# Start paying off BTL house or load pension



## Middleoftheroad (26 Jun 2020)

*Age:*
50
*Spouse’s/Partner's age:*
43

*Annual gross income from employment or profession:*
E53,000 due increase 7k
*Annual gross income spouse:*
E36,000

Usually max out rent-a-room each year of 10-14k , we take foreign interns but obviously not at present but have done it for many years, an hopefully a source of income in the future too. 


*Type of employment:*
Both private sector employees

*Expenditure pattern:*
We are both generally 'savers'

*Rough estimate of value of home*
E550,000
*Mortgage on home*
E430,000 - we've been paying 1980 pm - 20yrs left 
*Mortgage provider:*
Ics
*Type of mortgage: Tracker, interest only, fixed rate*
Tracker +1% 
*Interest rate*
1% above Euro rate.

*Other borrowings – car loans/personal loans etc*
no

*Do you pay off your full credit card balance each month?*
yes- don't use.

*Savings and investments:*
E10,000 savings. 
Rolling vesting stock/bonuses of 6k from 2022 onwards tax free 
*Do you have a pension scheme?*
Yes, I pay approx. E140pm into personal pension  Employer pays 8% -   fund only 30k at present  
Partner no pension.

*Do you own any investment or other property?*
Yes 4 bed semi - Clonee D15
Has been on interest only for 10yrs was originally my home before buying new home and started to let out. - Will switch to full payments  on feb 1st 2021
currently paying 600pm 
principle = 308k
rate 2.25% tracker
Rent 1730  Euro pm -  due to increase 4% sept but with freeze i'm not sure when or if it will happen. Good 6+ year tenants.  
New payment will be 2850 Euro for 10 years.

*Ages of children:*
2 kids  15 & 12    

*Life insurance:*
Yes.

*What specific question do you have or what issues are of concern to you?*
I go through our finances and realise that we will have spare cash every month going forward from 2021. For now I would feel comfortable funneling about E1200 of it into either

*Not sure which scenario is best ? *
a) My pension fund - sell BTL and funnel any equity into pension fun through AVC's( maybe 20k ) and max out monthly contributions to 22% + 8% employer   
or
b) Leave pension contributions as is 4% me 8% employer and subsidise full mortgage on BTL by circa 1200 pm     ie rent = 1730 + 1200 (my contribution) to make full payment - there will then also be tax on rental income.

b) overpaying our home mortgage each month by 1200 to reduce term and sell BTL  

Would like to retire at 60 if possible that's why I was thinking the BTL would offer a stable income if mortgage free in 10 yrs  

Any advice please ?

Thanks.


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## moneymakeover (26 Jun 2020)

At age 50 you're allowed to put up to 30% gross pay tax free into pension

You're putting about 3% (140x12 /53000)

So yes i think increase your pension contributions

You say you will have spare cash in 2021

But you also say your btl repayment will increase in 2021 from 600 to 2820


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## Middleoftheroad (26 Jun 2020)

Hi thanks for your reply,
Yes I am trying to decide is it better to load my pension over next 10 years and sell the BTL or to not load my pension and  add that money to rental income I receive to pay off BTL house over next 10 years 
Thanks.


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## moneymakeover (27 Jun 2020)

Middleoftheroad said:


> realise that we will have spare cash every month going forward from 2021


That sounds like you have already decided to sell?

If you don't sell can you afford the €2820 capital plus interest repayments?


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## RedOnion (27 Jun 2020)

Middleoftheroad said:


> Yes 4 bed semi - Clonee D15
> Has been on interest only for 10yrs was originally my home before buying new home and started to let out. - Will switch to full payments on feb 1st 2021
> currently paying 600pm
> principle = 308k
> ...


How much is the BTL worth? The amount of equity you've got should influence any advice you get.


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## Middleoftheroad (27 Jun 2020)

BTL currently worth 330k to 345k
308k owed


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## Sarenco (27 Jun 2020)

In your shoes, I would sell the rental and start maximising your tax-relieved pension contributions - for 2019 and going forward.  

To be honest, I think you need to be realistic about the likelihood that you will be in a position to retire in 10 years' time.  You currently have a net worth of around €160k and you still have two kids to get through college, etc.

I think a more achievable goal might be to fund a comfortable retirement - albeit from 65.


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## Brendan Burgess (27 Jun 2020)

Rental income€21,000Less interest      €308k@2.25%€  6,000Less other expenses€5,000Profit before tax€10,000Tax€5,000Net profit after tax€5,000

Equity in property:  €340k - €308k = €30k

This is a very profitable investment with good tenants. 
I am guessing that you bought it for more than its current value, therefore any increase in value up to the price you paid for it will be free of CGT, so it's a very tax efficient investment. 

Selling it will release only €30k now, so I don't think that is the right idea. 

But I agree with the principle of funding your pension instead of directly investing in property. It's just now is not the time to do it. 

Hold onto the property for another few years and you will be building up a lot equity and making a very handsome net profit. 

Let's look at the probable situation after 5 years. 
Assume house prices have remained the same. 
Your mortgage will be down to about €170k, so you will have €170k equity in the property.
If you sell it then and invest in your pension.

