mortgage application if needs be in the future at a lower interest rate.
4. Invest in a pension instead of property for renting (wary of pensions due to hidden fees and costs and constraints in extracting the funds in case of an emergency)
5. Invest in the stockmarket (no experience in this, and aware the market can be volatile based on economic climate, and we could end up losing money).

Perhaps there are other alternatives we haven't thought of, but at the moment we are looking at guidance on which of Options 1 & 2 would be the best course of action based on current market conditions and forecasts and gut feelings based on experience, if anyone would care to share?

Thanks in advance for any and all guidance and advice on these matters.

Mirsob

niallers1

Check out Dave Ramsey's baby steps.

Follow his steps and you cannot go wrong.
Mortgage interest rates more than Likely at or close to their low.
In the 80's we had interest rates tipping 15%.

Nothing to say we won't see those rates again in the next 10 years.

If you have any consumer / car debt pay that off first before paying extra on your mortgage.

Paying off debt is a guaranteed return on your money.

Mirsob

niallers1 wrote: »

Check out Dave Ramsey's baby steps.

Follow his steps and you cannot go wrong.
Mortgage interest rates more than Likely at or close to their low.
In the 80's we had interest rates tipping 15%.

Nothing to say we won't see those rates again in the next 10 years.

If you have any consumer / car debt pay that off first before paying extra on your mortgage.

Paying off debt is a guaranteed return on your money.

Thanks, makes sense. Some articles on the topic say its best to take advantage of low interest rates on debt, and paying off mortgage early represents opportunity lost in investment, with typically higher gains of 5% quoted for stock market. As I said I am clueless on the latter, so don't know how true this is. Return on investment in property is potentially a lot higher, depending on rental yield and prevalent market conditions.
Thanks again for the advice!

niallers1

A PRSA shouldn't cost more than 1% per annum assuming you don't have a pension scheme at work.

Stock market returns generally greater than 5% depending on the fund you choose but returns are not guaranteed.

Likewise with property. It could be 20 years before you make a profit. Over 50% of the rent you get goes back to the government in tax. From the remaining 50% you have to pay the mortgage. If that isn't enough then you have to pay the mortgage from your own pocket which is a drain each month.

Mortgage rates on investment properties is high. So factor in the mortgage rate and the risk of tenant not paying rent. It's not sure thing.

There is a peace of mind knowing that the roof over your family is secured for life.
If you are mortgage free you will have money in your pocket each month that you can invest.

nsi423

Your in a good position OP, congrats!
One thing I have heard others say in response to this situation is: what is your goal here? The goal should drive the decision.
It's often not an easy question to answer! And everyone's circumstances are different.
If the goal is simply to maximize financial gain, you still need to ask yourself when you will need the money and for what. The timeframe in particular is an important question as it can rule in or out things like pensions or the stock market (or property for that matter).
You mention that pensions can have lots of fees (it's true) but there are good pension options out there, with significant tax relief if you're on the higher rate of income tax. But that's no good if you're goal is to fund a career break or future kids' education.
You're in a good position financially - what do you want to do?

JustAThought

there was an intreating thread recently on if people overpaid their mortgage - some very interesting replies that you might find insightful. Ignore the eejits promising 10 &15% guaranteed returns on stock market speculation who came close to ruining it. warning value of stocks may ruse as well as fall & your hime may be at risk....

I’d be looking at risk - but thats me. The pandemic has focused that for a lot of people - traditional reliable income streams unexpectedly stopped, whole industries shut down, companies shut & many on ‘pandemic payments’ and taking significant lifestyle hits. We’re not out of it yet. And more layers of leglislation added to protect people not paying their rent under these circumstances but nothing to protect mortgage owners if they lose their job/income or if their tenant just refuses to pay.

I’f also be asking if I waited would I be too old to get a mortgage later - and what my long term goals would be - there may be far better lifestyle options to living & buying cheaper elsewhere - county or other country - with far cheaper overheads & better value properties that could deliver a better return - tourism/ university towns etc That being said both of those sectors are affected hugely by the pandemic... etc

Its a different world now.

If you lost your job tomorrow would you get another? Or are you a civil servant and so will never have to worry about that or a pension? Maybe thats the way forward - taking a salary hit but getting a job for life and almost free index linked pension & having your savings as a lifestyle buffer...? Genuine answer - just a little lateral thinking.

agent_88

I think you should speak to an independent financial planner. It will be the best money you ever spend.

