# To overpay or not??



## hikicker (24 Jul 2014)

Age: 37
   Spouse’s/Partner's age: 33

   Annual gross income from employment or profession: €120k
   Annual gross income of spouse: €35k

Monthly take-home pay: €8500 (total)

   Type of employment: e.g. Civil Servant,  self-employed: Company director

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving €1000 per month

   Rough estimate of value of home: €260k
   Amount outstanding on your mortgage:€295k 
*What interest rate    are you paying? *0.95 above ECB (Tracker

   Other borrowings – car loans/personal loans etc: No

   Do you pay off your full credit card balance each month? N/A
   If not, what is the balance on your credit card? N/A

   Savings and investments: €35k in 7 day access deposit account

   Do you have a pension scheme? Yes presently €50k with monthly €1000 contributions paid via company

   Do you own any investment or other property? Yes
Rough estimate of value of property: €220k
   Amount outstanding on your mortgage:€265k 
*What interest rate    are you paying? *5.15 KBC, €1944 per month 16 years remaining. Rent only €1000 per month.

   Ages of children: 6 and 1

   Life insurance: yes (1.2 million policy)


*What specific question do you have or what issues are of concern to you

I've recently got rid of a lot of short term debt whilst saving simultaneously. Have also increased salary as company is doing very well however as I've successfully cleared all short term debt by overpaying the monthly payments (one at a time then working off the next), I'm now inclined to overpay the mortgage on my investment property. Was previously paying approx €800 to other debt so by adding that to the existing mortgage of €1944 I would take a nice chunk off that mortgage over the next few years. As I have a decent tracker on my home I don't think it makes sense for me to pay that down. Would I be better off saving more or paying off investment mortgage?? 
*


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## Bronte (24 Jul 2014)

I agree that it makes no sense to overpay the family home Tracker. And also agree that you need to get the investment mortgage down to a level that the rent will cover it. If you lost your job you could be in trouble with that, not so if rent covers most of the mortgage and costs.

That's a very high interest rate on the investment, in the future, if rates change, and you've wiped the NE, then you should look at changing banks. Just curious as to why you have an investment where the rent is so low relative to mortgage, was it originally your home? I presume you're all uptodate on rental taxes, PRTB etc.

Remember also in the future, if you've overpaid, then you may not need such a high level of life insurance.  But as one gets older it gets more expensive, so bear that in mind before reducing it.


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## Brendan Burgess (24 Jul 2014)

Your tax return looks something like this

Rental income: €12,000 
Interest allowed:  €10,000    (€265k@5.15% @75%) 
Rental profit: €2,000 

If you pay less interest, you will make more profit and so will pay more tax. 

So you need to calculate the net cost of your interest: 

Interest rate: 5.15%
Allowed for tax purposes: 3.86% (75%)
Tax relief: 2% (c. 50% of 3.86%)
Net rate: 3.15% 

So you are saving 3.15% by overpaying your investment mortgage.  So it's definitely better to pay off your investment property than your home loan. 

Is there anything better you can do with your €35k?  If there is a reasonable prospect that you might, in the very short term, want to move home, it would be handy to have the €35k available.  But if not, you should not be paying 3.15% on a loan while having a deposit which is paying you around 1%.  That facility would be costing you €700 net a year. 


Unless you anticipate some other expense e.g. a car, in the near future, you should use most of your €35k to pay down the investment mortgage. 


You should tell KBC that you want to keep the same term, so your contractual repayments will be reduced.  You can then continue to overpay while that suits you. 

*Your next question - retain the investment property or not? 

*Rental income: €12,000 
Interest : €11,000  ( it's value, €220k @5.15%) 
Tax:      €2k         (€12k - €8k@50%)

So this is just about washing its face. 

It really depends on your call on the future of rent and property prices.  If you expect them to rise, keep it.  If not, sell it. 

If you might consider trading up your own home, then sell the investment property. It will restrict your ability to borrow.


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## hikicker (24 Jul 2014)

Thanks Brendan, I appreciate your advice. I've always thought it would be prudent to have 3-6 months nett take home pay in the bank for a rainy day so I'd be reluctant to touch that €35k to pay of any off the investment mortgage.

