# Where to overpay to clear negative equity?



## maggiemae (22 Mar 2010)

Age: 30
Spouse’s/Partner's age: 29

Annual gross income from employment or profession: 49000
Annual gross income of spouse:42000

Type of employment: public and private employers

In general are you:
Spending 
Rough estimate of value of home 220000
Amount outstanding on your mortgage: 242000
What interest rate are you paying? 3%

Other borrowings – car loans/personal loans etc
Car Loan 10000 payment of 350 p/m

Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? 2000

Savings and investments:
10k savings 
Bank shares... not worth fiddly 

Do you have a pension scheme? Yes 

Do you own any investment or other property? 
House value 300K rent 750pm no mortgage outstanding 
Apartment value 150K outstanding mortgage 180000 rent 800 pm repayments 900
Ages of children: None

Life insurance: To cover mortgage on death. Some scheme through work that issues twice the salary. Nothing heavy 


What specific question do you have or what issues are of concern to you?
As you can see we are currently in about 52000 of negative equity. We want to try and overpay in order to clear the negative equity as soon as possible. 
We are currently on a fixed 1 year rate with our home mortgage so haven’t been able to pay anything extra into it as yet. We are overpaying the apartment investment mortgage currently by about 150pm as this is the property carrying most negative equity 
Should we be paying this into our principle residence now rather than the investment property. Should we be switching the investment mortgage into interest only for now and plough the balance into our home property


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## dmos87 (22 Mar 2010)

I dont know much about mortgages etc. so I wont comment on those, I will leave that to others. Re: the car loan, €10k outstanding. You have 10K in savings, can I recommend seeing what a 5K lump sum might do to this (i.e. enquire with the lender)? It might reduce the monthly payments to circa €180-200 euros per month, leaving more money to target the neg equity. Also its not eating all of your savings and there is still enough for an emergency etc. Anything you can do to target interest will help somewhat. Or perhaps 2K off the CC, and 3K off the car loan? CC interest is awful and expensive. I know its frightening digging into savings but it doesnt make sense to have too much in savings when you have a lot of debt.


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## maggiemae (22 Mar 2010)

Thanks for your comment. We will definately clear the credit card in 2 months time. It is on 0% for the next couple of months so the plan is to clear it when the interest is reapplied. 

We had been considering changing the car for something a bit more fuel efficient. A diesel perhaps that comes into a lower tax bracket. We would get around 10K for the car at the minute so we might be able to clear the loan and pick up something a bit cheaper.


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## What the (22 Mar 2010)

You say you have 3 properties worth a combined total of 670k (220k plus 150k plus 300k) You only owe 422K (180K plus 242k). While 2 of your properties are negative overall you are not in negative equity as if you sold everything you would walk away with almost 250k in your pocket. 
I agree with DMOS87. Pay off CC first and then Car loan as they have a much higher interest rate than your mortgages and then whatever you have left over you can throw at the mortgages. The mortgage you should tackle first is the one with the highest interest rate.


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## Brendan Burgess (22 Mar 2010)

Agreed.

Negative equity is a meaningless concept in your case. 

You should immediately stop overpaying the investment property mortgage. You get tax relief on 75% of the interest on the investment property mortgage while you probably get no tax relief on your home. 

That is assuming that they are all on the same rate. You should probably ask the lender to switch the investment property to interest only and up the repayments on your home mortgage. 

With an income of €91k and a net rental income, you probably don't need to have a cash float of €10k. You should use this to reduce your most expensive borrowing or to upgrade to a cheaper car. 

You might review whether having an exposure of €670k to the housing market is too much. If it is, then you should consider disposing of a property, preferably the one with no mortgage. If one of the properties was your principal private residence and if it has a capital gain on it, then you should probably sell it to minimise the long term exposure to CGT.
Likewise you probably should retain a property with a CGT loss on it, as any future gain up to the purchase price will be tax-free.


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## darag (22 Mar 2010)

What the said:


> The mortgage you should tackle first is the one with the highest interest rate.


