Inherited a house, should I sell my existing property on a tracker?

[Beefy1]

hi, just looking for a bit of advice.
We have a home already, 88.5 k outstanding on a v good tracker rate. Not In negative equity at the mo as house is probably worth 215/240k, assuming a sale can be obtained...Have inherited a house that requires a bit of work, will cost about 200k when all is done to a good standard, we will do it as follows...
130k on boi mortgage, (can't qualify for any of the others, for a variety of reasons)
30 k on credit union loan , balance with our own savings.
Both myself and the wife are working with good secure jobs.
I like the house that we are currently living in and am thinking that it might be a good idea to hold on to it as a rental, however because of the punitive tax associated with house rental, we will be not able to cover the cost of the mortgage and accordingly will have to make up the shortfall from our own resources. There's also the issue of fear of hassle associated with becoming a landlord. Is it worth the bother?
The financial no brainer I am referring to in the title of the post is as follows... Should we cash in our chips, pay off both mortgages, do up the inherited property, and be left with a smallish loan of 30k once all the dealings have been completed.
Or continue to subsidise the tracker mortgage shortfall to the tune of 400pm while renting out our old house to own it outright in 13 years time at whatever value it may be worth then?
Surely the correct decision is to sell original house? Thank you.

 

[Brendan Burgess]

I like the house that we are currently living in

So what? If you are renting it out, it won't really matter if you like it or not.

Assuming that the tracker is at 1% interest, you are "profiting" about 2.5% a year by having a tracker. So this is a profit this year of around €2,000. This quickly reduces as you reduce the mortgage balance. So the tracker isn't really that much of an advantage to you.

The way to assess this is as follows:

Rental income after costs - say : €16,000
Cost: €130k @ 4% €5,000 (Bank of Ireland loan which you won't need if you sell)
€30k CU loan @ 9%: €3,000
€80k tracker @1% : €1,000
Tax €7,000 (€15,000@50%)
Net profit after tax: 0

If the rental income after costs falls below €16,000, then this will be a big loss maker.

As you repay the capital on your cheap tracker, the effective interest rate rises, and increases the losses.

So, sell your existing home.

Alternatively, sell the inherited property and pay off your tracker mortgage

It's very odd that BoI will give you a loan, but none of the others will.

Brendan

 

[Beefy1]

Thanks for the reply Brendan, here's how I've costed it, I'm a bit unfamiliar with how you arrived at your calculation. Option 1.
Keep both houses, one as rental property...
New mortgage 687€ pm 25 years
CU loan 550€ pm 5 years
Continue paying tracker on rental property, (as due to combination of tax and low rent probability will have to subsidise it) 377€ pm. I'll clarify a bit here about rent we expect to receive. 900€ (max and we'd be doing good to get it too!) per month, x12= 10800 pa- total expenses of 4610, leaving a pre tax net of 6190, this amt is then subject to tax at the higher rate, which will not leave sufficient to pay mortgage of 611x12,resulting in our making up the shortfall.

So this option will cost 1604 per month and eat up all our savings too in refurbishing the house but we will own the house with tracker mortgage after 13 years(and the house that we will move into in 25 years.) And of course the joys of being a landlord too!
Option 2
Sell the house we are living in, get 215/230k. Have no mortgages at all except for a small loan of 30000 for five years 550 pm.
You see the reason for all this prevarication is because of sentiment attached to both houses which is affecting my rational thinking. In addition, I currently save 350€ per month into a consensus fund, sure would I not be better diverting that into my new investment property?
Incidentally, kbc wont quote for what it calls a self build even tho the property to be refurbished is to be renovated by a builder(not me).

 

[Brendan Burgess]

I'll clarify a bit here about rent we expect to receive. 900€ (max and we'd be doing good to get it too!) per month, x12= 10800 pa- total expenses of 4610, leaving a pre tax net of 6190, this amt is then subject to tax at the higher rate, which will not leave sufficient to pay mortgage of 611x12,resulting in our making up the shortfall.

With that information, I can explain it another way.

The house is worth €215k.

If you sell it, you will be able to use the proceeds to
1) Pay off your tracker mortgage of €80k - € 800
2) Not borrow €30k off credit union at 9% - €2,700
3) Not borrow €100k from Bank of Ireland at 4% - €4,000

So selling it, saves you €7,300

Keeping it will earn you an income of €3,000 after tax.

You see the reason for all this prevarication is because of sentiment attached to both houses which is affecting my rational thinking.

Well preserve the memory of your existing home. If you rent it out, you will be emotionally upset, when the tenants don't treat it with the love and respect you deserve.

In addition, I currently save 350€ per month into a consensus fund, sure would I not be better diverting that into my new investment property?

Of course you would. Otherwise, you are effectively borrowing to invest. If you have money already saved, cash it and use it to pay for the refurbishment.

The only issue here is timing. You may want to hold onto your current house while you refurbish your new home. But you should sell it as soon as you move into your new home.

I think it's very unlikely, but ask whomever you have your current tracker with if they will move it to the new home. They might. Especially if you are borrowing more.

Talk to a mortgage broker who might present your case better to the lenders than you are doing.



Brendan