# Are we over-leveraged - what's our next move?



## BigBoots82 (2 May 2018)

Age:* 34*
Spouse’s/Partner's age: *36*

Annual gross income from employment or profession: *€66,000*
Annual gross income of spouse: *€50,000*
Monthly take-home pay: *€ 6,400*

Monthly expenses: circa €6,000 (includes the below)


*Mortgage 1 1,430*



*Mortgage 2 750*


*Gas + Electricity + Bins 150*


*Property Tax 45*


*Car Insurance 45*

*Diesel 60*
*Phones x 2 and broadband 110*


Type of employment: *Both in* *private sector*

In general are you:
(a) spending more than you earn, or BREAKING EVEN. 
(b) saving? *We are saving roughly €400 per month. We could potentially save more but we are overpaying mortgage 1 below by €1k per month.*


Rough estimate of value of home: *€330k*
Amount outstanding on your mortgage: *€297,000 (25 years remaining) rate is 3.15% *

Rough estimate of value of rental property: *€120k*
Amount outstanding on this mortgage *€150k*


Do you pay off your full credit card balance each month? *Yes, always. *

Savings and investments: *€4k in cash savings*

Do you have a pension scheme? *Yes, both in DC schemes. 5% employer and 8% personal for me.  Current total value is €12,000. Partner pays 5% and employer matches with 5%. Pension fund amounts to circa €40,000 *

Ages of children: *no children at the moment*

Life insurance: *We both have policies that pays 4 x Salary on death. My wife has serious illness cover. I have income protection (75% of salary) *

We've spent about 5k on holidays a year for the last 2 years.

*Questions*

What's our next move? Should we sell the rental property and just take the 30k hit?

Is out current level of debt sustainable? I'm thinking particularly if one of us lost our job or was out of work for a long period.

Both mortgages carry are variable rate only therefore we are exposed on the double to future increases in interest rates.

Can we afford to have kids?

I would expect our salaries to increase by c.2% per annum at the moment.


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## Sarenco (2 May 2018)

Hi BigBooks

On the face of it, you don't look like you are doing too badly at all.  

Can you give us a few more details about the rental?  When was it bought, for how much and was it always a rental?  What rent is your tenant currently paying and what interest rate are you paying on the mortgage on that property?  Are you up to date with your taxes, registered with the RTB, etc.?  Also, are you overpaying the mortgage on your PPR or the rental?

You don't seem to have sufficient savings to meet the €30k shortfall on the rental mortgage but that's not necessarily the end of the world.


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## BigBoots82 (2 May 2018)

Hi Sarenco

Rent is very low. Only €450 per month. Barely even covers interest (3.15% rate also). Property was bought in 2007. Because of location I'm not sure how much further prices will rise either (if any). Up to date and registered on rental property. Overpaying mortgage on PPR. Long term, our PPR will need investment of circa. 50k for upgrades but hoping to reduce debt level before taking on any refurbishment projects.


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## Sarenco (2 May 2018)

Thanks for the additional details.

It looks like you are doing everything right but the rental is letting the side down.  I'm afraid you are just going to have to be patient.

Remember you are chipping away at the outstanding principal every month - you will get out of NE in time, even if prices in your area never rise (which is very unlikely).

Is there any scope to nudge up the rent a bit?  €450pm seems a touch low for a property worth ~€120k.

I wouldn't be overly concerned by your debt level (and I share your aversion to debt).  The mortgage on your PPR looks reasonable relative to your income and while the rental obviously isn't ideal at least the rent is meeting the interest.

Your debt level is certainly sustainable and you can definitely afford to start a family.

So what should be your next move?

It's really a question of balancing your current needs and your future needs - bearing in mind that you are still fairly young.

In your shoes, I think I would be inclined to ease off on the mortgage overpayments a bit and build up whatever funds you think are necessary to make your home comfortable.  You obviously don't have to do everything at once but I don't think you should ever let your cash reserves dip too low if you can help it - €4k sounds a bit tight to me.

Your respective employer contributions to your pensions look good - I would be inclined to keep contributing whatever is necessary to get the employer match but not much more for the time being.

Hope that helps.


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## Brendan Burgess (2 May 2018)

Rent €450 x 12 = €5,400 

Interest on €120k =  €3,800 

Profit before expenses: €1,600 

Sell or hold is very close. 

The interest rate on your home is 3.15%
The net rate on your investment property is 1.6%  (3.15% less 50% tax)

So by paying the €12,000 off your home, you save €420 a year
Paying it off the investment saves you €200 a year.

So, in normal circumstances, you should pay off your home loan first. 