Normally I'd repeat Brendan's point regarding the fact that the interest paid on the investment mortgages can be offset against the rental income for tax purposes.  For example if they paid off the apartment mortgage, they would then have to pay tax (and PRSI) on the 800 month rent - say 400 a month.  Therefore the 180K only saves them 500 net a month in repayments.  If they used the 180k to pay off some of their their PPR mortgage, they get the benefit of the reduced payments "tax free".  However in this case, it seems the interest rate they are paying for the apartment so high that it may still make sense to try to pay some of it down - the 180K paid against your PPR will only save you 450 a month under the completely unrealistic assumption that you will only ever be paying 3% for your PPR mortgage.

I'd definitely sell the mortgage free investment property since the yield is absolutely awful (3% gross - which after tax is 1.5%).  Use the money to clear your personal debts and live mortgage free in your PPR.  Heck, even sticking it into a deposit account will earn you a better return than you're getting now.


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## Brendan Burgess (22 Mar 2010)

Darag/maggiemay

What is the interest rate on the apartment? 

I can't see it anywhere, so I didn't realise it was higher than the rate being paid on the home. I suspect it's not, if it's an old mortgage.

I did say



> That is assuming that they are all on the same rate.



Brendan


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## darag (22 Mar 2010)

Brendan, it isn't stated but it doesn't matter because it's not required for the rough calculation that I did.

The poster said there was 180k outstanding which was costing 900 a month to service.  If they paid this mortgage off, they would save 900 a month in repayments but would now have to pay say an extra 400 a month in tax/PRSI (assuming 50% at the margin on the stated 800 rent); netting them a saving of 500 a month.

If instead they put 180k against their PPR mortgage (at 3%), they would save 180k * 3% per annum in interest which is only 450 a month.

However, without knowing the terms of the mortgages this comparison isn't fair but it demonstrates that in certain scenarios, if the differences in interest rates are sufficient, then paying down your PPR first may not save you more money than paying off a mortgage on an investment property.

If the original poster can post the terms and repayments for both mortgages it will be possible to properly calculate which debts should be reduced first.   At the moment it's unclear - it's certainly not possible to say that paying down their PPR mortgage will save them more money.

The interest rate on the investment apartment is certainly higher than 3%; 900 a month for 180K would be 6% interest-only so I guess it's in the ballpark of 4.5/5%.


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## maggiemae (22 Mar 2010)

Thanks for the replies. I agree that selling the mortgage free house would put us in a far more relaxed position. However this property is something that we may want in the future though if we have a family as it is close to family and in an area that is family friendly. I would rather suffer a poor return now than hedge my bets that we would be able to buy something similar in the same area in the future. 

Darag/Brendan

Mortgage on the investment apartment is at 3.75%

Considering your comments I think the way forward is to change the apartment to interest only and put the excess into ppr.
Thanks for all the replies guys


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## Brendan Burgess (22 Mar 2010)

|investment|home
gross rate|3.75%|3%
tax reduction|1.85%|0
Net rate|1.85%|3%
Pay off the home mortgage first. The rest of the calculations about repayments are irrelevant.


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## Bronte (23 Mar 2010)

This is quite complex. Firstly as stated you are not in negative equity now but that doesn't mean that in the future you will stay the same.

The rent on the house is not good enough, the rent on the apartment is good.

Tax wise as stated it's better to pay off your home loan and keep loans on the investment property. 

If you are going to rent your current home out in the next couple of years you must think carefully if it's actually better to keep a large mortgage on it? If you are going to sell it then you need to get the mortgage down.

If you sell the rented out and invest somewhere else, could be say another 2 apartments for 150K getting 800 rent, you would be insulated from property rises and would still be able to go back to the near family area and buy at the time you need it. You could also sell, buy one apartment and lob 150 off the house you currently live it.

Just some ideas off the top of my head.  You'll have to do out all the figures yourself on the various scenarios to see what is the best solution

First though please clear the credit card with your savings and start paying down the car loan. Then start on the home loan, save until fixed period is up and then start tackling that mortgage


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## darag (23 Mar 2010)

Brendan said:


> Pay off the home mortgage first. The rest of the calculations about repayments are irrelevant.


Yes I got the savings from throwing 180k at their PPR mortgage completely wrong - they would save over 900 a month which is obviously much better than 500.


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