# Buying house for rental - use savings or mortgage?



## Cowpat (3 Aug 2014)

Evening and apologies if incorrect forum.

With falling bank/post office interest rates and increasing tax on savings my 7 year plan is to buy a house as an investment for rental income and (hopefully) appreciation gain. I can cover the purchase price with savings. However, does it make more financial sense to take out an interest-only mortgage for rental income tax-saving purposes? 
I am aware that fee-paying independent financial will be required to make a final decision.

Thanks in advance.


----------



## Bronte (4 Aug 2014)

I doubt very much if you will get an interest only mortgage and that's a good thing.  

The advantage of a mortgage is that you can write of 75% of the interest, which not spending your cash.  But you'll have to do the numbers to see what is best for you.

Don't see how an independant advisor is going to help you on the most important aspects, such as location, yield, and being a landlord.


----------



## Cowpat (4 Aug 2014)

Thank you Bronte for the feedback. I realise the importance of location, yield and the responsibilities of being a landlord. I have an appointment with the bank later this week and am trying to decide what's best. Maybe a BTL mortgage would be more suitable for rental income purposes? (75% of 5.5% interest write-off?). 
Post office savings are due to mature shortly and the best return I can see now is about 1.75% tax-free on savings that are tied up for five and a half years.


----------



## Branz (4 Aug 2014)

Re the interest relief, if the numbers don't stack without it, then don't do it as you run the risk of a policy change, such as was tried before, Google the Bacon report.
When the Bearded One and Say Hello are part of the next Government, BTLs wont get much succour, there wont even be money for the mayo on the BLT's 
Be also aware of the PRSI now on rental income, so as suggested, build the financial model and stress test it for increases in interest, loss of interest relief, more PRSI, higher taxes and the LPT and higher PRTB charges.


----------



## Cowpat (4 Aug 2014)

Thanks for input ircoha. We can only plan based on the information currently available. If policies do change then I'm lucky enough to have savings to fill the void if interest relief is reduced. At the minute, the 75% of interest write-off of a BTL mortgage looks attractive in offsetting income tax, PRSI, property tax, water charges, LPT, PRTB, house insurance etc charges.


----------



## dub_nerd (4 Aug 2014)

Cowpat said:


> Thanks for input ircoha. We can only plan based on the information currently available. If policies do change then I'm lucky enough to have savings to fill the void if interest relief is reduced. At the minute, the 75% of interest write-off of a BTL mortgage looks attractive in offsetting income tax, PRSI, property tax, water charges, LPT, PRTB, house insurance etc charges.



This reasoning doesn't make sense to me. The LPT, water, house insurance are all fixed hits on your profit, regardless of whether you are getting the tax relief or not. The only reason you would borrow would be if the cost of borrowing is less than you can earn on your own money by not putting it toward the purchase. So that's all you need to consider.

I'll use an example amount of €100,000, but the numbers scale for any amount.



Mortgage amount | €100,000
Term | 20 years
Rate | 5.5%
Total Interest | €65,100
75% of T.I. for tax relief | €48,800
Tax relief at 41% | €20,000
Interest less tax relief | €45,100

So your net cost of borrowing over 20 years is  €45,100. You are saying that by keeping your €100,000 and investing it, you can earn more than that. As a deposit rate, that is the equivalent of 1.88% net, or 2.88% gross. If you reduce the mortgage term to 10 years, the equivalent deposit interest increases to 1.92% net, 3.08% gross.

The only deposit paying that sort of interest is the 10 year State Solidarity bond, which ties your money up for ten years anyway. On any other deposit you will be losing money when netted against your mortgage interest costs. There are other ways to make money of course, e.g. equities. But then your money is in risk assets _on top of_ a leveraged property gamble. And let's face it, it _is_ a gamble, because you are using the same calculus as everyone else chasing a return in the face of falling deposit rates and rising taxes. The chances of getting caught up in another government-manufactured bubble are significant.


----------



## Cowpat (4 Aug 2014)

Thanks dub_nerd for the stats. It's a seven year plan (making use of CGT relief on disposal of property bought before Dec 2014). Just thought that 75% of 5.5% interest write-off on  tax on a five year mortgage was an attractive proposition. I totally agree that it is a gamble but I've also had some sleepless nights having invested life savings in Northern Rock - and now in our bankrupt state savings schemes. Also I'm not interested in equities (been there, been burnt - thanks to Morrough Stockbrokers, Cork).


----------



## dub_nerd (4 Aug 2014)

But surely then you actually *want* your money tied up in bricks and mortar instead of leveraged and still at risk. Especially since, as I pointed out, it's actually cheaper if you don't borrow.