A couple of things to consider with investing in property - its impossible to predict the way the market is going to go. If you plan to rent the property out depending on your income you could be paying 40% tax on this income.
I would look at maxing out your pension contributions. Look into doing AVCs (additional voluntary contributions), this maximises your tax relief.

Mirsob

nsi423 wrote: »

Your in a good position OP, congrats!
One thing I have heard others say in response to this situation is: what is your goal here? The goal should drive the decision.
It's often not an easy question to answer! And everyone's circumstances are different.
If the goal is simply to maximize financial gain, you still need to ask yourself when you will need the money and for what. The timeframe in particular is an important question as it can rule in or out things like pensions or the stock market (or property for that matter).
You mention that pensions can have lots of fees (it's true) but there are good pension options out there, with significant tax relief if you're on the higher rate of income tax. But that's no good if you're goal is to fund a career break or future kids' education.
You're in a good position financially - what do you want to do?

Thanks for the advice, v good questions to ask, and as you said, hard to answer, especially since Covid and the government reactions took away an awful lot of certainty and security I used to have about the future, so much harder to plan ahead and work out goals for the future!!

Mirsob

JustAThought wrote: »

there was an intreating thread recently on if people overpaid their mortgage - some very interesting replies that you might find insightful. Ignore the eejits promising 10 &15% guaranteed returns on stock market speculation who came close to ruining it. warning value of stocks may ruse as well as fall & your hime may be at risk....

I’d be looking at risk - but thats me. The pandemic has focused that for a lot of people - traditional reliable income streams unexpectedly stopped, whole industries shut down, companies shut & many on ‘pandemic payments’ and taking significant lifestyle hits. We’re not out of it yet. And more layers of leglislation added to protect people not paying their rent under these circumstances but nothing to protect mortgage owners if they lose their job/income or if their tenant just refuses to pay.

I’f also be asking if I waited would I be too old to get a mortgage later - and what my long term goals would be - there may be far better lifestyle options to living & buying cheaper elsewhere - county or other country - with far cheaper overheads & better value properties that could deliver a better return - tourism/ university towns etc That being said both of those sectors are affected hugely by the pandemic... etc

Its a different world now.

If you lost your job tomorrow would you get another? Or are you a civil servant and so will never have to worry about that or a pension? Maybe thats the way forward - taking a salary hit but getting a job for life and almost free index linked pension & having your savings as a lifestyle buffer...? Genuine answer - just a little lateral thinking.

Thanks, really good questions and things to think about, because the uncertainty following Covid has definitely changed the horizon and level of risk, and the legislation is questionable on an awful lot of things, including tenant and landlord rights.

I'm self employed and director of a limited company, so have a bit of flexibility in extraction of salary and use of any company profits for pensions, potential property investment in the future etc. That being said, turnover took a big hit last year due to Covid, so business can be unpredictable, and there's no guarantees for the future!

Mirsob

agent_88 wrote: »

I think you should speak to an independent financial planner. It will be the best money you ever spend.

A couple of things to consider with investing in property - its impossible to predict the way the market is going to go. If you plan to rent the property out depending on your income you could be paying 40% tax on this income.
I would look at maxing out your pension contributions. Look into doing AVCs (additional voluntary contributions), this maximises your tax relief.

Thanks, as a company director I've a bit more flexibility with salary extraction and pensions etc.
Have gone to financial advisors, and they all advised that pensions are a good investment for tax relief reasons. I did up a spreadsheet based on their projected pension payments from aged 60 onwards and realized that the way pensions are set up is such that your return on investment is not actually even realised until aged 77+, so that didn't sound like a good business move to me, and my gut instinct was telling me it would be better to have more control over the funds myself even if it means having a higher tax bill. Nonetheless, based on the advice from financial advisors and accountants I started up a pension 2 years ago, only thing is a €23k deposit went missing from my account for a few months so my trust in the pensions companies has been pretty much destroyed. It eventually appeared in the account, but only after I threatened to go to the financial ombudsman about the missing funds.
Re buying property through the company, as far as I know any rental income is taxed at 25%. Not sure about the practicalities of liquidising the asset in the future though, so would probably have to get some professional advice on that to determine the pros and cons of potentially purchasing through the company versus from personal funds/mortgage. Anyone have any experience in this?

