Advice on (i) Unlocking Pension to Repay debt and (ii) whether to keep RIP

[_OkGo_]

A debt free property worth 700K + appreciation over next 15 years vs 100k invested today for them in 15 years ?

This is where your thinking is fundamentally flawed and you are not even close to comparing apples to apples.

As @Sarenco has already pointed out to you, your rental is generating a return of ~€3k net. This means that your income is paying down the bulk of the mortgage, not the property itself. And with the level of debt you have in loans, credit card and ppr mortgage, it is loss making.

You currently have debt commitments of ~€5k per month. Unusually both your mortgages go well past your retirement age which is a major red flag. If you were to try clearing these by 65, your monthly commitment would be €5.7k.

Your major problem is cashflow and its only going to get worse in 4/5 years when your kids do start university. You don't have the income to sustain the debt and cost of university.

If you sell the rental (which you absolutely should), it frees up ~€5k per month which can be invested for the next 15 years in something that is more easily accessible e.g. shares/ETF's. It also allows you to easily fund university from your income.

I would also imagine that you won't have €100k left over to play with. There is surely a significant CGT bill on the rental and you should be clearing all debts, not just the ppr mortgage. But even that doesn't change the very obvious need for you to sell the rental

 

[jim masters]

€377k x 5.39% (4.5 + 0.89) = €20,320.

So, €31,140 - €20,320 - €3,000 = €7,820.

Less income tax, prsi and usc @52% = €3,753.

Less €750 LPT = €3k.

That’s a lot less than the amount you are paying in interest on your PPR mortgage (which is highly likely to rise when you come off your current fixed rate).

And a heck of a lot less than the rate you are paying on unsecured debt.

You asked for views and I think it’s fair to say that we’re all saying the same thing - sell the rental, pay down your debts and leave your pensions alone.

But, look, it’s your money and your decision.

Best of luck whatever you decide.

This is where your thinking is fundamentally flawed and you are not even close to comparing apples to apples.

As @Sarenco has already pointed out to you, your rental is generating a return of ~€3k net. This means that your income is paying down the bulk of the mortgage, not the property itself. And with the level of debt you have in loans, credit card and ppr mortgage, it is loss making.

You currently have debt commitments of ~€5k per month. Unusually both your mortgages go well past your retirement age which is a major red flag. If you were to try clearing these by 65, your monthly commitment would be €5.7k.

Your major problem is cashflow and its only going to get worse in 4/5 years when your kids do start university. You don't have the income to sustain the debt and cost of university.

If you sell the rental (which you absolutely should), it frees up ~€5k per month which can be invested for the next 15 years in something that is more easily accessible e.g. shares/ETF's. It also allows you to easily fund university from your income.

I would also imagine that you won't have €100k left over to play with. There is surely a significant CGT bill on the rental and you should be clearing all debts, not just the ppr mortgage. But even that doesn't change the very obvious need for you to sell the rental

Thanks again for all the advice. I definitely need to deal with the expensive short term debt immediately so the choice is to access cash from the pension lump sum or sell the RIP.
So on the positive side sale of the RIP would leave us entirely debt free (we have losses so will pay no CGT on disposal) and free up the current debt servicing capacity to invest for the kids etc...it would also leave all of pension money to continue to enjoy tax free gains for 15 years.
So far so logical. But the probelm I have is the attracttiveness / possibility of further cap appreciation on the house versus the attartiveness of being able to invest the monies currently spent on debt servicing.

We could use 45k of tax free from pension to eliminate the short tern debt and also use the savings products to pay down most of the PPR (when they mature in a couple of years, which is around the time the fixed rarte expires ). That would deal with the overall indebtedness and keep the ability to benefit from any further appreciation in the RIP. We could then sell it in 10 years time and split the proceeds then into savings accounts for deposits for the kids. Of course it could falll in value...........

Thanks again for all the advice, much appreciated.

 

[Brendan Burgess]

Of course it could falll in value...........

That is the key.

You should not be borrowing money to invest in property. And that is what you are doing in effect.

Brendan

 

[Itchy]

So far so logical. But the probelm I have is the attracttiveness / possibility of further cap appreciation on the house versus the attartiveness of being able to invest the monies currently spent on debt servicing.

You could buy IRES REIT, double your after tax yield, maintain leveraged exposure to the Irish (Dublin) property market, diversify your specific property risk and eliminate the hassle of being a landlord. Your current RIP is a poor investment.

 

[thedaddyman]

Get the strategy right first, which is to sell the RIP.

Then look at the basics.

You won't need a rainyday fund with such a high income.

And you should be paying down debt rather than building up savings especially when you have savings products which mature in a few years.