If it's any consolation, I also have (lots of) money in state savings and bank deposits that I am anxious to move as they mature over the next couple of years. However, for myself I've decided that I wouldn't touch Irish property with a forty foot pole. Anything that is so highly incentivised by the government has got a major chance of going wrong. And to be honest, looking at your rationale in the first post -- though I understand it -- convinces me even more to steer clear and not chase the herd on this one. I'd prefer to be earning zero on my cash.


----------



## Cowpat (4 Aug 2014)

Having had savings tied up in saving schemes over the years, yes I want to invest in bricks and mortar - at least I'll have the pleasure of seeing something concrete that I may retire to - rather than chasing numbers. I suppose that it depends on life circumstances but, for me, at this stage the property is in the right location, detached, relatively private and has real rental income potential. Cash is great but life is short.


----------



## Brendan Burgess (4 Aug 2014)

I have moved the interest, side track, to: 

I won't invest in shares again because I lost my money in Morroughs


----------



## Brendan Burgess (4 Aug 2014)

This is a fairly easy question to answer. As Dub Nerd says 

"The only reason you would borrow would be if the cost of borrowing is  less than you can earn on your own money by not putting it toward the  purchase. So that's all you need to consider."

But then he makes it needlessly complicated by looking at a long term calculation.  And any answer which ignores the time value of money, is very vulnerable to lead to a wrong conclusion. 

Cow pat has €100,000 cash. 
He has two options


Buy with cash
Borrow the €100k interest-only and put the cash on deposit
If he borrows €100k interest only, the annual interest bill will be




 €100k@ 5.5%|€5,500 |

Tax relief| €1,690   |€5,500@75%@41%
Net interest bill|€3,800The best instant access deposit account pays 2% gross, or 1% after taxes and USC.  So he will earn €1,000


The cost of borrowing to invest, while he has money on deposit is €2,800 a year per €100,000 borrowed. 

So the answer is very clear - do not borrow to invest at 5.5% if you have the cash available. 

The only exception to this would be if you had some need of the cash in the immediate future and would have to borrow at higher rates to fund that expenditure.


----------



## Brendan Burgess (4 Aug 2014)

*
"Post office savings are due to mature shortly and the best return I  can  see now is about 1.75% tax-free on savings that are tied up for  five and  a half years."*


As it's costing you €3,800 net to borrow, this would still not make any sense. 

But I don't think you should be comparing the return on 5 year savings certs. You are taking big risks by investing in them.


The 5.5% cost of interest is likely to rise. So you could  possibly compare the 5 years savings return, with the 5 year fixed rate  offered by the bank.
Tax treatment could well change over the next five years, so you  should not tie up your money for 5 years, while you have borrowings.
Savings Certs are not risk-free. If the state goes bust, you will be left with your mortgage and nothing to pay it off
So not only is buying with cash the best financially, it is also the safest as you are taking no risk with your savings.


----------



## Brendan Burgess (4 Aug 2014)

"Maybe a BTL mortgage would be more suitable for rental income purposes? (75% of 5.5% interest write-off?)."

I am not sure if you are making an error here in your understanding of how it works. 

You might be reasoning as follows: 25% of 5.5% is 1.375% 
1.75% is higher, so it's worth borrowing to invest. 

That is not how it works.


----------



## dub_nerd (4 Aug 2014)

Hi Brendan, I don't think calculating the total interest payable on the mortgage is particularly complicated, and calculating it as interest-only could over-estimate the total interest (and the relief) by 100% over the lifetime of the mortgage. Depends what you're aiming for, I suppose.

Just to note also -- there's no USC payable on deposits.


----------



## Brendan Burgess (4 Aug 2014)

Hi dub nerd

You are ignoring the time value of money, so most of these calculations lead to wrong conclusions. 

Such decisions should be assessed on an annual basis as they should be reviewed annually.  So if it worked out that it made sense to borrow to invest, that decision should be kept under review.  Changes in tax relief  or interest rates could switch the decision and it would then make sense to pay off the mortgage. 

In this situation, the decision is so clear that, ignoring the time value of money, does not change the decision.  But it's best not to use these 20 year figures, as they are so subject to error.


----------



## Bronte (5 Aug 2014)

dub_nerd said:


> However, for myself I've decided that I wouldn't touch Irish property with a forty foot pole. Anything that is so highly incentivised by the government has got a major chance of going wrong.


 
You are kidding me on property investment being incentivised, it's the exact opposite.  If it were, there probably wouldn't be chaos in the Dublin rental market.


