Financial Advice Please

[Bobby]

I need some financial advice.

We need to extend our home to support our expanding family. The extension we want will cost around €100K. To finance this is where the problem arises. On a single family income I bring in €40K - not a lot of money when you have 3 kids! There is no guarantee that the banks will give us €100k and even if they did they only way I could afford repayments would be to stretch the house mortgage term out to infinity. Then what happens if building cost rise during construction? Moving house is no solution. The combined cost of my house with extension is still cheaper than similar properties in the vicinity.

I do have a second investment property that would net me €150k if I sold up in the morning. So what’s the problem you might ask? Well my job is not pensionable and I see the second house as my nest egg. Close friends and family have repeatedly told me that I would be mad to sell it considering it’s amazing financial performance since I bought it 8 years ago. But I am beginning to feel poor, preoccupied by money thoughts and yearn for some financial freedom. My wife feels the same. On the other hand the investment property ensures future financial security. Do I live for today or tomorrow?

 

[ClubMan]

There is no guarantee that the banks will give us €100k and even if they did they only way I could afford repayments would be to stretch the house mortgage term out to infinity. Then what happens if building cost rise during construction? Moving house is no solution. The combined cost of my house with extension is still cheaper than similar properties in the vicinity.

Must be some extension to cost €100K! Do you have a mortgage on the property at the moment. How much is outstanding on it? What lender? What rate? What type (fixed/variable/tracker)? What is the current market value of the property?

I do have a second investment property that would net me €150k if I sold up in the morning. So what’s the problem you might ask? Well my job is not pensionable and I see the second house as my nest egg.

Why don't you start a personal pension plan or a PRSA? By investing in your PPR and another property you are putting many or all of your financial eggs in the one basket (Irish domestic property) which is potentially risky. You might be better off diversifying your investments a bit more. Is the potential €150K gain on the investment property net of CGT?

Close friends and family have repeatedly told me that I would be mad to sell it considering it’s amazing financial performance since I bought it 8 years ago.

Sounds to me like you don't have a clear plan on your investments. Perhaps you need to obtain independent, professional financial advice?

But I am beginning to feel poor, preoccupied by money thoughts and yearn for some financial freedom. My wife feels the same. On the other hand the investment property ensures future financial security. Do I live for today or tomorrow?

If poverty is €40K p.a., your own home and an investment property that could yield a €150K gain then I don't know what's going on...

 

[RainyDay]

If you are prepared to trade-down your house on retirement, you will almost certainly free up the index-linked equivalent of your €150k gain which you can then invest in property or equities to bring in a similar income.

 

[Bobby]

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Must be some extension to cost €100K!

2 bedrooms, a toilet, and a dining room. The existing house is only a 2 bed bungalow. When did you last price an extension?

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Do you have a mortgage on the property at the moment. How much is outstanding on it? What lender? What rate? What type (fixed/variable/tracker)? What is the current market value of the property?

Yes. €130K outstanding. IIB. 3.7% variable. Value €350K.

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Why don't you start a personal pension plan or a PRSA? By investing in your PPR and another property you are putting many or all of your financial eggs in the one basket (Irish domestic property) which is potentially risky.

Not as risky as some smurfit business school graduate investing my hard earned money in bad companies. How many people's pensions were not worth a tupence just a few years ago?. I like to manage my funds personally.

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You might be better off diversifying your investments a bit more. Is the potential €150K gain on the investment property net of CGT?

Yes.

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Sounds to me like you don't have a clear plan on your investments. Perhaps you need to obtain independent, professional financial advice?

Do I sell the investment house or not? Is that not clear enough?

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If poverty is €40K p.a., your own home and an investment property that could yield a €150K gain then I don't know what's going on...

€40k a year with a young family on a single income is not easy. In December alone I spent €580 home oil, €85 oil burner serviced, €200 car repairs, 2 weddings, then there was Christmas. Of course everyone has bills but I don't think €40k is any great shakes because I can't even afford to go out. The €150K is only a paper gain and will remain so until I unlock it - which is what this whole posting is about.

 

[ClubMan]

Yes. €130K outstanding. IIB. 3.7% variable. Value €350K.