My main question was whether to overpay future monthly payments off this mortgage as well as future dividends/bonuses or should I continue to save/buy shares etc?


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## Steven Barrett (24 Jul 2014)

Hi Hikicker

You are 100% right to have an emergency fund. That is the starting point for any investment advice that I give clients. You never know what is around the corner and it is comforting to know that you have funds there, just in case. 

Back to your question, I have never met a debt free client who told me they regret being debt free. 

Investing the money, you may make money or you can lose money. Even with wise investing, there's nothing you can do if someone decides to fly a jumbo jet into a building again. 

On the property side, 5.15% is a relatively high interest rate. So even though you can offset rental income against 75% of it, it is a cost. 


Also, do you have goals on when you want to be debt free? Or is there something else you want to do in the near future that you need to fund?

Without knowing all your goals and what you want, I would do a mix. Once the money goes into the mortgage, it's gone and you can't get it back. Build up some form of investment portfolio and you accumulate a fund that can be accessed in the future, plus you have asset diversification.


Steven
www.bluewaterfp.ie


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## hikicker (24 Jul 2014)

Thanks Steven. In a nutshell what I want is to create some passive income, this is obviously difficult because of the shortfall with rent vs investment mortgage. I could possibly sell it when it is out of negative equity (inc CGT), which won't be too far down the road if I accelerate payments. I'm trying to weigh up whether to start buying stocks now or just pay off investment mortgage.

My company is doing very well at the moment and would be valued at approx €1.4M - €1.8M at present (have had offers), my intention is to keep building it and offload in 10 years or so. I also intend to start pumping more money into the company pension (€30-€40k a year) this year.


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## Brendan Burgess (24 Jul 2014)

hikicker said:


> I've always thought it would be prudent to have 3-6 months nett take home pay in the bank for a rainy day so I'd be reluctant to touch that €35k to pay of any off the investment mortgage.



I think you are being excessively prudent here. You have a very good income so you will build up your savings again fairly quickly. 

If your business or income is volatile, then by all means keep money to one side. 

Otherwise keep around 4 months' rental payments in case the tenant doesn't pay.

If something big hits you suddenly, with your income, you will have little difficulty borrowing, although of course the interest rate will be over 3%. 

If you really think you might need that money, then buy a few shares directly.  You can then sell them quickly if you need the cash. 

Brendan


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## Brendan Burgess (24 Jul 2014)

hikicker said:


> My company is doing very well at the moment and would be valued at approx €1.4M - €1.8M at present (have had offers), my intention is to keep building it and offload in 10 years or so. I also intend to start pumping more money into the company pension (€30-€40k a year) this year.



Do you have eligible Capital Gains losses on your investment property?  If so, you may be able to set them off against future gains.


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## hikicker (24 Jul 2014)

Brendan Burgess said:


> I think you are being excessively prudent here. You have a very good income so you will build up your savings again fairly quickly.
> 
> If your business or income is volatile, then by all means keep money to one side.
> 
> ...



Thanks again Brendan. Yes income is steady and very secure. Will also have good annual dividends going forward so do you still recommend throwing circa €20k off investment mortgage and continuing to overpay? As I'm saving €1000 per month should I continue putting this on deposit or buying shares?


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## Brendan Burgess (24 Jul 2014)

hikicker said:


> Yes income is steady and very secure. Will also have good annual dividends going forward



If it's a private company, dividends are not usually good tax efficient way of paying people.  That is a separate issue, and start a separate thread if need be. 




> so do you still recommend throwing circa €20k off investment mortgage and continuing to overpay? As I'm saving €1000 per month should I continue putting this on deposit or buying shares?



I would keep very little in cash - maybe €3k, unless you expect some larger expenditure.  If you want to keep more accessible cash, buy shares. 

And I would continue overpaying the the investment mortgage until at least the negative equity was eliminated completely, so that you will be free to sell it if you wish to.  Or, if some other lender comes along and offers a better lending rate, you may be able to switch and thus cut the net 3.15% rate. 

Forget investing until you have your borrowings down to a very comfortable level.  Paying off your loans gives you a guaranteed 3.15% return.


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## hikicker (24 Jul 2014)

Brendan Burgess said:


> If it's a private company, dividends are not usually good tax efficient way of paying people.  That is a separate issue, and start a separate thread if need be.
> 
> 
> 
> ...



