# Good income now but high levels of mortgage debt



## EldridgeCleaver (13 Aug 2015)

*Age:*
43
*Spouse’s/Partner's age:*
37
*Annual gross income from employment or profession:*
€165,000
*Annual gross income spouse:*
0
*Type of employment:*
Private sector employee
*Expenditure pattern:*
We are both generally 'spenders'

*Mortgage on home*
€388,650 outstanding. Taken out in early 2007. Maturity Date – Aug 2042
*Rough estimate of value of home*
€280,000
*Mortgage provider:*
PTSB
*Type of mortgage: *
Tracker
*Interest rate*
ECB+2.25% - currently paying 2.3%

*Equity Release Mortgage (secured on Investment Property)*
€80,000. Taken out in early 2007. On interest-only since Day 1. Maturity Date – Feb 2029
*Mortgage provider:*
PTSB
*Type of mortgage: *
Tracker
*Interest rate*
ECB+1.35%


*Do you own any investment or other property?*
Yes.
*Rough estimate of value of investment property*
€180,000
*Mortgage on Investment Property*
€178,380. On interest only since 2009. Taken out in 2002. Maturity Date - Aug 2028.
*Mortgage provider:*
PTSB
*Type of mortgage: *
Standard Variable Rate
*Interest rate*
4.15%
*Rental Income*
€1050

*Other borrowings – car loans/personal loans etc*
Credit card 1 - €4,800

Credit card 2 - €2,800

*Do you pay off your full credit card balance each month?*
No – minimum payments but plan to clear it in the next 3/4 months.

*Savings and investments:*
0

*Do you have a pension scheme?*
I previously worked in the public sector for about 7 years so there will be a defined benefit pension of some small amount from that when I retire. I also have pension bonds from previous occupations. I think the total value of the bonds is about €28,000. I have a decent pension now and between my contributions and my employer’s contributions I put about €3,000 in per month. 

*Ages of children:*
11, 8, 3

*Life insurance:*
Yes but only covers my home and the equity release mortgage in the event of either me or my wife dying. I have no insurance on the investment mortgage.

*What specific question do you have or what issues are of concern to you?*
We made a very bad decision back in 2007 to move to a bigger home because our family was growing. We put our house on the market and bought a bigger house. We got the mortgage and an equity release to cover the downpayment and moved to secure the new house before our own was sold. We were in a bidding war and we really liked the house. I suppose our appetite for risk was different then.

Anyway, the market tanked and we could not sell our old house so we rented it out for what we hoped would be a short term. Any subsequent offers we received on the house after that were low so we decided to keep it and rent it long term.

We struggled really hard for a number of years. We were both working but the cost of childcare, mortgages etc took everything we had and we went into arrears. Nothing that big but enough to keep you awake at night. About 18 months ago I got the job of my dreams and my wife, who was not so happy at work, wanted to stay at home with the kids for a couple of years. Everything has been good since and we have cleared the arrears on our mortgage.

My next plan is to clear the credit cards as quickly as possible and I will do that in the next few months. After that, I am not sure what to tackle next. I considered tackling the small mortgage of 80,000 but I am paying the lowest interest rate on this. I considered switching the investment mortgage back to principal and interest but I am now thinking that I should just overpay the big mortgage as I can write off the interest on the investment mortgage against the rental income so I do not see the sense in reducing that first. I have also thought about reducing the overall debt burden by selling the investment property but the rental income covers the payments on both the investment mortgage and the equity release mortgage so I would realise a loss on the sale and would still have the equity release mortgage to deal with.I am concerned though that if interest rates start to climb again I will be in trouble.

I would appreciate any thoughts you have on the best approach or indeed any alternative proposals you may have. My income has gone up considerably but we have learned to live frugally over the past few years so I really want to tackle the debt mountain now rather than spending the additional income unwisely.


Thanks in advance
Eldridge


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## Redone (13 Aug 2015)

I think you're probably over reacting to the dire straights you were in. Things are now good, and just need to be managed over time.

You've no arrears so the advice I would give would be to pay off the most costly debt first, which (as you've mentioned) are the Credit Cards, then pay off the Investment property as soon as possible. You are on trackers, with historically low EU interest rates, but your income (approx. €95k per annum after tax) should easily accommodate foreseeable interest rate increases.

Then overpay on your PPR.

I'd hold onto the rental property as it's generating positive cashflows and paying off the principal.

Congrats, assuming you can maintain your job you should be well able to afford your repayments and enjoy a substantial increase in lifestyle.


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## Brendan Burgess (13 Aug 2015)

Is this summary correct?