However, as you are in negative equity on the buy to let, I would be tempted to pay that off first.  Clearing the NE gives you the flexibility to sell.  The lender may make it awkward to sell if there is a shortfall. 

Pay down the NE to around €10k and then resume overpaying the home. 

Brendan


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## Sarenco (2 May 2018)

Brendan Burgess said:


> Interest on €120k =  €3,800


Isn't the o/s mortgage on the rental €150k?


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## Palerider (2 May 2018)

Get rid of your investment property, re-evaluate your priorities, if you are ready for a family then get to it, it will enrich your life beyond words and definitely beyond your present concerns.

You are on the wheel of life as we all are, embrace it, be aware of where you are, both of you are doing great, de- stress your life, have a family and enjoy all of that.

Good Luck to you.


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## Sarenco (2 May 2018)

Palerider said:


> Get rid of your investment property


How?  The property is in NE and the O/P doesn't have the funds to meet the shortfall on the mortgage.


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## Brendan Burgess (3 May 2018)

Sarenco said:


> Isn't the o/s mortgage on the rental €150k?



It is. But if he sells the property, he will have a shortfall of €30k, so I am working on the profitability of it. 

The overall conclusion is the same.  While it's less tax efficient, pay down the mortgage on the investment property.

Brendan


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## aristotle (3 May 2018)

Hi, just checking, with €116k income and €447k in mortgage borrowing, is that not considering fairly highly leveraged? Its over 3.5 times income? 

Its 3.85. So its not crazy but its on the upper end ?


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## Brendan Burgess (3 May 2018)

aristotle said:


> with €116k income and €447k in mortgage borrowing, is that not considering fairly highly leveraged?



Not really, in that he can reduce it to 2.8 times  (327/116)   just by selling off the investment property. 

Brendan


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## aristotle (3 May 2018)

Yes, if they reduce it to 2.8 times then that sounds good. But in general, would 3.85 times not be considering fairly highly leveraged?
Its just some comments above say the debt levels are fine, nothing to be worried about etc


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## Brendan Burgess (3 May 2018)

Let's simplify things. 

Say I have a mortgage of €400k on my home and an income of €100k. That is a Loan to Income of 4 times which is very high.

Say, that you have a mortgage of €200k on your home and €200k on an investment property and an income of €100k.  You also have a LTI of 4, but you are not as nearly vulnerable.  Not only will you have the rental income from the investment property, but if you lose your job or interest rates rise, you can sell your buy to let and solve or mitigate the problem.

To illustrate this by exaggeration. 

Say I have a Buy to Let portfolio worth €1m and €300k of a mortgage on them. On top of that I have a €200k mortgage on my home.
With an income of €100k, my loan to income is now 5 times. But so what.  Ratios must be interpreted in the whole context. 

Brendan


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## bleary (3 May 2018)

If you wish to have children then you should prioritise that. 
From 35 on fertility goes off a cliff. And fertility treatment is expensive. 
It's not really something you can leave thinking about for another few years if its something you really want.


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## rob oyle (3 May 2018)

Palerider said:


> ...de- stress your life, have a family...


An oxymoron, surely?


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## Steven Barrett (4 May 2018)

You are doing fine. Cashflow is tight because you are overpaying your mortgage by €1,000 a month, so if you want, you can have another €1,000 a month in your pocket. 

Can you afford to have kids? Can anyone afford to have kids!!! The cost of childcare in this country is an absolute disgrace. It is a real burden on working families. You certainly won't be paying €1,000 a month extra into your mortgage when you have a similar bill for a creche. But you know what, you just go without when you have to pay for kids as they come first. And you know that €5k a year you are currently spending on holidays? When you have kids, that's the cost of a 2 week holiday in Spain for the family.

On the investment property, it doesn't look like a good investment. The rental income is pretty low and there's no capital appreciation. I'd agree with Brendan that you should look at trying to get out of negative equity and get rid of the place. It's likely going to be a cost to you over the years. Sometimes investments don't work out and it is important to recognise that and be able to cut your losses. It is something Irish people refuse to do, especially with property, even though it costs them thousands of euro to hang onto a bad investment. 


Steven
www.bluewaterfp.ie


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## Bronte (6 May 2018)

Time to have kids. Agree about overpaying your home loan. But I’d overpay by 500 and increase the savings by 500. That money can then be used for costs of kids or home improvements. Which should increase the value of the home.


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## BigBoots82 (19 May 2018)

Hi everyone. Thank you for all of your thoughts and advice above. Much appreciated. Will likely hold the investment property for now and try increase rent to 500 per month. I also intend to reduce personal pension contribution to 5% which is what's needed for employer to contribute same. Will likely lower mortgage overpayments on ppr by 25% to allow us to build up further savings. Kids are no. 1 on priority list even if probably most expensive investment of all!!