Ultimate dream is to own three properties mortgage free, one for each child, and then retire early to leave the rat race behind and claw back some health before I burnout, buy a plot of land with a sea view (probably in Ireland, but undecided on that) convert a shipping container or two to a house with a big window vista out over the sea/ocean, and ideally direct walking access to a beach. Might have to change that dream now though with the threat of global warning and sea level rise due to melting ice sheets!! On the plus side I have a campervan so can always live in that and park it at a safe distance from the coastal edge if all else fails

Are there really still people in Ireland who think buying one property to rent out is easy, hassle-free, and going to make them loads of money?.

lawred2

niallers1 wrote: »

Check out Dave Ramsey's baby steps.

Follow his steps and you cannot go wrong.
Mortgage interest rates more than Likely at or close to their low.
In the 80's we had interest rates tipping 15%.

Nothing to say we won't see those rates again in the next 10 years.

If you have any consumer / car debt pay that off first before paying extra on your mortgage.

Paying off debt is a guaranteed return on your money.

15% interest would lead to widespread defaults. Not going to happen.

niallers1

Almost impossible to get planning permission to build near the sea so you would probably have to buy.

There might be vat issues buying a property through a company.

There is no wrong answer. All of what you suggest is good. You could do a bit of everything.
Some towards pension, some towards overpaying mortgage.
Just don't risk losing your family home for the sake of a profit that may or may not materialize in the future.

flexcon

Financial Ireland are offering 20 years fixed at 2.9%.

I mean you would have thought every new First time buyer would take that. Save the money over 20 years and hopefully be in the same position as the OP.

We were going to overpay the mortgage by 10% a year, but, as was rightly pointed out - inflation tends to do that anyway sorta.

The J Stands for Jay

Mirsob wrote: »

I did up a spreadsheet based on their projected pension payments from aged 60 onwards and realized that the way pensions are set up is such that your return on investment is not actually even realised until aged 77+, so that didn't sound like a good business move to me,

It sounds like your looking at the monthly pension on the projections. Ignore that, no-one goes for the annuity option these days. Ask the advisors about ARFs.

niallers1

lawred2 wrote: »

15% interest would lead to widespread defaults. Not going to happen.

Never say never. A lot can change in 10 years.

We've had them before, we can have them again.

lawred2

niallers1 wrote: »

Never say never. A lot can change in 10 years.

We've had them before, we can have them again.

Well of course - anything can happen.

But interest rates at a level that would result in a widespread default isn't really an option on the table for central banks.

High interest rates don't just happen. They are set by central banks.

15% interest rate on a 300k mortgage is €45k interest per annum

So yeah - it's not going to happen.

Mirsob

lawred2 wrote: »

Well of course - anything can happen.

But interest rates at a level that would result in a widespread default isn't really an option on the table for central banks.

High interest rates don't just happen. They are set by central banks.

15% interest rate on a 300k mortgage is €45k interest per annum

So yeah - it's not going to happen.

I would agree with the philosophy never say never tbh, and to be prepared.

If it happened before it could theoretically happen again. Thankfully I did not experience the 15% rate in the 80s as I was too young to know anything about it, but would not put it past the banks and those in power in government to increase the rates again as they please, with no regard for the ECB rate or for the wellbeing of the customers and citizens of the country, especially in any attempts for them to claw themselves out of the massive hole they have dug in the exchequer and all public funding pots due to the Covid response. That's what happened in the last crash - rates were escalated quite significantly over a short period post 2009 after the celtic tiger crash, and good customers were forced to pay for non performing loans.

I have just had the pleasure (not) of reviewing correspondence and records of my mortgage payments over the last 15 years (from PTSB) and can see that they indiscriminately raised standard variable rates to as high as 6%+ whenever they pleased, and that their tracker rates were well in excess of ECB rates on a consistent basis, so how they can call them tracker rates is beyond me.
In my view, the fact that PTSB are 75% state owned probably means they can do whatever the hell they please these days with no repercussions whatsoever, and similarly for the other state owned banks, which means that the state are implicit in shafting everyone who tries hard to earn an honest living and put a roof over their heads and provide for themselves and their families, forcing them to shell out massive proportions of household income on an ongoing basis with inflated house prices due to the brown envelope deals they are doing with the investment and vulture funds and the incredulous fact that only 11% of all repossessions arising from mortgage arrears in this country are successful, which leads to the need for banks to raise the rates to recuperate their losses from performing customers and those who pay their debts no matter what, even if it means they might not have enough food on the table for their own kids. My fear is that once the safety net of Covid 19 Government funding is whipped out from under us the true Covid fallout will be felt by people no longer able to pay the rising interest rates, who will default on the mortgage payments and lose their home, with many many tenants and those renting evicted in the process, and potentially left homeless and struggling to put a roof over their heads.