----------



## Bronte (5 Aug 2014)

Brendan Burgess said:


> Cow pat has €100,000 cash.
> He has two options
> 
> 
> ...


 
Aren't you forgetting that cowpat will not be paying the cost of borrowing. He should be getting it from the rent. So your figures don't show the true cost to him. But with all the taxes, prsi, charges etc you want to be very careful with the overall return. 

One thing that could also be very important is property price rises or falls, which we are not allowed to discuss. But it is something that Cowpat has to think about. The current no CGT on investments should also be factored in. The calculation has to be done two ways as you have to take real income and expenditure versus what's allowable tax wise. Also the rent should be covering the capital element of the mortgage, today we're only talking about interest only mortgage.

Rent: 10,000
Mortgage: 5500
PRSI
Tax
Property Tax 250
PRTB 90

Rent: 10,000
Less
Interest relief 4125 (75% of 5500)
Leaves 5875
Less costs to get to profit and then calculate tax and prsi and usc.

At the end of this calculation, after 20 years of mortgage, how much will it have cost Cowpat to acquire an asset. And does house price falls really matter if one it taking this as a long term investment.


----------



## Brendan Burgess (5 Aug 2014)

Bronte said:


> Aren't you forgetting that cowpat will not being paying the cost of borrowing. He should be getting it from the rent. So your figures don't show the true cost to him.



Hi Bronte

It's important when looking at complex financial decisions, to simplify them and answer the key question.

Cowpat appears to have made a decision to buy an investment property. His only remaining question is whether to use his savings or to borrow. 

He gets rent anyway. He will avail of the 7 year CGT holiday anyway. He will have the other expenses anyway.

So my post isolated the question he asked, and answered it. 

If his question was "I have €100k in savings. What should I do with it?" , I would have a far more comprehensive answer.  It would also depend on his other assets.  For example, does he have his own home already? Does he have a mortgage? Does he have a pension?  

But maybe I should have put in a caveat - "I am answering the question asked. However, the more fundamental question should be _What should I do with €100k savings? _"


----------



## Brendan Burgess (5 Aug 2014)

Bronte said:


> At the end of this calculation, after 20 years of mortgage, how much will it have cost Cowpat to acquire an asset.



No! No! No! No!

I will have to do a Key Post on this issue as most people don't understand this at all.  The asset cost is €100k in today's money.  We can assess the profitability of the investment *this year* based on income and expenditure. He can make an assumption about the future price of property. 

He should compare this to the risk/return on deposit accounts. 

That is the *only *correct way to assess an investment proposition.


----------



## monagt (5 Aug 2014)

> I will have to do a Key Post on this issue



Please do.


----------



## Bronte (5 Aug 2014)

Brendan Burgess said:


> No! No! No! No!
> 
> I will have to do a Key Post on this issue as most people don't understand this at all. The asset cost is €100k in today's money. We can assess the profitability of the investment *this year* based on income and expenditure. He can make an assumption about the future price of property.
> 
> ...


 
As Mongt said I really wish you would do a key post. Then I might figure out if the decision I made to buy a very long time ago was a wise decision or not. 

It would be interesting too, to understand when it is actually good to buy an investment property and become a landlord.


----------



## dub_nerd (5 Aug 2014)

Bronte said:


> dub_nerd said:
> 
> 
> 
> ...



Ironically I think I agree with you -- but we're talking about slightly different things. I take it you mean it is hard to make a profit from a buy-to-let business (I gather from your other posts that you're involved in one). I too have looked at the numbers several times and they just don't stack up. It is difficult to impossible to find Irish property with adequate rental yield. That is one reason why I wouldn't touch it.

So with that being the case, why is the OP here so enthusiastic? Well, maybe they have found a rare property with 10-15% gross yield, which is what I would consider the absolute  bare minimum to cover the growing list of costs and compensate you for the headache of property management. Or more likely, as they hinted, they are seeing deposit rates plunging, and deposit income being taxed out of existence by the government, and on the other side seeing continuing tax breaks (income and CGT) on property purchase. That is what I see as the carrot and stick the government is using to entice money out into the open.

Well, the government plan is working. Cash is  pouring into the market. Dublin property prices are rising against all expectations. Investors look at the last couple of years and see a tax free capital gain looming. They are not concerned with income or doing any better than keeping a mortgage ticking over. In short, they are not "investors". They are the same as last time we had people piling into a market that made absolutely zero sense from a rental  yield point of view -- they are speculators.

(P.S. I am making no predictions as to the future of property prices, as per the rules  here. I am just saying I wouldn't be caught dead getting involved).


