Should I transfer my BoI tracker to my new home, or keep it for a while?

[OhPinchy]

We're currently searching for houses and have mortgage approval in principle from BOI. Likely total cost will be 700K range: purchase of 550K and 150K renovation and extension cost. After deposit of 110K, total mortgage amount will be 590K.

Current mortgage has 275K remaining (house is valued at roughly 340K) and the mortgage is with BOI and is a tracker of ECB + 0.70% (followed advice on here 10 years ago and negotiated a good rate). Preference would be to keep our current house at least until completion of the renovation and extension work to minimise hassle (2nd baby on the way). Have approval from BOI for this arrangement.

But now rethinking it, taking the tracker with us would likely be the most economical approach, for the first 5 years at least. BOI have indicated we could take the 275K tracker to the new house at 1% higher, so ECB +1.7%, with their standard 3.6% on the remaining 315K, and revert to standard variable for the full amount after 5 years.

I would like to calculate the monthly repayment and total cost of funding for both of these options and then make a final decision (e.g. if saving was minimal, we might keep the current house and sell it later if we felt capital may increase and offset the worse rate, but if it was a major difference, we would sell now and move the tracker). I'm aware of online mortgage cost calculators but they seem to be for more straightforward scenarios, what's the best tool or formula for calculating the monthly and total costs of this more complex scenario?

 

[Joe_90]

Option 1.
Keep tracker €275k
Get new mortgage €590k at 3.60%.

€275k over 25 years is €1,005 per month.
€590k over 25 years is €2,985 per month.

Option 2
€275k @1.75% for 5 years then 3.6%
€315k @3.60%

€275k over 25 years is €1,132 per month
€315k over 25 years is €1,594 per month.

Now to try to compute the interest.
€275k over 2 years @ .75% is €4K
€590k over 2 years @3.6% is €42k
Then €540k @3.6% over 23 years is €255k
Total interest €300k

€275k over 5 years @1.75% is €23k
€315k over 5 years @3.6% is €55k
€503k over 20 years @3.60% is €203k

Total interest €281k

 

[OhPinchy]

Thanks a lot for that Joe_90, very much appreciated.

Couple of things I need to clarify: when you get to the point of trying to compute the interest, you use 2 and 23 years as the timeframe and a rate of 0.75% on the €275K - not sure where those numbers come from (tracker would remain for 5 years and would be ECB +1.70%)?

Am I right in interpreting it as the €540K is the amount outstanding at the end of the 5 year tracker period, so for the remaining period of the mortgage, it's a case of applying the rate to that amount over that timeframe?

So it seems a case of €300K interest for Option 1 (is it a discounted first 2-years rate, or is the 2% cashback factored into your calculations) and €281K for Option 2? Significant difference, but not quite as much as I thought it might be, particularly when you consider Option 2 would require us to rent for approx. 12-months, offsetting much of the €19K difference. I had a meeting scheduled with a mortgage advisor yesterday and when I sent him all our details, he cancelled the meeting saying there was no point meeting as it was such a no-brainer to keep the tracker - I thought on that basis the gap would be wider, am I interpreting something incorrectly?


I would be very keen to learn how to do the calculations you have posted Joe_90 - this would come in very handy when considering different permutations of acquisition and renovation costs, and different rates from different lenders. Is it a case of dividing the complex calculation up into its subcomponents and then using a tool to calculate the interest for each subcomponent? Or is there a more powerful tool/Excel formula that can do this? If there's an online tool you'd recommend, or even one costing a small sum, I'd be interested in being pointed towards it as I can imagine this would be useful when reassessing mortgage options every few years (e.g. advisor suggested do the 5-year tracker switch period and then consider moving lenders at that point).

 

[Brendan Burgess]

Hi Joe

Which option are you recommending?

Or, are you recommending one over the other?

Brendan

 

[Brendan Burgess]

I had a meeting scheduled with a mortgage advisor yesterday and when I sent him all our details, he cancelled the meeting saying there was no point meeting as it was such a no-brainer to keep the tracker

Was this a BoI mortgage advisor or an independent mortgage advisor?

Did they recommend that you keep your existing house or transfer it to the new house?

Brendan

 

[OhPinchy]

Meeting was scheduled with an independent mortgage advisor - very good guy recommended from friends. And he was absolutely earnest in his view, was very much saying he felt it would be imprudent of him to advise anything other than transferring the tracker for the 5 years and then reassess which is the best lender option at that point. He recommended we sell existing house and move the remaining tracker amount (€275K) to the new mortgage.