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## Gordon Gekko (19 May 2018)

There is a balance to be struck between financial prudence and living in the here and now. There is no point being the wealthiest OAP in the neighbourhood if you’re living hand to mouth now.


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## coolhandluke (19 May 2018)

Gordon Gekko said:


> There is a balance to be struck between financial prudence and living in the here and now. There is no point being the wealthiest OAP in the neighbourhood if you’re living hand to mouth now.



You are so right, relative of mine living like a pauper but sitting on 2 un-mortgaged properties worth in excess of €500k.....madness !!!.


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## BigBoots82 (29 Aug 2021)

UPDATE - 3+ YEARS LATER

Age:* 38*
Spouse’s/Partner's age: *40*

Annual gross income from employment or profession: *€100,000*
Annual gross income of spouse: *40,000*
Monthly take-home pay: *€ 6,900*

Monthly expenses: circa €6,000 (includes the below)


*Mortgage 1 1,530*
*Mortgage 2 1,190 (overpaying by 500pm)*


*Gas + Electricity + Bins 180*


*Property Tax 45*


*Car Insurance 40*
*Diesel 50*
*Phones x 2 and broadband 110*
*Creche  525 (will increase to 1,800 next July as both babies will be in 4 days a week)*
*Life assurance 40*
*Health insurance 100*
*Food  500*
*Near term savings acc for car purchase 300*
*Child saver acc  150*
*Home renovation 600*


Type of employment: *Both in* *private sector*

In general are you:
(a) spending more than you earn, or BREAKING EVEN
(b) saving? *We are saving roughly €1,450 per month. We could potentially save a lot more but we are overpaying mortgage 2 and undertaking some home renovation work.*


Rough estimate of value of home: *€330k*
Amount outstanding on your mortgage: *€255k (17 years remaining) rate 2.30%*

Rough estimate of value of rental property: *€65k*
Amount outstanding on this mortgage *€125k (3.15% variable)*
Do you pay off your full credit card balance each month? *Yes, always.*

Savings and investments:
*€15k in current acc (mainly holding for rainy day fund purposes)*
*€1.8k in child saver account*
€4k in near term car saver acc

Do you have a pension scheme? *Yes, both in DC schemes. 8% employer and 12% personal for me. Current total value is €70,000. Partner pays 5% and employer matches with 5%. Pension fund amounts to circa €100,000*

Ages of children: 2 and one due next month

Life insurance: *We both have policies that pays 4 x Salary on death. My wife has serious illness cover. I have income protection (75% of salary)*

We've spent about 3k on holidays a year for the last 2 years.

We have invested about 20k into home improvements since we bought in 2018. The likelihood is we will spend the same again in the next 3 years. We are ok with this as we see it as our forever home and when we bought we knew a lot of renovation was needed.

The plan is when fixed rate term on mortgage 1 expires in 4 years to derisk by refinancing with Avant for 15 years at around 2.20%.

Property 2 continues to be a major headache unfortunately. We want to pay mortgage down to a level which gives us headroom to sell without having a large residual balance. Rental income per month is 550.

*Questions*
It feels like we are making good progress in making the debt more manageable. Any thoughts on how we are doing on this?

I currently don't have health insurance. I struggle to see the benefit but I'm considering getting a low cost plan so at least have a minimum cover. Can anyone convince me why insurance is beneficial? Good plan recommendations also welcome.

Next car purchase is in 2023. Plan is to finance by part exhange and cash only.

Anything we are missing in current plans?


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## Monbretia (29 Aug 2021)

Health insurance - to jump the public queue!  Main reason anyone takes it out.  In an emergency you will be seen in A&E but anything other than an emergency and you're on the public list.


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## Gordon Gekko (29 Aug 2021)

It is good to hear back from you.

Why has the value of the rental property collapsed?


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## BigBoots82 (29 Aug 2021)

Gordon Gekko said:


> It is good to hear back from you.
> 
> Why has the value of the rental property collapsed


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## BigBoots82 (29 Aug 2021)

Suspected defective blockwork identified unfortunately


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## Coldwarrior (30 Aug 2021)

BigBoots82 said:


> Suspected defective blockwork identified unfortunately


Sorry to hear that, that is really unfortunate. Does it qualify for any of the mica redress schemes?


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## BigBoots82 (30 Aug 2021)

Thanks. My understanding is it doesn't under the current scheme. It's very early stages but fearing and assuming the worst


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