If you are on the same combined salary, you will be able to put about €30k a year into the pension.  That will be used up in 10 years or so when you add in contributions from your current income. 

Even if you don't use up your maximum amount, your spouse can use theirs for another 7 years or so if they work until 65. 

If you sell it now and realise €30k equity, you will have only one or two years of maximum contributions. 

Brendan


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## Brendan Burgess (27 Jun 2020)

I am also a little bit worried about your cash flow.

You have a €430k mortgage on your home and two children aged 15 and 12. 

As it's a cheap tracker, if all goes well, you should be able to manage. 

But if there is a recession or loss of a job or a non-paying tenant in your investment property, you will be glad to have access to the cash through selling the property rather than having it untouchable in a pension fund.

Brendan


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## RedOnion (27 Jun 2020)

Brendan Burgess said:


> This is a very profitable investment with good tenants.
> 
> Selling it will release only €30k now, so I don't think that is the right idea.


I was thinking the same, but the cashflow is a major barrier. Repayment is increasing by 2,250 per month. That's an extra 27k a year to come up with compared to how they've been living. It looks difficult based on current salary / savings.


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## Itchy (27 Jun 2020)

RedOnion said:


> I was thinking the same, but the cashflow is a major barrier. Repayment is increasing by 2,250 per month. That's an extra 27k a year to come up with compared to how they've been living. It looks difficult based on current salary / savings.



Would the OP be in a position to refinance on another interest only deal? The return on equity is great.


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## RedOnion (27 Jun 2020)

Itchy said:


> Would the OP be in a position to refinance on another interest only deal? The return on equity is great.


They're currently on a 2.25% tracker. Refinance interest only at c.5%, and there's not much return left. Plus they'd need to put in 100k cash to bring the LTV to a level that anyone would refinance.


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## Brendan Burgess (27 Jun 2020)

RedOnion said:


> but the cashflow is a major barrier.



But the OP says that they are comfortable with the increased cash flow from next year?



Middleoftheroad said:


> I go through our finances and realise that we will have spare cash every month going forward from 2021. For now I would feel comfortable funneling about E1200 of it into either



I took that to mean that they had €1,200 left over after paying the higher repayments.

If they can't meet the higher repayments, then there would be no issue.


Brendan


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## RedOnion (27 Jun 2020)

Brendan Burgess said:


> But the OP says that they are comfortable with the increased cash flow from next year


Yes, but they must have another income source they haven't mentioned!..
I think the 1,200 is before the capital repayment starts on the BTL. I can't make much sense of it, so I might have completely misinterpreted the post.


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## Sarenco (28 Jun 2020)

I thought the point was the OP could afford to either commence principal repayments or maximise pension contributions.

Meeting the principal repayments looks very challenging to me and if it limits the OP's ability to maximise pension contributions then it looks clear to me that selling the rental is the better option.


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## Brendan Burgess (28 Jun 2020)

Hi Sarenco.

I agree with you in principle, but not in timing. 

If they sell  it now, it will give them only a couple of years of maximum pension contributions.

Whereas if they keep it for 5 years he keeps a very profitable investment and will still not use up their contribution limits. 

Brendan


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## Sarenco (28 Jun 2020)

Brendan Burgess said:


> If they sell it now, it will give them only a couple of years of maximum pension contributions.


Yes but it would also improve cash flow so that contributions could be maximised out of income going forward.

Retaining the rental will squeeze the household's cash flow (once the principal repayments kick in) to a very significant degree.  Is it worth it to make a €5k after-tax profit every year?  I don't think so.

Add in the fact that they couldn't afford to maximise tax-relieved pension contributions for a further 5 years (bear in mind that the OP is 50 and only has a pension pot of €30k) and it looks clear to me that selling the rental now is the right move.


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## Brendan Burgess (28 Jun 2020)

OK
Rent received after expenses:  €15k
Less tax: €5k
Less repayments: €34k
Cash flow "cost" of keeping property: €24k 

So they can make the €30k contribution in the year they sell the property 
And €24k a year thereafter. 

Paying capital off the mortgage now is really deferring the pension contribution for a few years. 

But they will have an additional €50k to contribute after 5 years of profits. 

I think it's still right to hold onto the property. 

Brendan


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## Sarenco (28 Jun 2020)

Hi Brendan

By retaining the rental for 5 years the OP would have to skip making €103k in pension contributions (€13k for 2019 (25% of €53k) and €18k (30% of €60k) for the next 5 years).

That's €103k relieved @40%, that can subsequently be drawn down effectively tax free.  Net, after-tax return of €41k (ignoring any potential investment growth within the pension).

Keeping the rental would produce a net, after-tax return of €25k (€5k pa for five years) and would create a greater cash-flow squeeze.

Your argument might make sense if there wasn't an annual limit on tax-relieved pension contributions.


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## Brendan Burgess (28 Jun 2020)

Sarenco said:


> Keeping the rental would produce a net, after-tax return of €25k (€5k pa for five years) and would create a greater cash-flow squeeze.



Yes, but they then contribute it to their pension fund?  And they then have more money to contribute so they would be better off.

