Thanks for the follow up.
If I was in your position, I would sell that rental property and apply whatever modest equity you might realise against the outstanding balance on your PPR.
Here's the way I would look at it:-
That rental property is producing a net yield of around 3.64% (€7,800/€150,000 x 70%) that you are financing at a rate of 1.1% (that's 2.54%, net of financing costs). Here's a link to another thread where I set out my rationale for deducting 30% from the gross yield figure to arrive at a long term net yield figure.
http://www.askaboutmoney.com/threads/buyers-remorse.196291/
Before you even start to allow for taxes on the rental income, it should be obvious that the capital tied up in that rental property would generate a better return by simply paying down a mortgage on your PPR that carries a rate of interest of 3.6%. In a nutshell, the net return is roughly 1% per annum higher
before taxes.
On an after-tax basis the investment proposition for retaining the rental property really starts to fade.
As 44B correctly points out you also need to factor potential capital appreciation of the rental property into the decision. However, over the very long term the value of real estate really does nothing more than rise in line with the general rate of inflation and CGT is obviously applicable. As such, relying on potential capital appreciation alone to justify a property investment makes no sense - you might get lucky or you might not.
You will have plenty of exposure to real estate even if you sell this rental property so that shouldn't be a consideration. If anything, dialling down your property exposure should be seen as a positive.
Liquidating the rental property should also significantly improve your cash flow position. I would suggest that you need to be careful not to simply inflate your lifestyle to account for the additional cash flow - your long term financial goals are important. Replace the car by all means but don't forget to look out for your future self!
Whether you apply any additional cash flow against your PPR mortgage balance or make additional pension contributions is a matter of judgment. On the one hand, paying down your mortgage gives you a guaranteed, tax free return equivalent to 3.6% per annum with zero investment costs. Would your pension fund produce that sort of return, net of investment costs, over the term of your mortgage? Well it might, particularly when you factor in the 40% head start the tax relief gives your pension contributions, but it is obviously far from guaranteed.
If it was me, I would focus on building up a decent cash reserve in the first instance - I would shoot for around 6 months of your typical household expenses. You should also make sure you have adequate insurance in place (life, health, income and assets).
Once you are comfortable that you have adequate "downside" protection in place, I would personally concentrate on ramping up pension contributions rather than further accelerating your mortgage repayments.
Having said that, there is no "wrong" decision here - accelerating your mortgage repayments out of freed up cash flow may well turn out to be the better option and it does protect your position if and when interest rates start to rise again. This is really a question of balancing risk and (potential) reward.
Hope that helps.