Credit cards: €7,600

First priority is to clear your credit card debt.

_I have a decent pension now and between my contributions and my employer’s contributions I put about €3,000 in per month._

OK, if your employer matches your pension contribution, then you should continue to make it. However, you should not make any Additional Voluntary Contributions in excess of this level. You have a high level of debt, and your priority should be to reduce it.

_I considered switching the investment mortgage back to principal and interest but I am now thinking that I should just overpay the big mortgage as I can write off the interest on the investment mortgage against the rental income so I do not see the sense in reducing that first_

You should voluntarily switch any mortgage back to principal and interest. At any time, you can overpay your mortgage. But if you change it to principal and interest, you may be stuck with that. If things get tough in the future, you may fall into arrears.

The size of the mortgage is not the issue here. It is the net interest rate after tax relief.

You are getting 50% tax relief on 75% of the interest.
You are paying 4.15% on your investment
75% is 3.11%
tax relief is worth 1.55%
Net cost is 2.6% ( 4.15% - 1.55%)

As that is the highest rate, you should pay that off first.
Another reason for paying that off first is that if you do want to sell it, you will probably have to have it out of negative equity.  If it's in negative equity, then the lender could refuse you permission to sell it.
Another reason is that it has the earliest maturity date - 2028.  You will probably have to sell it then to pay off the mortgage, so you should aim to have it comfortably out of negative equity by then. 

Another very minor consideration is that if you get it back into negative equity, you may be able to switch to a cheaper lender. However, this is only a remote consideration at this stage, as the new loan would have to be cheaper than the average of your main loan and equity release, which is unlikely.

But overall, paying down the expensive investment loan increases your options.

If you get into financial difficulties in the future, prioritise the investment mortgage first.  For all of the above reasons and because your home is protected by the Code of Conduct on Mortgage Arrears.


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## Brendan Burgess (13 Aug 2015)

EldridgeCleaver said:


> I have also thought about reducing the overall debt burden by selling the investment property but the rental income covers the payments on both the investment mortgage and the equity release mortgage so I would realise a loss on the sale and would still have the equity release mortgage to deal with



It seems from what you are saying that the rent you are receiving exceeds the interest you are paying on the main mortgage. 

If so, then you should retain this property. 

The equity release is irrelevant to this decision. It just happens to be secured on that property. You don't get tax relief on the interest.  Just treat this as any other cheap unsecured loan.


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## Bronte (14 Aug 2015)

This is a well presented money makeover, particularly the personal information which give more of a feel for the person.

*Home loan*

Low tracker.
2042 - 2015 = 27 years remaining.  43 + 27 = 70 when mortgage is paid off.

I don't like that.  Think it's too old to end your mortgage.  Ideally I'd like 10 years off that, so aged 60.

Does the 388K outstanding include the 80K Equity release mortgage.

Also don't like that you are so much in NE. It's currently 108K.

*Life Insurance*

I presume you have a policy to pay off the mortgage on all properties/the *3* loans.  It's not compulsory for investments of course.  And for that type of property if the rent is covering the mortgage than it should never be an issue.

*Credit cards*

It's a no brainer to pay this off first.  People shouldn't use their credit card unless they have the money to pay it off monthly, not sure if this is an issue here, but you did mention that you both are 'spenders' whereas you need to become 'savers'

*Investment*

Not in NE, good.  However it's interest only.  So you need 180K in your back pocket in 2028 plus another 80K = 260K.  That's a heck of a lot of money.  This needs sorting now.  Of course as BB points out you could sell the investment if necessary when the time comes.  BUT - one does not like to reach a deadline in the future and be forced to do anything if one ideally doesn't want to.  For examply one could be at the celtic tiger burst when the date comes up.  So one has to have a plan b.  And you've already been there yourself so let that experience guide you. 

I would suggest makign capital repayments on the main mortgage and ignoring the cheap equity mortgage.  As BB pointed out you don't have to change the interest only, just make voluntary capital payments.

From my life's experience of banks so far, it's better you have more power by being in more control and not being at their beck and call, which you are when you are so much in debt to them.  It reduces your options.

Also one never knows what way interest will go, everybody says it's historially low, but that because we're part of the Euro it will never go so sky high again.  I don't believe everybody.  Look out for yourself.

I presume everything is koser with PRTB, LPT and revenue?



*Young children*

What are your plans for them.  How are you going to pay for college etc.


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## Brendan Burgess (14 Aug 2015)

Bronte said:


> Low tracker.
> 2042 - 2015 = 27 years remaining. 43 + 27 = 70 when mortgage is paid off.
> 
> I don't like that. Think it's too old to end your mortgage. Ideally I'd like 10 years off that, so aged 60.