BOI advisor I met previously and he was open to either approach, and as we were leaning towards keeping the current house and its tracker, and having a completely new mortgage for the new house, that's what he submitted in the mortgage approval in principle request. We can still go back and ask for the alternative approach if we wish. But it's not inconceivable that the value of the existing house will rise by €20K in the next year, and when that is considered along with the roughly €15-€20K renting for approx. a year while the works are done would entail, the gap when all aspects of the costs of both options does not seem so significant as to constitute a no-brainer. Though I may well be misinterpreting something. Then when you add in the non-economic factor of having to move to a rental place when our second baby is just about to arrive in September, and that we would lose the 'not in a chain' attractive purchaser status, I would still err towards keeping the current house. Another factor to consider is by shopping around if we were to get a better rate than the BOI 3.6%, that would further reduce the gap between the two options and potentially make a stronger case for going with a totally new mortgage.

As this will be one of, if not the, biggest financial decision we'll make in the next decade or two, I very much want to understand how to break it down and calculate the monthly and total costs of various options and permutations - this will be a useful skill to have in the future so any pointers in that regard are very much appreciated.

 

[Brendan Burgess]

Hi Pinchy

This is a very complex calculation. Here is my first stab at it.



The first principle is that you should look at the first 5 years only. What happens after that is irrelevant as you are free to switch to the cheapest lender which is unlikely to be Bank of Ireland.

The second principle is that you should look only at the interest cost and not the repayments.

Do you qualify for the BoI 2% cash back. I assume you don't.

Option 1 - Keep current house




These are rough figures. You will actually pay less than €10k interest as you are reducing the balance very quickly.

But as it's very clear that you should keep your current house, there is no need to get the calculations any more precise.

The difference is so huge, that I am wondering if I have made a mistake in my reasoning somewhere?

This assumes that Bank of Ireland do not try to take your tracker from you if you let your house. However, it's currently the practice of all banks except Danske Bank not to take a person's tracker in these circumstances, even if the loan agreement allows them to do so.

The difference may be even bigger than I calculate

I am surprised that BoI is giving you an 84% LTV loan while you already have a home loan. I assume that no other lender would approve you for a new mortgage. But if they do, your savings would be bigger as BoI is the most expensive.

After a couple of years with rental income coming in and with your LTV reduced, you should be able to switch to a cheaper lender on your home mortgage.

After 5 years, if you keep your investment property, it will be a very profitable investment as the interest rate is so low.

 

[Brendan Burgess]

The more I think of it, the clearer it is that you should keep your current house at least for the duration of the renovations.

After the renovations are over, you should review the decision whether or not to rent out your existing house.

While it's a very profitable investment in its own right, you will have around €80k of equity in it in a year's time. This would be enough for you to bring your mortgage rate below 3% after switching to another lender. The overall savings combined with the saving in hassle of being a landlord will probably swing it for you.

But come back next year and ask that question.

 

[peno]

Interesting scenario here and good summary from Brendan.

One question I'd have is if the tracker is still valid if the current house is let or is there a chance the bank will try to alter the rate?
This could close the gap on options considerably before the allowance of whether to invest or not.

 

[Brendan Burgess]

Hi peno

Good point. I have altered my summary to reflect that assumption.

 

[OhPinchy]

Sincere thanks for the insights provided, very much appreciated. I am trying to get my head more thoroughly around some of the different permutations here as I'd like to get full clarity on each permutation before making a final decision. Hope it's ok to link it here, but I found this mortgage calculator spreadsheet online very useful: http://forums.moneysavingexpert.com/showthread.php?t=1157173

I'm using that at the moment to work out each permutation - it allows me to figure out the interest paid on say BOI 2-year fixed rate, and then move to standard variable for the remaining 3 of the 5 year period we're looking at (it shows net principal at end of the 2 year period, which becomes starting principal for the next 3 year calculation). Will take some time over the weekend to ensure I've worked it all out fully and hopefully correctly and then post it to gather thoughts and sense-check. All calculations for new and current mortgage are done over 30 year periods.

For evaluating the option of renting our current house: €275K @ 0.70% gives €847 monthly payments. I estimate rental income would be approx. €1,600 per month. So do I apply tax (total 51%?) to the full income amount (1,600*.49 = 784) and then subtract that amount from mortgage repayment = 784 - 847 = monthly loss of €63? After writing off relevant tax deductibles, could potentially break even on the rental by the looks of it, meaning any increase in the value of the house would be a net equity increase.