Thanks Brendan. I should have phrased dividends as bonuses, I take them before paying corporation tax for company. Thanks for the advice. I've decided to do the following:

Pay €20k off investment mortgage
Leave €15k on deposit
Overpay investment mortgage by the €800 that I was paying off short term debt plus €1000 that I am currently saving. This would mean I am paying €3700/month off that loan and should reduce the negative equity very quickly.

Would you agree?


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## Steven Barrett (24 Jul 2014)

Brendan Burgess said:


> I would keep very little in cash - maybe €3k,



I'm going to disagree with you on this Brendan. Hicker's current lifestyle is €7,500 a month. His wife's income is very secure and would be c. €2,000 a month. I know Hikicker said his income is secure but if something happened the business, there's no welfare payments and there's a big lifestyle adjustment.  There are plenty of other things that can happen that will cost more than €3,000. If you put it in stocks, you may have to sell at the wrong time because you need the cash.  

In creating passive income, look at dividend paying stocks as well as property.

You are going the right way in creating income sources through property, pension funding, looking at stocks, building up a value in your business. 

When do you want to achieve all these things by? Do you want to retire by 50 or 60? Are there things you want to do before then? Do you have the lifestyle that you want and do you want to maintain going forward? 

The demands on money are constant and growing (as you've probably seen with your 6 year old as he/ she has got older) so you need to ensure that you have the right levels of liquidity available at the right time so you can do the things that you want to do. 

Steven
www.bluewaterfp.ie


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## Brendan Burgess (24 Jul 2014)

hikicker said:


> Pay €20k off investment mortgage
> Leave €15k on deposit
> Overpay investment mortgage by the €800 that I was paying off short term debt plus €1000 that I am currently saving. This would mean I am paying €3700/month off that loan and should reduce the negative equity very quickly.
> 
> Would you agree?



That's a reasonable balance. 

Not sure why a privately owned company  which is very profitable is paying Corporation Tax. But, that is a separate thread.


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## hikicker (24 Jul 2014)

Brendan Burgess said:


> Not sure why a privately owned company  which is very profitable is paying Corporation Tax. But, that is a separate thread.



The company profits are subject to corporation tax @ 12.5%. It's a limited company. Why would you think otherwise?


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## Brendan Burgess (24 Jul 2014)

Tax planning: take salary or leave profits in company?

In summary

Pay Corporation Tax on profits
Then pay income tax when you eventually take them out. 

Brendan


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## hikicker (24 Jul 2014)

Brendan Burgess said:


> Tax planning: take salary or leave profits in company?
> 
> In summary
> 
> ...



The company has been averaging €150k nett profits over the past few years, I've been reluctant to take too much out of company in order to build up good reserves which are now nearly €500k and as a result have had to pay the CT on those profits. Going forward I intend to take more from company hence why I am asking for advice of what to do with extra cash.


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## Steven Barrett (24 Jul 2014)

Brendan Burgess said:


> I would keep very little in cash - maybe €3k,





Brendan Burgess said:


> Not sure why a privately owned company  which is very profitable is paying Corporation Tax.



Something tells me you're not a fan of rainy day funds Brendan 


Cash is king and in times when it is difficult and expensive to get overdraft facilities from banks, you need to accumulate some cash to ensure a positive cashflow. If that means paying CT, then so be it, at least until the company is on a steady footing and your are more sure of the regular cashflows into the company. 

Steven
www.bluewaterfp.ie


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## Brendan Burgess (24 Jul 2014)

hikicker said:


> The company has been averaging €150k nett profits over the past few years, I've been reluctant to take too much out of company in order to build up good reserves which are now nearly €500k and as a result have had to pay the CT on those profits. Going forward I intend to take more from company hence why I am asking for advice of what to do with extra cash.



You should get your accountant or tax adviser to show why he is recommending this in detail in writing. 

Profitable companies should have a written tax strategy. 

Check out askaboutmoney and you will find a recurring question "How do I get cash out of a company?"  Prevention is better than cure. Don't let it build up in the first place.


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## Brendan Burgess (24 Jul 2014)

SBarrett said:


> Something tells me you're not a fan of rainy day funds Brendan
> 
> 
> http://www.bluewaterfp.ie



I am a big fan of appropriate rainyday funds. 