No, no, no, no, no.

It's a cheap tracker. The longer the term, the better.  Pay off expensive debt first.  Put money in your pension first.  People should not worry about having very long term, even indefinite, mortgages if they are on cheap trackers.






Bronte said:


> *Investment*
> Not in NE, good. However it's interest only. So you need 180K in your back pocket in 2023 plus another 80K = 260K. That's a heck of a lot of money. This needs sorting now.




There is no urgent need to sort an investment property because it has to be repaid in 13 years time. (It's 2028, not 2023) It can always be sold.



Brendan


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## Bronte (14 Aug 2015)

BB I got distracted and hadn't finished the post !


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## Brendan Burgess (14 Aug 2015)

OK, happens to me all the time. I will edit my response accordingly.


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## Bronte (14 Aug 2015)

Brendan Burgess said:


> No, no, no, no, no.
> 
> It's a cheap tracker. The longer the term, the better.  Pay off expensive debt first.  Put money in your pension first.  People should not worry about having very long term, even indefinite, mortgages if they are on cheap trackers.


 
What if he loses a job !  When you are 70 you have zero earning power and it's too late to do something then.  Don't get caught is my mantra, when you have a lot of earning power it's better to reduce the term.  Who would pay the large mortgage if anything were to happen to him.  It's deep in NE as it is.  It may be very cheap, but that's not the whole of life story.


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## EldridgeCleaver (14 Aug 2015)

Thanks Redone, Brendan and Bronte for your feedback.

Brendan, the summary table is almost correct. The outstanding mortgage on the investment property is 178k not 174k. Thanks for the calculation on the net cost of the investment mortgage which I had not realised was the most expensive after considering tax relief on rental income. In relation to the equity release, I am not sure how the bank would view that. i.e. would the bank consider the negative equity on the investment property as 78,000 negative (178k+80k mortgages less value of 180k) or would it consider the negative equity on my home as 188k (388k+80k mortgages less value of 280)? I suppose its all my debt but it could influence the banks decision to allow me to sell the investment property if they considered it to be 78k in negative equity? 

Bronte, the 388k outstanding on the main mortgage does not include the 80k equity release as I explained above so the total outstanding mortgage debt is 388k+178k+80k= 646k. So the negative equity is higher than 108k. It is 186k. The life insurance is for an amount that would over the 388k + 80k.  I enquired about extending this to cover the 178k as well but could not afford the additional premium at the time. It might be worth doing this now for peace of mind. 

The credit cards have to go. Thats my focus now. The I will tackle the investment mortgage with lump sum payments rather than switching it to principal and interest. 

Many thanks.


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## Brendan Burgess (14 Aug 2015)

EldridgeCleaver said:


> I am not sure how the bank would view that. i.e. would the bank consider the negative equity on the investment property as 78,000 negative (178k+80k mortgages less value of 180k)



The lender doesn't really mind too much if you are in negative equity if you are meeting your full repayments.  

It only matters if you want to sell the property. The negative equity is the amount of the mortgages less the value of the property. As I understand it, you have two mortgages on the investment property so they result in the negative equity. If you took equity release to buy the family home, it doesn't matter if that is not secured on the family home. 



EldridgeCleaver said:


> The life insurance is for an amount that would over the 388k + 80k. I enquired about extending this to cover the 178k as well but could not afford the additional premium at the time. It might be worth doing this now for peace of mind.




If you die tomorrow, your wife be in the following position: 

Mortgage free home:  €280k 

Investment property worth €180k
Mortgage of €174k. 

She can pay off that mortgage by selling the investment property. There is no need for life cover. 

Brendan


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## Bronte (14 Aug 2015)

(I had posted more but it seems to have disappeared - really do not like the way the new website works )

One should have an eye to the future for house repairs, new car purchase, holiday expenditure, health care and children's education.


*Six month rainy day fund.*

Need to built this up. 

*Savings*

Should start a regular savings amount.  It's good discipline.


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## gnf_ireland (14 Aug 2015)

Brendan Burgess said:


> She can pay off that mortgage by selling the investment property. There is no need for life cover.



I am going to disagree here. True, from an investment property point of view your family would not be in debt. 

However, you would be leaving behind a family with 3 children with limited resources to survive off. You wife is not working currently and may struggle to get back into the workforce - combined with the additional costs of childcare, education, activities etc

I doubt any husband/father would like to leave their children in that circumstance. I think you should be considering 20 year life cover, as some sort of financial buffer for your family, to at least see your kids through their education years and have some buffer for your wife.