3.7% variable is a ridiculously high rate these days. You should definitely look at switching to a more competitive lender.

Not as risky as some smurfit business school graduate investing my hard earned money in bad companies.

Quite possibly it is actually. You are proposing to concentrate most or all of your wealth in a single asset class/grographic region which will generally be riskier than diversifying across a more varied set of assets, grographic regions, risk/reward profiles etc. (e.g. property - such as your PPR - and equities - such as a low charges managed or index tracker unit linked fund).

How many people's pensions were not worth a tupence just a few years ago?.

Most pension funds are performing very well over the past few years.

Do I sell the investment house or not? Is that not clear enough?

The question is clear enough but the answer is not. It's impossible to answer that question categorically without more detailed information such as a financial advisor will solicit and use to advise you.

 

[DrMoriarty]

€130K outstanding. IIB. 3.7% variable. Value €350K.

If you remortgaged and topped up by €80K you'd be eligible for NIB's tracker rate of 3.24% (for LTV <60%). You don't say how many years you have left on your current mortgage, but you could extend this to the max allowed (usually until age 64) in order to lessen the higher repayments somewhat. Then later, if/as conditions improve, you could start reducing the term.

Close friends and family have repeatedly told me that I would be mad to sell it considering it’s amazing financial performance since I bought it 8 years ago.

Does that mean rental income? Is that included in your €40K p.a.?

€40k a year with a young family on a single income is not easy.

I agree. Are you going to be benefitting from the new CB payments for children under 6? Could you foresee a day where your partner might return to work — even part-time — thereby reducing your tax 'hit' under individualisation?

 

[Bobby]

3.7% variable is a ridiculously high rate these days. You should definitely look at switching to a more competitive lender.

IIB 3.77%, AIB, 3.55%. It seems fairly competitive to me. Are the savings really worth the cost of switching?

Quite possibly it is actually. You are proposing to concentrate most or all of your wealth in a single asset class/grographic region which will generally be riskier than diversifying across a more varied set of assets, grographic regions, risk/reward profiles etc. (e.g. property - such as your PPR - and equities - such as a low charges managed or index tracker unit linked fund).

Ok I will give it some consideration.

Most pension funds are performing very well over the past few years.

Maybe over the last couple of years but certainly not over the last 5 years.

The question is clear enough but the answer is not. It's impossible to answer that question categorically without more detailed information such as a financial advisor will solicit and use to advise you.

What does the average financial advisor charge? I heard Eddie hobbs defending his €250 per hour fee on the radio. Maybe if you know of one you can send me his details privately.

 

[ClubMan]

IIB 3.77%, AIB, 3.55%. It seems fairly competitive to me. Are the savings really worth the cost of switching?

Unless I'm mistaken the most competitive variable tracker rates on offer right now are in the low 3% APR range (possibly depending on LTV and mortgage amount) and would be significantly lower that the rates above (you don't clarify if these are nominal rates or APRs) and would make a big difference to the total interest bill over the lifetime of the mortgage. Some lenders (e.g. NIB and UB who offer competitive tracker rates) will pay the costs of remortgaging. Where a lender does not do this you'd need to estimate the potential savings possible by switching to a cheaper lender and the see if they outweight any remortgaging costs. Karl Jeacle's mortgage calculator is useful for doing just this.

Maybe over the last couple of years but certainly not over the last 5 years.

The best buys list is a little out of date but it illustrates that pensions were up in the last five years - in fact the returns are probably even higher since the list was last updated. Pensions need to be viewed/assessed over the very log term (decades I most cases) rather than a few years. Past performance is no guide to future returns.

What does the average financial advisor charge? I heard Eddie hobbs defending his €250 per hour fee on the radio. Maybe if you know of one you can send me his details privately.

I don't know but I would expect somebody with a high profile like Eddie to charge at the higher end of the range.

 

[Bobby]

If you remortgaged and topped up by €80K you'd be eligible for NIB's tracker rate of 3.24% (for LTV <60%). You don't say how many years you have left on your current mortgage, but you could extend this to the max allowed (usually until age 64) in order to lessen the higher repayments somewhat. Then later, if/as conditions improve, you could start reducing the term.

