KBC re-fix & paying for extension

[Lt Ripley]

Marital status: married
Age: 40
Joint gross salary: €140,000 p.a. (both full-time privately employed)

Investment portfolio: €185,000 (approx current value post any capital gains tax, shares are reasonably steady +/- 3%)
Cash savings: €65,000
Pension: €129,912 lump sum, €17,000 p.a. on retirement.
Pension (spouse): no current pension
No other savings or investments

Current mortgage lender: KBC
Outstanding mortgage balance (how much you still owe): €247,000
Years left on mortgage: 23 years
Approximate value of your property: €590,000
The date you started your fixed-rate mortgage (month and year): October 2018
How many years you fixed for: 5 years
Your current mortgage interest rate: 2.6%
Your current monthly repayment (excluding any overpayments): €1,190
Remaining term left on mortgage: 23 years
No other property other than our current house

We are one of one of the many customers with a KBC fixed-rate mortgage. We are also in the process of planning for a house extension (currently aim to commence building in Feb 2023). Originally, we were debating whether to get a top-up mortgage to cover some of the cost of the renovation, but the mortgage transfer is throwing some doubt on the best way to proceed as getting a top-up from KBC is not possible and we would have to negotiated with Bank of Ireland post-transfer.

After many years of savings collectively we have about €250,000 in total assets (split between shares - approx. €185,000 post capital gains tax when we sell, and cash savings of €65k). The estimated cost of the extension and full renovations to the property (incl fit out) is €210,000.

I've a couple of questions that I'm hoping you may have opinions on:

• As a saver, I'm nervous about using the majority of our savings to pay for the renovation and wonder whether we would be better paying for a portion of it via savings (holding back some shares and a small amount of cash) and subsidising it via a mortgage top-up via BOI. I've no idea how feasible this would be, however. We think we can still very comfortably afford to increase our mortgage repayments to 1,300 per month.
• Should we look to re-fix with KBC? If so, for how long? We've been guaranteed no breaking fee, so we could potentially refix for 3 years at 2.25%, 5 years at 2.40% or 10 years at 2.85%
• My wife is also looking to at last start a PRSA pension paying €200 per month (approx. 170 post-tax). Better late than never, or at this stage is it a bad idea?

So, I'm looking for any advice re. the mortgage and house - should we go ahead and re-fix with KBC and pay for the extension from our existing savings, or is it wiser/less risky to consider applying for a top-up with BOI in the new year?
As a separate point, should my wife even consider starting a pension this late (at 40)?

Thanks!

 

[Brendan Burgess]

After many years of savings collectively we have about €250,000 in total assets (split between shares - approx. €185,000 post capital gains tax when we sell, and cash savings of €65k). The estimated cost of the extension and full renovations to the property (incl fit out) is €210,000.

It makes no sense whatsoever to borrow for the extension when you can pay for it with cash. After doing so, you will still have €40k cash and two jobs with a joint income of €140k.

Let's say you borrow an additional €100k , you will be left with €140k cash/investments. So you will end up borrowing at BoI's very high rates to invest in shares. The first rule of investing is "Don't borrow to invest."

As you are planning to start building in 5 months, you should start the process of selling your shares just in case a sudden market crash means that you can't afford it.

Alternatively, wait until 1 January so your CGT bill will be a year later. But if you have some investments which do not have taxable gains, you should sell them now.

Brendan

 

[Brendan Burgess]

Current mortgage lender: KBC
Outstanding mortgage balance (how much you still owe): €247,000
Years left on mortgage: 23 years
Approximate value of your property: €590,000
The date you started your fixed-rate mortgage (month and year): October 2018
How many years you fixed for: 5 years
Your current mortgage interest rate: 2.6%

You can fix for five years at 2.4% and that probably is the right option. But given that you are moving to BoI you might prefer to fix for 10 years so that you are not caught by their predatory lending rates for existing customers.


Alternatively, you should look at switching to Avant or AIB.

Brendan

 

[Brendan Burgess]

My wife is also looking to at last start a PRSA pension paying €200 per month (approx. 170 post-tax). Better late than never, or at this stage is it a bad idea?

It is never too late to start a pension.

I presume she is paying 40% top rate of tax. If so, the net cost should €120. Where are you getting the €170 from.

I think she can make a contribution now for last year and probably should do so.

Brendan

 

[Lt Ripley]

This is very helpful, thanks Brendan.
Makes obvious sense re borrowing vs spending savings when you say it- I guess thats what theyre for, I just have to get used to the idea, but we should be able to build them back up slowly again.

As you are planning to start building in 5 months, you should start the process of selling your shares just in case a sudden market crash means that you can't afford it.

Alternatively, wait until 1 January so your CGT bill will be a year later. But if you have some investments which do not have taxable gains, you should sell them now.

This is something I'd considered. There is some moderate gain on all the shares, but I'll try and assess which ones have least gain and sell those first just in case, with the plan to sell the remainder we need in January. I assume selecting & selling the most recently acquired shares will get me around the FIFO policy somewhat and minimize any CGT I've to pay for the more recent traches.

You can fix for five years at 2.4% and that probably is the right option. But given that you are moving to BoI you might prefer to fix for 10 years so that you are not caught by their predatory lending rates for existing customers.

5 years would give some peace of mind, but I'm very wary of how BoI is going to treat KBC customers in the future coming off their fixed terms - that plus the severe lack of competition of mortgage lenders and impending economic uncertainty, so 10 years may be a better option.

I presume she is paying 40% top rate of tax. If so, the net cost should €120. Where are you getting the €170 from.

Yes, you are correct - €120. She's working through a broker, but likely to go with either Aviva or Zurich.

 

[Brendan Burgess]

I assume selecting & selling the most recently acquired shares will get me around the FIFO policy somewhat and minimize any CGT I've to pay for the more recent traches.

I would try to avoid these complex CGT calculations.

If you have shares in 5 different companies, maybe sell all of one company now rather than 20% of each company.

It could be a bit more cashflow-efficient the other way, but is it worth the complexity?

Brendan