Brendan


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## Sarenco (28 Jun 2020)

I don’t see how they afford to do that.

in fact, I’m sceptical that they afford the principal repayments out of their after-tax income even without the pension contribution.


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## _OkGo_ (2 Jul 2020)

OP really needs to get professional advice on this!!!

Maybe I'm completely missing something here but this seems to have gotten sidetracked into the merits of a one off BTL

OP is seriously over borrowed on both properties and does not have the funds to pay for both. Loan to income (salary) is >8   
There is no sign of saving history (no cash, very small pension , very little equity in properties). IF BTL has been interest only for 10 years, then where has the €50k profit dissipated to? 
Cost of changing tenants at least twice in next 10 years, renovations needed, cost of sale means that future rental ''profit'' is totally dependent on house prices

What other living expenses does the OP have? what about cars?

Even with some +/- on the numbers below, I don't see how any of this works unless OP continues into retirement with huge debt

*Net Income**Annual**Monthly*Salary (53k+36k) (Tax calc inc health BIK and current pension) € 66,000  € 5,500 Rent a room € 10,000  € 833 BTL € 5,000  € 417 Total € 81,000  € 6,750 *Mortgage expense (karls mortgage)**Annual**Monthly*Mortgage BTL (10yr) € (34,416) € (2,868)Mortgage PPR (10yr) € (45,312) € (3,776)Mortgage PPR (15yr) € (30,996) € (2,583)Mortgage PPR (20yr) € (23,844) € (1,987)Not an option, OP will be 70!BTL 10yr + PPR 10yr € (79,728) € (6,644)BTL 10yr + PPR 15yr € (65,412) € (5,451)*Leftover for all other expenses (for next 10 yrs)**Annual**Monthly*10 year plan € 1,272  € 106 15 year plan € 15,588  € 1,299


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## Brendan Burgess (2 Jul 2020)

Hi OKGO

Welcome to Askaboutmoney. That is a very helpful detailed analysis. 

I was responding to the question asked. 

I got the impression from the following , that after they have increased the payment on the Buy to Let to Capital and Interest, then they will have €1,200 extra. 



Middleoftheroad said:


> *What specific question do you have or what issues are of concern to you?*
> I go through our finances and realise that we will have spare cash every month going forward from 2021. For now I would feel comfortable funneling about E1200 of it into either



But your figures show that either I have misunderstood the OP or that the information is incomplete. 

If they can't afford the repayments, then there is no question.  The property must be sold whether it is profitable or not. 

Brendan


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## _OkGo_ (2 Jul 2020)

Hi Brendan

Glad to join, have read and learned a lot from this valuable site 

I think you are absolutely correct in relation to the OP's question. And for someone with a healthier equity and less risky position then it should be a no brainer to hold on to it. 

But if the OP want's to retire at 65 with both properties, I'm struggling to see how they can make it work and meet all the capital payments. I think the only way the BTL benefits the OP is if they can negotiate another interest only period to give some buffer to plan the sale

Again just my opinion but I think professional advice needs to be sought to best plan a happy retirement for OP


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## SPC100 (3 Jul 2020)

Figures above seem to be off



Middleoftheroad said:


> *Annual gross income from employment or profession:*
> E53,000 due increase 7k


7k additional income not included



Middleoftheroad said:


> Usually max out rent-a-room each year of 10-14k ,


Only 10k modeled



Middleoftheroad said:


> Rolling vesting stock/bonuses of 6k from 2022 onwards tax free


This is not included (granted starts in 2022)



Middleoftheroad said:


> *Mortgage on home*
> E430,000 - we've been paying 1980 pm - 20yrs lef


The cashflow cost of ppr is much lower than modelled

That all would create about 1.5k per month more cashflow than above.


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## _OkGo_ (3 Jul 2020)

SPC100 said:


> Figures above seem to be off
> 7k additional income not included


Not off, just realistic to highlight the issues. OP is 'due' an increase. If it is guaranteed, then great it is another €3.5k net to add above



SPC100 said:


> Only 10k modeled


OP's range was 10-14k. Maybe they don't get to max it every year depending on timing of interns. And as they said, none at the moment because of current climate. They also need to commit to doing this every year for the next 15 years and beyond to rely on. They don't have the luxury of stopping this. +4k if they can guarantee it




SPC100 said:


> This is not included (granted starts in 2022)


If these were granted at no cost to OP and vest tax free, then add to the above figure. If it is a typical ESPP, then OP is currently contributing so the net gain from 2022 onward is probably more like 1-2k, and dependent on share price
+6k or +1k/2k



SPC100 said:


> The cashflow cost of ppr is much lower than modelled


If OP has any chance of retiring at 65, they need to clear the PPR in 15 years. It might make cashflow look good now but how do they fund it at 66-70 when there is not much in the way of pension currently in place

Either way, OP has outstanding debt of 738k on a net income somewhere in the range of 66-76k. If they have only built up ~150k equity in last 10-15yrs, how will they clear 738k equity in the next 10-15 yrs. There are also 2 kids who may or may not go for third level education. Only OP knows these answers and its why I suggest again that they need real professional advice to really plan their finances


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