It's a viscous circle with no incentive to change the system so long as it lines the pockets of those in government and the fat cat CEOs of the banks, and so long as we all continue to accept it without question or reason.

And tbh there are a lot more variables and risks today in the 21st century than there was in the 80s, so would not be surprised by any rip off rates that might be flung upon us in the future.

It's a tough call either way, and apologies for any perceived negativity (and brutal honesty), but eroded trust in the government over the past year is perhaps fueling to added cynicism and skepticism regarding the trustworthiness of banks and those in power, even more so than ever before. I am convinced that they have their best interests at heart and are essentially out to shaft us all.
Feel free to correct me if anyone thinks I am wrong.
And for anyone who thinks there might even be a tiny bit of truth to what I am saying, any insights and advice into what you think we might be able to do about it, would be very much appreciated, as it appears to be a bit of a stalemate/catch 22 situation to me. We are damned if we do and damned if we don't so long as corrupt greedy bankers and politicians continue to be allowed to wield such power without challenge or demands for accountability from the people who are paying their wages.

listermint

niallers1 wrote: »

Check out Dave Ramsey's baby steps.

Follow his steps and you cannot go wrong.
Mortgage interest rates more than Likely at or close to their low.
In the 80's we had interest rates tipping 15%.

Nothing to say we won't see those rates again in the next 10 years.

If you have any consumer / car debt pay that off first before paying extra on your mortgage.

Paying off debt is a guaranteed return on your money.

If mortgage rates are currently the lowest.



Doesn't it make more financial sense to hold on to your low mortgage as the rate on servicing that debt is Tiny in comparison to paying it down with usable money?

niallers1

listermint wrote: »

If mortgage rates are currently the lowest.



Doesn't it make more financial sense to hold on to your low mortgage as the rate on servicing that debt is Tiny in comparison to paying it down with usable money?

Depends on your appetite for risk. Most people cannot even Imagine the interest rates going up. It will be a shock to them if they ever have to experience that.
Investment returns are unknown. Paying down debt is a known.(your return is your interest rate guaranteed and that nice warm fuzzy feeling that you own your home)

Personally, I would pay into a pension and pay down mortgage debt to at least a very comfortable level.

Choosing not to pay down the mortgage in order to invest is like choosing to borrow money to invest. This cost + some percentage for risk (risk of making a loss) needs to be factored into the decision.

In order I would do the following-
1- Pay down all consumer debt, credit card and car loans etc.
2- Pull together 3-6 months of living expenses
3 - Pay at least 15% of household income into pension
4- Start paying down the mortgage to get it to a comfortable level so that it could be paid even if you were dependant on social welfare while out of work.

There is no real wrong decision with what the OP wants to do. He is in a great position where he just needs to choose which right decision is better.

cruizer101

listermint wrote: »

If mortgage rates are currently the lowest.

Doesn't it make more financial sense to hold on to your low mortgage as the rate on servicing that debt is Tiny in comparison to paying it down with usable money?

It depends, firstly if you think there is any chance of you taking a loan down the line, (car, college fees, house renovation) then yes better to keep that money aside as mortgage rate will be lower.

If you can pay more into a pension with AVC's and get the tax benefit that is worth far more due to the tax advantage.

Lastly overpaying vs investing there is no right answer, there was thread shut down a while ago as it was people arguing over which was better.
Mortgage overpayment is guaranteed, and is better than other guaranteed, eg. state savings bonds.
Investing in stocks is not. That said over a long enough period stocks will probably give a better return.
You will have people say that you can get a 10% return every year, maybe they can but they could also lose a lot.

Probably best to go with a bit of both but it really depends on the individual I think.

FromADistance

Have you considered an SSAP pension? If you had the capacity to borrow money you could buy a property through an SSAP. Rent would accrue tax free within the scheme & could be used to service a loan repayment. Of course, none of this comes without risk and you would need proper financial advice to see if this would be a runner for you.

Mirsob

FromADistance wrote: »

Have you considered an SSAP pension? If you had the capacity to borrow money you could buy a property through an SSAP. Rent would accrue tax free within the scheme & could be used to service a loan repayment. Of course, none of this comes without risk and you would need proper financial advice to see if this would be a runner for you.

Yes thanks, an SSAP has been recommended to me previously, sounds like it is worth looking into a bit more.