----------



## Knuttell (5 Aug 2014)

dub_nerd said:


> Well, maybe they have found a rare property with 10-15% gross yield, which is what I would consider the absolute  bare minimum to cover the growing list of costs and compensate you for the headache of property management.



There are properties around even now that will generate a decent net yield of 10-12%,you just have to look for them.Yes there is a deal of work associated with it but where else are you going to get a yield like that,sometimes it takes  rolling up your sleeves and getting stuck in but its not an ongoing commitment if you choose the correct tenant.


----------



## Bronte (6 Aug 2014)

dub_nerd said:


> Investors look at the last couple of years and see a tax free capital gain looming. They are not concerned with income


 
I suspect this is also true.  Take the OP, he has x amount sitting in the bank doing diddly squat.  Instead puts speculator hat on, been around the block a few time, knows what it to be a landlord, and says I might as well lob it into a house, and forget renting it, because the return doesn't justify the hassle or tax, and he'll leave it there for the time of the CGT exemption.  Worth a punt, absolutely.


----------



## Cowpat (7 Aug 2014)

Maybe it is best if I re-phrase the original question posed in order to reach a clearer conclusion. As already explained, the plan is to buy property that I may retire to in approximately seven years’ time and can cover the purchase price with savings. I intend to rent it out in the meantime and am aware of the importance of location, yield and the responsibilities of being a landlord. 
Many thanks for the helpful feedback given by previous posters and I realise that a decision to buy  now will vary for each individual depending on life circumstances but for me (not having got caught up in boom time mania and who saved during this time) the property is in the right location, has real rental income potential.
Making  the following assumptions –  home owner with mortgage already paid off, in full-time permanent employment, DB  pension and AVC contributions over 20 years and no dependents.
The question is - buy with cash now or borrow i.e. does it make more financial sense to take out an BTL mortgage for rental income tax-saving purposes i.e. 75% of 5.5% interest write-off on the rental income. 
As already mentioned we can only plan based on information currently available to hand and I would prefer not to get into idle speculation. If government policies do change then I'm in a lucky position to have savings to cover the mortgage in full (i.e. if interest relief is reduced/or eliminated). At the minute, 75% of interest write-off of a BTL mortgage looks attractive in offsetting at least 52% tax (41% income tax, 4% PRSI, 7% USC etc). I’m also assuming that life assurance associated with the mortgage is also an allowable expense. The alternative is to purchase with savings - and pay full tax liability on any rental income.
Constructive feedback welcome!
Thanks.


----------



## Brendan Burgess (7 Aug 2014)

Hi Cowpat

I have answered your question here:  http://www.askaboutmoney.com/showpost.php?p=1395345&postcount=11



> The cost of borrowing to invest, while he has money on deposit is €2,800 a year per €100,000 borrowed.
> 
> So the answer is very clear - do not borrow to invest at 5.5% if you have the cash available.


----------



## Brendan Burgess (7 Aug 2014)

> 75% of interest write-off of a BTL mortgage looks attractive in  offsetting at least 52% tax (41% income tax, 4% PRSI, 7% USC etc). I’m  also assuming that life assurance associated with the mortgage is also  an allowable expense. The alternative is to purchase with savings - and  pay full tax liability on any rental income.



This is not proper reasoning.  The advantage is illusory. 

If you purchase with savings, you will pay tax on the rental income. 

But if you purchase with a mortgage, and put your savings on deposit, you will pay tax on your deposit interest.


----------



## Cowpat (7 Aug 2014)

Thanks for the prompt reply Brendan but aren't post office savings tax free?


----------



## valparaiso (11 Aug 2014)

The upshot of all of this surely is that the rent is treated as Income and taxed at 52% nett. 

Is there a scenario anywhere in which one can make a profit on such an investment ? Ultimately my situation is that each year I supposedly make a "profit" on which I pay Income Tax. This profit costs me €2000 a year in income tax. The rent just covers the mortgage. I have to pay out for washing machines, flooring, boiler service and any other failing the tenant points out. 
The house is in my possession for 12 years and is valued at the same as when I bought it.

Moral of story: you must speculate to accumulate debt.


----------



## Bronte (11 Aug 2014)

valparaiso said:


> Moral of story: you must speculate to accumulate debt.


 
Is the debt you owe, the mortgage, not reducing every month?


----------



## valparaiso (12 Aug 2014)

Yes indeed it is. 

So hopefully after another 8 years when it's paid off fully the house will be worth at least twice what we paid for it. OR NOT.

even if it's worth twice, if we sold it we'd have to pay CGT At 40%??. or more by then. 

the experience of letting is not one which I would recommend unless you've some creative accounting or tax break incentive.


----------