Surely that would inly make sense if you have critical illness cover privately and/or sickness cover through work and/or an appropriate level of life asssurance. ?

I'm aware of a former colleague of mine who was a well paid contractor and had none of these in place and is now has terminal cancer with a Go Fund me page set up to help his family

 

[Brendan Burgess]

Hi Daddy

They have two big incomes. Of course,, you will know someone where they were both big earners and got killed in a car crash.

But with two big earners, critical illness cover is not needed.

But look, lots of people like paying out huge money to insurance companies to cover every possible eventuality. I don't.

Brendan

 

[jim masters]

That is the key.

You should not be borrowing money to invest in property. And that is what you are doing in effect.

Brendan

Not sure I follow you here Brendan. Most direct property investment involves debt to amplify the return on the equity. I get that the yield in the case of the RIP is poor today but if we had cut and run when we came out of negative equity we would not have the C Eur 350k equity in the RIP today. Yes rates are where they are today but we had 10 years of ecb at zero. That's not to say we shouldn't sell now because we have had a good run, just don't see the logic of not using debt when it comes to property investment.

 

[Sarenco]

I get that the yield in the case of the RIP is poor today but if we had cut and run when we came out of negative equity we would not have the C Eur 350k equity in the RIP today.

Is that not largely because you have been paying down the principal balance on the RIP mortgage?

If you paid €350k off the PPR mortgage, you would still have that €350k equity.

 

[jim masters]

You could buy IRES REIT, double your after tax yield, maintain leveraged exposure to the Irish (Dublin) property market, diversify your specific property risk and eliminate the hassle of being a landlord. Your current RIP is a poor investment.

Hi Itchy, interesting suggestion. I get that the underlying co uses debt to amplify their returns and this should be reflected in NAV and share price growth but don't REITs have a terrible rep for trading at a discount to NAV? Put another more basically if Dublin resi prices go up 5% next year are my 350k IRES shares going to appreciate as much as were I to continue to own a 725k house. I know diversification, one bad tenant, hassle and better (c5% it seems) dividend return from IRES but what about the prospects for cap growth ?

 

[jim masters]

Is that not largely because you have been paying down the principal balance on the RIP mortgage?

If you paid €350k off the PPR mortgage, you would still have that €350k equity.

Not totally accurate because from the point we exited neg equity we also had a long period of paying 89 bps interest and after tax profit rent to contribute to amortisation which occured alongside capital growth

 

[Sarenco]

Not totally accurate because from the point we exited neg equity we also had a long period of paying 89 bps interest and after tax profit rent to contribute to amortisation which occured alongside capital growth

Ok, but you’re now paying 5.39% interest and any possible future capital gains are obviously taxable.

Over the last 16 years, the real growth of Dublin residential house prices was negative.

Who knows what the next 16 years will bring but I wouldn’t bet my future on outsized real growth in house prices.

The era of zero interest rates is well and truly over.

 

[jpd]

By now it seems pretty clear that Jim wasn't really looking for advice but rather confirmation that his preferred option was correct

 

[jim masters]

ah not true - am seriously considering the advice. You've got to be willing to defend the advice you give though and not be thin skinned if someone qusetions it! I do very much appreciate the time people take to reply.

 

[Fortune]

Ok, but you’re now paying 5.39% interest and any possible future capital gains are obviously taxable.

Over the last 16 years, the real growth of Dublin residential house prices was negative.

Who knows what the next 16 years will bring but I wouldn’t bet my future on outsized real growth in house prices.

The era of zero interest rates is well and truly over.

Well, in this case you'd be betting your future on outsized real growth in one particular house's price

 

[Steven Barrett]

Just started reading this thread and my first thought was "sell the RIP". And everyone thought so too...except Jim!!

Selling the RIP, you will be able to clear the decks. Pay off most or all of your debts and free up cashflow, giving you space to breath.

Holding onto a debt because it's a tracker mortgage doesn't make sense. Do you know what's better than a tracker mortgage? No mortgage!

Based on your incomes and ages, your pensions are underfunded, so you should not touch them. Once you hit 61, you will have to start taking money out of them, so you may be making withdrawals before you want to retire, giving you unwanted taxed income at 52% total tax.

Clear your debts and start over and save money for retirement and take out life cover.


Steven
www.bluewaterfp.ie

 

[Itchy]

I know diversification, one bad tenant, hassle and better (c5% it seems) dividend return from IRES but what about the prospects for cap growth ?

Apart from diversification of property type, location, tenant, hassle free professional management and twice the yield, what have the Romans ever done for us?!

Selling the RIP is the financially sensible idea, as outlined. Even if you insist on being a property investor, there are better risk/return options than the property you have. Classic sunk cost fallacy.