 

[OhPinchy]

So, an update on our complex situation: we went Sale Agreed back at end of July but due to execution of a will/probate, it was delayed - we got word last week that probate has now been granted and we're due to close very shortly. Due to various family/medical/job/new baby circumstances, we haven't reviewed the mortgage options recently so are now caught tight for time trying to reassess options and execute before closing date. Purchase prices is 475K, we will pay 20% deposit of 95K. Mortgage offer letter from BOI covers 130K of works which do not require planning permission (Phase 1 works). We are awaiting planning permission decision by end of March. If approved, we would expand works to Phase 2 works, total cost of 270K.

The permutations involved are many: do we keep our tracker on our current house & rent it out after the works are completed and we move into new house and get a fully new mortgage on the new house? Or do we transfer the tracker to the new house (with extra 1% and only for 5 years)? Given that our mortgage approval includes funding for Phase 1 works, but in reality we hope to proceed with Phase 2 works, it's a very complex situation to calculate permutations, but I've given it my best shot. Not sure there'll be many that'll read given the level of details, but if you have the patience to bear with it and give your observations, that would be hugely appreciated as my head is almost melted at this point (and the baby crying is not helping)! Not looking for subjective advice, moreso objective clarification of figures.

First thing to calculate is what each scenario for what we do with the old house would entail. I do reckon we could get 1,700 per month rent. I believe new rule is 80% of mortgage interest can be written off against tax if renting - is that only on buy-to-let or any mortgage? I don't have a clue about what expenses renting would entail and what's deducitble, so estimated 3,000 expenses and 2,000 of that being deductible. And I used a roughly combined 51% tax rate.

So is my calculation correct that if we move the tracker to the new house and stay in the old house for 1 year while works are done on the new house, it would cost us a net increase of 7,344eur vs keeping the tracker on the old house (17,436 vs 10,092)?

And then if we keep the tracker and rent out the old house, we lose roughly 1,258eur per annum in net cost? And an operating loss of 3,940eur per annum if we move the tracker and go to a Buy-To-Let mortgage and rent out the hold house?

Obviously, capital gain is a potential benefit in all scenarios of keeping the old house. Value of old house is currently somewhere around 330-350K (so 60-80K equity). I struggle to see it ever breaking 400K, but hey, what do I know? I'd like to understand how capital gains would be applied in the scenario we sold it in 5 years for 400K (original mortgage was 360K 10yrs ago). If I feel potential for further gains is under 50K and a chunk of that will be lost to tax, it reduces the attractiveness of holding onto it.

Context: neither my wife nor I ever set out to be landlords and are uneasy with the concept - we would only do it if it's a case that we'd be mad not to.

 

[OhPinchy]

In this post, are the details of the options for the scenario where we hold onto the old house and, as a result of not releasing the equity, we don't have funds to contribute towards the works on the new house (just the 95K deposit plus possibly 30K cash). So it's a higher LTV option. Funding approval for all options is not an issue, focus is on which makes most sense economically and from risk-exposure perspective.

Looks like a strong case that Scenario G, switching the tracker, is cheapest in this case. The BOI cashback offer further improves that scenario, but a relatively minor consideration over course of 30 year mortgage.

 

[OhPinchy]

And lastly, here are the options for the scenario where we live in the old house up to near completion of the works, then sell the old house and use 50K of equity to go against construction costs. Scenario D is a dumb option - not moving tracker and then selling old house in year 2 would be worst of all scenarios as we gain least continued benefit from the tracker.

Scenario H, moving the tracker, seems the most economical option here. Scenario L, KBC 3.10% option, may be competitive vs Scenario H if we got the LTV below 80%. Given the sequencing of the construction, drawdowns, and property value, going fixed with BOI for a year and then moving mortgage in order to get the KBC lower LTV rate would be the preference here. I'm cognisant of some concerns shared here about KBC not passing on rate reductions.

Either way, unless my calculations (using the brilliant spreadsheet linked earlier) are way off, given the specifics of the circumstances, the decision on which option is most attractive for us is a lot less clearcut than the independent advisor initially stated. But it does suggest that moving the tracker is the best move for us given A) it's at least on par with lowest alternative interest payment over 5-years B) selling old house frees equity we may well need for completing build, lowering LTV, and furnishing the new house and C) we don't want to be landlords unless it's such a no-brainer it would be foolish not to.

Well, if you persevered with it and read this far, you're a saint and there'll be a Kinder Surprise winging it's way to you in the post Biggest financial decision we will make in our lives as this will be our forever home if we get the planning permission, so I genuinely appreciate anyone talking the time to validate the figures or assumptions and highlight any incorrect calculations/interpretations made.

 

[OhPinchy]

And, lastly (I promise!), if you persisted this far, you might be the type that would want to see the basis for the calculations summarised in the green tables for the 2 scenarios we're leaning towards: