# Go interest only on Tracker and use saving to pay off investment mortgage



## nbc (8 May 2013)

My PPR(120k outstanding) has a tracker rate of 1.35. If I went int only I would save 1000 per month. I have an EBS investment property(E135k outstanding)- rate now just over 5%.
If I went int only on former for 1 year and lodged the 1k into my investment property how much money would I save over the 10 years that remain on both mortgages?
Is it 3.65% of 6,000*12 years( 6,ooo being the mean saving in on year)
Confused. Is it a good idea?
NBC


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## Brendan Burgess (8 May 2013)

Calculating savings "over a ten year period" is not the right way to look at it. You are adding 2013 euros to 2023 euros . A 2023 euro is likely to worth a lot less, due to inflation. 

Even if they were the same value, the calculation would be wrong as it's an annuity mortgage.  The savings will be a lot less towards the end of the ten years as the balance outstanding will be much smaller. 

Even if it was not an annuity mortgage, it would be wrong, as you have not allowed for tax relief. 

Even if you did the calculation correctly, you would not be allowed to do it by your ppr lender.


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## Gerard123 (9 May 2013)

This is a very interesting question. No doubt, there are hundreds if not thousands of investors out there who are facing a very similar scenario. What is the best thing to do when the interest rate on an investment property is much higher than ones own PPR. It is not an easy question to deal with and there are many factors to consider and complications. At the same time if there are significant savings to be made, and I believe there may be when the rates are very different and there are large mortgages over a long period, then it is worth at least a consideration. 

1 It is always preferable to ensure that the mortgage on one’s own house is up to date and paid, and economics aside, would not appear to be logical to divert payments to repaying an investment property mortgage. Roof over head, more difficult for a bank to seize a PPR than an investment property, etc, etc. 

2 Is there an ability to do as suggested, i.e. in effect reduce PPR mortgage repayments and use them to pay down an investment property? Would a Bank allow this? Highly unlikely I imagine unless there are other factors at work, e.g. borrower has significant income or other security it can provide on the PPR. Brendan’s comment re the lender not allowing this is probably correct. It would take a lot of persuasion at the very least! Also, there is no incentive for a Bank to allow someone to stretch out an expensive tracker product, which would happen by delaying payments on the PPR. 

3 Effect of tax relief on interest payments on an investment property, the impact of time value of money (2013 euros worth more than 2023’s - though I think my attempt to look at the numbers has dealt with this mostly due to the approach I used). 

4 Attitude to risk, security of employment, level of rents being obtained on the investment property, etc, etc. There may well be other personal considerations to take account of also. 

5 It require a very high level of financial discipline to see it through as there may be a temptation to use the money for other purposes after the investment property is repaid, thereby costing. 

*A decision to do this should not be taken lightly and should only ever be taken after receiving expert legal and finance advice re the implications. They are significant and not to be underestimated. I would almost always advise against doing this but there may be exceptions. *

Having said all of the above this is an interesting case study in the use of money. 

CALCULATION OF CASH SAVINGS POSSIBLE

In the example here I did a series of calculations to estimate from a purely financial viewpoint what the difference would be if priority was put on repaying the higher interest rate investment property mortgage first, and then the PPR. 

I assumed that both mortgages would still be fully repaid within the ten year period, I factored in tax relief on interest payments on the Investment property assuming a higher rate tax payer (likely given the scenario here), I assumed that the PPR mortgage would switch to an interest only facility on the same tracker (can debate this) until the investment property was repaid and then all the cash was diverted to the PPR to allow it be repaid within the original 10 year timeframe. 

My calculations show that savings in cash terms can be made of about €6,000 in total. (I had to revisit my numbers to recheck this). In the scheme of things this may seem quite low but is due to the fact that the interest on the investment property mortgage gets tax relief and also the period of 10 years does not allow compounding of savings as would happen if it was 20 years, for example. 

The net saving of about €6,000 in total is made up of savings on the investment property mortgage of approx €10,000 (paid faster) reduced by higher costs re the PPR of €4,000 (as moved to interest only for five and a half years). 

Your estimate of €6,000 per year is completely wrong. To rationalise the saving, since the two loans are not that far apart let’s assume the average mortgage is €127,500. The interest saving is the difference between the rates (1.35% and 2.4%, the latter being 5% reduced by tax relief of 52%). The interest difference is therefore around 1.05% applied to €127,500 for ten years, but divide the answer by 2, as the mortgage balance will reduce to zero after ten years – simple approach but helps to rationalise the savings, i.e. 127,500 *1.05% * 10 years divided by 2 = 6,693, which is close to my estimated total savings of €6,000 (difference being the compounding effect). 

If the decision was to be made on purely financial terms, ignoring everything else, and assuming the Bank would agree, then it may appear logical to focus on paying the Investment property first and then the PPR. However, as stated earlier, there are many non cash matters to consider. My gut is that the security around ones PPR, knowing that it is getting paid down, is worth €6,000, so in this case I would probably advise against changing things. 

Would be great to hear feedback on approach, have I overlooked anything, etc. 

(I may try another example later taking larger balances and longer periods to see what the savings might be).


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## Gerard123 (9 May 2013)

I did a similar calculation assuming two mortgages, each €500,000, one on the PPR tracker 1.35%, second on an investment property with an interest rate of 5% as above.

The cash saving over the 20 years works out at almost €57,000 (€235 per month). Beginnning to look worthwhile? 

Also to an investor, if they were 'subbing' the investment property and the sub was out of their other income they would need to earn double the saving in gross terms to give them the cash to pay the savings. 

My view is that this now starts requiring serious consideration but with all the caveats and comments I incuded previously still being very relevant.

Also, would a bank allow it? 

However, if someone was overpaying their PPR tracker mortgage it might start to make sense to use those funds to up the payments on the higher interest cost investment property, assuming one was comfortable to do this financially.


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## nbc (9 May 2013)

*.*

Thanks guys for the replies- especially the detailed one which must have taken some time. So basically if I did this for one year I would make a saving on E6000 in 10 years time . Is that correct? This appears to be quite significant to me. Regarding the tax relief- have you factored in that only 75% is allowable.
Regarding my own mortgage provider I can be vague about the purpose of the interest only period. 
NBC


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## Gerard123 (9 May 2013)

No. The saving of 6000 only exists if you do it for the full period. See the second paragraph under Calculation starting I assumed that both.....

If you did it for one year it wouldn't save very much. I don't understand why you would do it for one year only but guess you have your reasons.  I am guessing one reason, a personal one rather than financial. Can't see point otherwise as you would have to go through a detailed review by the bank to let you do this perhaps. 

I did factor in tax relief on the inv mortgage at 75%.


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## ronaldo (9 May 2013)

nbc said:


> Regarding my own mortgage provider I can be vague about the purpose of the interest only period.
> NBC



But would the lender allow it for any excuse? I don't think mine would let me extend the term by a year, never mind go on interest only terms for any period whatsoever.


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## nbc (9 May 2013)

*.*

Thanks Gerard. I said 1 year as I don't believe my mortgage provider would allow more.  Can I ask a stupid question? If I do this for 1 year then the balance on my investment mortgage will be 12000 less every year for the remaining 10 years- I am therefore not paying 5% on this. Ok I'm paying 1.35% on my ppr but even with tax relief factored in it does seem like a reasonable saving.
NBC


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## Brendan Burgess (9 May 2013)

As I said, you need to look at it on an annual basis.  Gerard's "6,000" figure is adding apples and oranges and pears and bananas and pineapples and kiwi fruit and grapefruit and strawberries and rasberries and lemons. 

Your savings in the first year will be 

You will be saving €1,000 @1% for 12 months or €10 plus €1,000 @1% for 11 months etc. 

On average in the first year, it will be  €6,000 @1.05% or €60. 

Not worth being a strategic defaulter for. 

After 5 years, it will be around €72,000 @1% or 720 "2018 euro"

The 6,000 (mixed euro) assumes you can pay interest only for the full ten years.


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## Brendan Burgess (9 May 2013)

If you do it for one year only, you would owe €12,000 less on your Investment and €12,000 more on your home loan, so you would save €120 a year. 

Total savings over the 10  years would be around 1140 (mixed euro) - 

But  I think you would have to reduce it further as your repayments on your home loan after year one would rise so that you would pay the mortgage off within the 10 years. 

Brendan


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## Bronte (10 May 2013)

Why do you want to pay down the mortgage on the investment?

You will 1) lose tax relief and 2) pay higher taxes on rental income.


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## Joe_90 (10 May 2013)

You are paying 5% on the investment loan and 1.35% on the PPR so clearly it merits consideration.

But it's not really 5% (5% x .75 x .52) = 3.05 after tax.

So the real difference is 1.7% so at the end of year one you have 12,000 less on the inv loan €204 in interest x no of year left.

I would keep the powder dry for a few years in case your circumstance change and you need 12 months interest only on your PPR.


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## Gerard123 (10 May 2013)

Lots of confusion here so I will post my calculations. One can lose sight of the bigger picture by getting caught up in a numbers game, there is much more to consider than numbers. If you reread my earlier post I have tried to set it out clearly. Can't simply take rates and apply to open loans, need to look at over the full period. I did my calculations on a detailed monthly basis for 10 years. 

It is only by going through the detailed mathematical exercise can you actually work out the savings. I found that out myself trying to take shortcuts, it really throws you. 

Brendan - not adding all those varieties, the 6 grand is a real cash saving in nominal terms though it occurs over a 10 year period so there is a time value of money element alright. Also the 6 grand is not based on interest only for the full period. It is interest only for 5 and a half until the Inv prop loan is paid, then the PPR loan is fully paid over the remaining 4 and a half years. At the end of the ten year period both loans will be fully paid. The first year saving is far more then 60. It's greater then a thousand (simply 135k *1.05%, with some reduction for time value, not that great over a one year period). In fact the majority of the 6 grand saving occurs in earlier years as the more expensive loan is paid. 