22 years. That was an obvious route. But the max amount the banks will give me is not enough money to build and kit an extension. The other problem is that my car is knackered and needs replacing. I have looked at stretching things this way and that way but I fear the only way forward is to sell the investment house. I am more or less resigned to the fact. This posting was a last ditch effort to see if anyone out there had any bright ideas.

Does that mean rental income? Is that included in your €40K p.a.?

No the house just covers itself.

I agree. Are you going to be benefitting from the new CB payments for children under 6? Could you foresee a day where your partner might return to work — even part-time — thereby reducing your tax 'hit' under individualisation?

Yes we will be benefitting. I have chosen not to push my wife back into work as I feel the kids should at least be raised full-time by one of their parents. Plus she enjoys them. Considering the youngest is 9 months it will be many years before she returns to the work place, although she may return earlier if she wishes.

 

[CCOVICH]

Assuming €130k over 25 years:

3.77% (IIB)

Total interest payable (ignoring tax relief) is €70,935

3.55% (AIB)

Total interest payable (ignoring tax relief) is €66,291

Assuming value €350k, borrowing €100k would leave the total outstanding at €230k. Even assuming a nil value on the extension, the loan to value would be at around 65%. IIB are currently offering a tracker of 3.40% if you are over 60% LTV (so why are you currently paying 3.77%????).

Even better, keep your LTV under 60% and you would qualify for a rate of 3.1% with NIB or Ulster Bank (Based on last Friday's Irish Times, I'm not sure where Dr. M gets 3.24%, but I guess it's over a longer term). The repayments would be then €1,103 (on €230k for 25 years).

But this is irrelevant if you can't afford the repayments. I don't know if you have any option but to sell the investment property (unless the rental income allows you to afford the repayments on the topped up mortgage).

Another scenario is to use the €100k of the proceeds of sale to build the extension, and then put the €50k into a PRSA as a start on a pension fund (or something silmiar to what ClubMan has suggested). Personally, I don't think that pensions/funds/equities are any riskier than a property in the longer term, and pension contributions can have beneficial tax advantages). Your mortgage repayments would be be lower as you are on a lower interest rate.

I don't know if you'll get a financial advisor for less much less than €200-€250 an hour. A lot of money when you are on a tight budget, but it could save you €'000s in the long run (P.S. I am not a financial advisor, so have no vested interest in promoting them), and at least they (an Authorised Advisor) are likely to be more objective than close family and friends.

Anyway, best of luck. Getting the balance between living in the present and providing for the future is always difficult.

 

[DrMoriarty]

On balance, and with the same disclaimer about it being best to pay an expert a few quid to confirm your hunch, if nothing else — I'd be inclined to consider letting the investment property go — unless you have or can foresee coming into other funds in the near future.

You say it would net you €150K, from that you'll need of course to deduct the outstanding mortgage and pay off the CGT liability. Will that leave you with enough to fund the extension you're thinking of? Because if not, and you're still looking at borrowing, then maybe it would be better to fund the extension as far as possible by way of a top-up on your PPR mortgage (of which I've no details other than the rate of interest. If you're topping up, you might as well move to the best rate you can get). That way you maximise TRS. Once you clear the other mortgage on the investment property and pay off your CGT, then whatever is left over becomes your new, diminished nest egg — after trading up to a newer car (within reason! )

The consolation would be that
(a) presumably, at the end of the day, you've made a half-decent gain on the investment property — which may or may not have continued to appreciate as much/as fast in the next 5/10 years as it has in the last...
(b) you and your growing family would — without the grief of moving — be living in a bigger, nicer house, fully 'realising' the benefit of your new investment (in your improved PPR, CGT-free if you ever moved on again). The money wouldn't be 'gone', nor foolishly spent.
(c) the remaining funds could be used to start a pension — tax-efficient, 'safe as houses' by and large, and very much a sooner-started-the-better creature. You should also take out some life insurance, if you haven't already.

Oh God! I'm turning into my Da....!

[Edit: post crossed with CCOVITCH's. Thanks for the correction on the NIB rate, which is indeed 3.1% — for the moment! P.S. Also agree with both Clubman and CCOVITCH's point about paying an advisor a few quid to save you more...]