Agree with Bronte - you need to build up a rainy day fund, think of your future outgoings whether it be education, car purchase etc, both short term (next 5 years) and beyond that. 

In terms of which mortgage to pay off first, it would depends on what your plan is for the investment property. If you plan is to sell it at some stage, I would overpay that one first as it is the most expensive. Once you sell it, any funds you have can always be used to pay off against the family home.

Just keep in mind that you have to pay 80k in 2029, so 14 years time - when your kids will be 25, 22 and 17, with some potentially expensive years between now and then. Very few people can pull 80k together very quickly


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## Brendan Burgess (14 Aug 2015)

Bronte said:


> What if he loses a job ! When you are 70 you have zero earning power and it's too late to do something then. Don't get caught is my mantra, when you have a lot of earning power it's better to reduce the term.



I am not suggesting squandering the money. I am saying that he should put it in his pension instead of paying down the mortgage. When he is 70, he will have a higher income if he puts the money into a pension fund now rather than pay off a mortgage.


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## Brendan Burgess (14 Aug 2015)

gnf_ireland said:


> I am going to disagree here. True, from an investment property point of view your family would not be in debt.



He does not need life cover for the investment property. 

If he wants to pay high premiums now for cover in excess of the amount needed to clear the mortgage on his family home and his unsecured loan, fair enough.  The level required would depend on a number of issues, such as the wife's earnings capacity. 

In general, I would think that paying down debt and contributing to a pension fund was a higher priority than life cover in excess of that required. 

Brendan


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## North Star (14 Aug 2015)

Hi all coming to this late , but will offer a different perspective. The comments above are all sensible but if this were a client of ours the priority of the action items would be very different.

The current situation is that current cash flow/income is strong and as long as that continues, the OP will be in a better position to deal with negative equity, paying off debt and building a retirement fund. However the key issue is that this will take time and several/many years of good income to deal with these issues. So if the OP has the luxury of time to work out their financial pressure points then all should be resolved in time. However all of this is predicated on both the income flow and time. 
What happens if the OP can no longer work through ill health?   Item 1 check that the current employer provides PHI/income protection. If this is not provided then look at the costs of setting up a policy yourself to replace a good portion of your current income. The premiums are tax deductible. We cant protect against the OP losing his job and if that happens then you may need to stop the PHI as the payout is based on your income at the point of claiming.
Item 2 - What if either the OP or partner passes away ( we always need to  hope for the best but plan for the worst ),  then we   would say that life cover for a replacement income is vital for both OP and partner ( to cover childcare costs etc till the youngest is reasonably expected to be able to look after their self. Again check with employer as to what Death in Service is provided which may reduce or fully meet the amount of life cover the OP needs.
Once these  main risks are dealt with then and only then look to pay off credit card debt and build up a good rainy day fund. Only after that would we then look at the options of repaying debt and/or material pension contributions.
As we said above, current income is strong and hopefully in time all the financial issues will be resolved but from our viewpoint the immediate risks need to be adresses/mitigated. I hope a different perspective is helpful. All the best Vincent


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## Redone (14 Aug 2015)

North Star said:


> Hi the OP will be in a better position to deal with negative equity,



He has already paid off the negative equity.

It depends on his risk profile, but I'd clear the CC debt or at least bring it down to the level where he is not being charged interest.


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## orka (14 Aug 2015)

Brendan Burgess said:


> _I considered switching the investment mortgage back to principal and interest but I am now thinking that I should just overpay the big mortgage as I can write off the interest on the investment mortgage against the rental income so I do not see the sense in reducing that first_
> 
> *You should voluntarily switch any mortgage back to principal and interest*. At any time, you can overpay your mortgage. But if you change it to principal and interest, you may be stuck with that. If things get tough in the future, you may fall into arrears.


Is the bit in (my) bold/underlined missing the word 'not'? ie you should not voluntarily switch to officially paying P&I because then you're stuck with that and can't change back.  You can unofficially effectively pay P&I yourself by overpaying each month.


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## gnf_ireland (14 Aug 2015)

Brendan Burgess said:


> He does not need life cover for the investment property.


Brendan - this point we can agree on.

I am not saying he needs life cover on the investment property, I am saying he needs life cover in general to provide for his family should the worst happen.

His turnaround in financial matters is predicated on his new job/role and the salary that comes with it. However, this can change for a number of reasons - being let go (not much you can do about this), serious illness (income protection insurance maybe!) or death (life cover). 