I have taken account of tax relief. The point is that even allowing for it there is still a saving. On the flip side, it would not make sense if the tax relief reduced the inv property rate below the ppr rate in which case the inv prop rate would be lower.


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## Gerard123 (10 May 2013)

Here are my workings. Welcome comments or thoughts. Based on these I believe that there are savings in cash terms of about 6 grand (285,612 less 279,993 = 5,619) over the ten year period. Many different configurations can be made, eg interest only for one year, etc. Also tables below are a summary for the ten years, just as easy to do one per year though would take time. 


_*Existing positions - assume both mortgages are being paid on a full capital and annuity basis*_


*Three columns - PPR/ **Inv Prop/ **Total*
Mortgage balance - 120,000/ 135,000/ 255,000 
Interest rate - 1.35%/ 5.00%/na
Period left (years) 10 years each

Estimates only

Monthly repayment - 1,070/ 1,430/ 2,500 
Total gross repayments (10 years) - 128,400 / 171,600 / 300,000 

Includes interest of: - 8,400 / 36,893 / 45,293 
Net interest 
(assume marginal tax 52%, 75% int deduction**) - 8,400 * / 22,505** / 30,905 
Saving' due to tax relief on interest on Inv Prop - na / 14,388 / 14,388 

*Total net repayments (10 years) (out of pocket)* - 128,400 / 157,212 / *285,612 (this is the total cash payments to be made under existing situations, ie two annuity mortgages being paid in full over ten years)*

* No difference, not tax deductible
** Assume relief for interest available, ie receiving rent and in a position to avail of interest deduction. Calculated as (36,893 less 75% of 36,893 tax relieved at 52%)





*Revised position - assume PPR interest only until Inv property paid off. Thereafter the PPR is paid off within the original ten year period also*

*Three Columns - PPR / Inv Prop / Total*


Mortgage balance - 120,000 / 135,000 / 255,000 
Interest rate - 1.35% / 5.00%/ na
Period left (years)- 10 years each


Estimates only

Monthly payments initially (first 5 1/2 years) - 135 / 2,365 / 2,500 _NOTE 1 __NOTE 2 _
Monthly payments when Inv Prop fully paid (i.e. After 5 1/2 years) - 2,300/ Zero (fully repaid) / 2,300 

Total gross repayments (over the ten year period) - 133,110 / 154,480 / 287,590 _NOTE 3 _
Effect of tax deduction of interest on Inv Prop - na / 7,597 (Note 4) 

*Total net repayments (10 years) (out of pocket)* - 133,110 / 146,883 / *279,993 *

NOTE 1 - PPR on interest only at 1.35% pa would require a monthly payment of €135 to meet interest cost. Assume the balance of the monthly payment of €2,500 under the existing situation is then all used to pay the investment property until it is paid off.
NOTE 2 - Investment property paid off in full by month 66 (i.e. 5 and a half years). From that point onwards assume that the payment is made to the PPR to allow it to be fully cleared by end of year 10. To facilitate this the monthly payment should be approx €2,365.
NOTE 3 - Comprises €135 per month for 5 1/2 years and €2,300 per month for the remaining 4 1/2 years, such that the PPR mortgage is fully repaid within the ten year period
NOTE 4 - Interest cost is 154,480 less mortgage 135,000 = 19,480. Tax relieved at 19,480 *75% *52% = 7,597


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## Brendan Burgess (10 May 2013)

Joe_90 said:


> I would keep the powder dry for a few years in case your circumstance change and you need 12 months interest only on your PPR.



Leaving aside the strategic default issue, Joe's point is the clincher. 

You save €60 this year. You might need it much more at some stage in the future. 

Brendan


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## Brendan Burgess (10 May 2013)

> The first year saving is far more then 60. It's greater than a thousand  (simply 135k *1.05%, with some reduction for time value, not that great  over a one year period). In fact the majority of the 6 grand saving  occurs in earlier years as the more expensive loan is paid.



Just to clarify, the €60 is the amount of cash saved _in the first year _by going interest-only. I was surprised myself when I calculated it at €60. But _I think  _that I am correct. 

"Total savings over the 10  years [by going interest only in the first year] would be around 1140 (mixed euro) " which ties in with your "greater than a thousand".


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## Brendan Burgess (10 May 2013)

> 1 It is always preferable to  ensure that the mortgage on one’s own house is up to date and paid, and  economics aside, would not appear to be logical to divert payments to  repaying an investment property mortgage. Roof over head, more difficult  for a bank to seize a PPR than an investment property, etc, etc.



Keeping the family home is a priority.

But precisely  because "more difficult  for a bank to seize a PPR than an investment property, etc, etc. "   it may make sense to go into arrears on the family home to keep an investment property out of arrears. 

For example, if one had a cheap tracker on an investment property which the bank was threatening to take from you, it might be worth going into arrears on the family home instead to keep the cheap tracker on the investment property.   If most of the repayments on the home loan were capital, and you have loads of equity in it,  it would be well worth paying just the interest on the home loan as the bank is never going to repossess it.


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## Gerard123 (10 May 2013)

See attached file


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