But if someone has a regular income and foreseeable expenditure and an overdraft facility, they are totally unnecessary. 

I hate seeing people borrowing money at 7% to earn 1%.


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## hikicker (24 Jul 2014)

Brendan Burgess said:


> You should get your accountant or tax adviser to show why he is recommending this in detail in writing.
> 
> Profitable companies should have a written tax strategy.
> 
> Check out askaboutmoney and you will find a recurring question "How do I get cash out of a company?"  Prevention is better than cure. Don't let it build up in the first place.



Thanks Brendan, whilst I really appreciate your advice RE personal finance, your point above is ridiculous. Why would I risk a viable and profitable business by risking liquidity to avoid CT?. I'll give you a recent example. Had a really good May/June by turning over just above €1million. Majority of customers have 60-90 day payment terms and I now have a vat liability of almost €250k for that period of which I won't be paid any of that €1 million in time to pay it. This also doesn't take into consideration my creditors who are also on 60 day terms. I sleep much easier knowing I don't have to worry about paying this and don't require any overdraft facility either.


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## Brendan Burgess (25 Jul 2014)

Start a separate thread or read one of the existing ones and I will explain the strategy there.


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## Steven Barrett (25 Jul 2014)

Brendan Burgess said:


> I am a big fan of appropriate rainyday funds.
> 
> But if someone has a regular income and foreseeable expenditure and an overdraft facility, they are totally unnecessary.
> 
> I hate seeing people borrowing money at 7% to earn 1%.



The fund is there for an emergency. Hikicker's lifestyle €7,500 a month with €1,000 left over. Reducing his emergency fund to just €3,000 is too much, not even covering a month's expenditure. Or what if something in his house needed repair and cost €10,000? Should he use an OD facility to pay that or credit card at 20% APR? 

Different people have different comfort levels. I have clients who know they have too much sitting on deposit but it is at a level that they are comfortable with. My job as their financial planner is to help them see the benefits of long term investing but always being mindful of what their comfort zone is. 

Hikicker seems to be putting a strategy in place but it won't happen overnight. Maybe when it is up and running, the €35,000 deposit will be reduced, but give it time. 


Steven
www.bluewaterfp.ie


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## Brendan Burgess (25 Jul 2014)

SBarrett said:


> ]Or what if something in his house needed repair and cost €10,000? Should he use an OD facility to pay that or credit card at 20% APR?



Indeed he should use an overdraft to fund this. 

Usually you would have some notice of a €10,000 bill. When he sees such a bill approaching, he should stop overpaying his mortgage and save up for it. 
If he has 3 months' notice, he will have €6,000. He will borrow €4,000 on his overdraft which he will pay off at €1,000 a month. So he borrows €4,000 @ 10% for two months i.e. €200.  Using a credit card would cost him about €400. 

People with good reliable incomes do not need massive rainy day funds.  Someone with a patchy employment record who faces unemployment does need a rainy day fund.


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## hikicker (25 Jul 2014)

I've no overdraft or credit card and don't intend having either again.


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## Bronte (25 Jul 2014)

hikicker said:


> I've no overdraft or credit card and don't intend having either again.


 
I totally agree on the overdraft.  But you must have some kind of CC for flights etc?

I do not agree with you reducing your savings to 3K.   A minimum of 6 months investment mortgage, you never ever know as a landlord what is around the corner.  But you are in NE so that is exceedingly important for you.  Despite you being on a good solid income.  

I think sBarrett's point about what if your business goes bust, the shock to change of lifestyle, particularly as you have no social welfare buffer is relevant.

I do agree with paying a lump sum off now, and the increasing mortgage repayments to get down the overall amount owing.  Particularly as you have such a high interest rate.  Once the NE is gone, the strategy should be looked at again.


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## hikicker (25 Jul 2014)

Thanks Bronte. I have a Visa Debit, If I can't afford to buy something cash I don't buy it, delayed gratification and all .

I read the Richest man in Babylon a couple of years back and have stuck to its teachings since then, have saved 10% of my income as soon as I got paid whilst also clearing my debts and it has served me well so far. I now have a decent amount of cash banked hence the original post. Will immediately start overpaying the investment mortgage.


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