As a partner and parent, I believe we all have a responsibility to our dependants, regardless of their independent earning power, to ensure that there is some sort of financial plan in place should the worst happen. This should be discussed and agreed and both parties should feel comfortable with the plans and feel they are adequate. The plans that are in place can reflect the partners earning power etc, but it should still be planned for. This is no different to having a plan in place in case both the OP and his partner passes away, to ensure the children are adequately taken care of. Adding three children into any household will be a tough ask on anyone (family or otherwise) without some level of financial assistance.


I am all for financial conservatism and relieving oneself of debt as quickly as possible, as well as building up a nice pension fund. But there is no point having a 2 million pension fund and passing away on your 65th birthday having never lived and enjoyed time with his children!

*Note* I am assuming that for 165k, the OP works a fair number of hours (not a regular 9-5 role) and probably has a level of travel as part of the role !


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## eirefinq (16 Aug 2015)

EldridgeCleaver said:


> *Life insurance:*
> Yes but only covers my home and the equity release mortgage in the event of either me or my wife dying. I have no insurance on the investment mortgage.



If you were to die have you considered how your spouse would replace your income? Aside from the mortgage protection there is no other life/serious illness cover mentioned. I think you need life and serious illness cover in place to provide cover in the event of your death over and above the existing mortgage protection.


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## EldridgeCleaver (17 Aug 2015)

Thank you all for your additional comments. It certainly gives me additional food for thought. 
Redone,
I have not paid off any negative equity. Just arrears that I had built up. Current negative equity I would estimate at 186k.

GNF_Ireland,
You assume correct. I work long hours and I would have on average 3 business trips per month. Travel is limited to Europe.


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## kennyb3 (17 Aug 2015)

The OP definitely needs some sort of cover for his family should he unexpectedly pass away. At the moment his wife would be left with a pension & properties (limited cash).

However she could be left in a very dire mess until she is able to deal with getting hold/liquidating these resources.


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## Bronte (17 Aug 2015)

EldridgeCleaver said:


> GNF_Ireland,
> You assume correct. I work long hours and I would have on average 3 business trips per month. Travel is limited to Europe.



I would also have assumed with your kind of job that there would be top of the range benefits included as part of your package.


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## EldridgeCleaver (17 Aug 2015)

Hi Bronte

Yes, I should have mentioned that. If I have a serious illness or am incapacitated while in service I would receive a lump sum of €65,000. If I died while in service my dependents would receive a lump sum of €125,000.


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## Bronte (17 Aug 2015)

No pension payout or income of some sort for your dependants other than the lump sum?

There is a very cheap insurance for properties called Term insurance, at your age the cost would be negligible.  But it would mean the investment was paid off and you have for your dependants a revenue stream, on low tax as your wife is not earning.  Your home would be paid back so no mortgage.  But you need to see how much else she would need.

Others have recommended other products, but it is my understanding that these are costly and complicated.

Lucky you only Europe, my OH had to go all over, but mostly Europe.  As he got older and wiser he refused to get up in the middle of the night or ruin our weekends !


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## EldridgeCleaver (18 Aug 2015)

Hi Bronte,

No ongoing pension payment. Just the lump sum. Thanks for the advice on the term insurance. I will look into it. On the travelling I am lucky as I deal mainly with European public sector bodies and they prefer to meet on Tuesdays, Wednesdays and Thursdays so our weekends are usually our own. I did the long haul stuff in the past when I was young and single. I enjoyed it but it takes its toll and the novelty of travelling wears off fast.

Best regards.


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## North Star (20 Aug 2015)

Hi again EldridgeCleaver,
Based on what you have provided in terms of Death in Service benefit of just €125,000 with no pension benefits for the surviving partner, I would suspect that you very under insured. In the event of your death  the family  will lose that income and only have the €125k lump sum and the widows pension of €193 per week. I accept the  mortgage on the family home will be cleared. Is this enough income to support  your family's current lifestyle? just fyi a 20 year term policy for cover of €500k on your life costs just €60 euro per month (assuming no medical issues and non smoker) . If we  look at dual life cover for both you and your partner for  €500k cover for 20 years the total cost is around €90 per month.
You say you have no income protection if you arent able to work. To get a replacement income of €50k per annum till age 60 with a deferred period of 26 weeks will cost approx €105 per month.
These are just indicative amounts of cover. I suggest you sit down and try to work out what level of life and income protection you would need to provide a reasonable standard of living for your self and your family. I know this whole topic isnt much fun, but could be very important. all the best Vincent


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## EldridgeCleaver (21 Aug 2015)

Thank you for the advice North Star. I am looking at term insurance options now and have contacted a couple of companies for quotes.


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