# Negative Equity on PPR, Need to move, Calculations as 1st time Landlord



## tipping (5 Jan 2011)

Hi 

Due to an expanding family and negative equity we are looking at renting out our apartment and then renting a house ourselves. 
I am doing some calculations to see if this is feasible and would appreciate someone checking the maths and seeing if I am deducting too much/little etc. If this is more suitable to another forum please move.

*Background Info: *
Initial Purchase Price: €335000
Current Value (Estimate): €180000
Mortage Outstanding: €278000
Initial Term: 30 years
Term Remaining: 26.5 years

*Current Mortgage Cost (Per Month) as Principal Private Residence:*

Interest Rate: 3.5%
Interest Repayment: €813
Capital Repayment: €533
Total Repayment: €1346
Mortage Life Insurance: €75

Total Mortgage Cost: €1421
Less 
Mortgage Interest Relief: €180
*Effective Mortgage Cost: €1241*


Now if I rent out the property.

Expected Rental Income Per Month: €900
Assume Occupied for 11 months
*Annual Rental Income: €9900* (Updated)

Annual Mortgage Interest @ 3.5%: €9640

*Deductibles*
Deductible Interest Relief @ 75%: €7230 
Management Fees: (Covers Bins, Insurance, Maintenance of Outside Common areas, Street Lighting): €700
Depreciation on Furniture etc: €300
Insurance: €300
*Total Deductibles: €8530*

*Taxable Profit on Rental: €1370* (Updated)

Income Tax @ 41% €561.7
USC @ 7% €95.9
PRSI @ 4% €n/a
*Tax Payable €657.6 * (Updated)

*Other Fixed Costs: *
NPPR: €200
PRTB Registration: €70

*Total Annual Liabilities: €947.6* (Updated)
*Contingency: €500 *
*Net Annual Rental Income: €8452.4* (Updated)


*Overall Annual Cost of Renting out Property:*

*Interest Only = €9640-8452.4= €1187.6* (Updated)
*Interest & Capital = (1346*12)-8452.4 = €7699.6* (Updated)
(or Approx €640 per month)

*To Summarise*
These are calculations based on data from a number of sources. If there are any ommission (glaring or not) please let me know and I will adjust accordingly. 

The Interest only option if possible works out at close enough to cost neutral for the year. I have not spoken to the bank yet to determine if interest only is possible or not. 

If not I am facing a shortfall of €600 per month to cover the interest and capital payments. This should work out at a net shortfall of approx €450 per month as rental on new house should be approx €1100 as opposed to current mortgage payment of €1241. I can afford to pay an additional €450 to move house but not a lot more. If the worst comes to the worst with problem tenants, non payment of rent etc etc we have savings that should cover us (although it would be a terrible waste of hard saved cash!)

If my calculations to date are correct I will update factoring in interest rate rises.

Thanks for any advice.
Tipping


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## Howitzer (6 Jan 2011)

Mortgage Interest Relief is not available to you as a landlord. You must inform the bank of this as it's deducted at source. They may or may not wish to put you onto a Investment Mortgage at that point which may be at a different rate and mess up your, pretty good, calculations.


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## aristotle (6 Jan 2011)

"Expected Rental Income Per Month: €900
Assume Occupied for 11 months
*Annual Rental Income: €10800"*

That 10,800 is based on 12 months.


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## Maggs065 (6 Jan 2011)

Howitzer said:


> Mortgage Interest Relief is not available to you as a landlord. You must inform the bank of this as it's deducted at source.


 
It's revenue you inform, not the bank. There is a form on revenue.ie for this purpose.
It's up to you whether you inform bank or not. Depending on the bank, they may or may not move you to an investment rate.


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## oldnick (6 Jan 2011)

You must inform both bank and Revenue. No ifs or buts. And insurance company.

Your biggest problem will be  that interest rates will increase over the next few years - you could be paying 6-7% in 2013. Maybe more if the bank charges you more on basically an investment rental property that your house will become

And there may not be any interest relief. Its already gone from 100% TO 75% and depending on the complexion of the next govnt may decrease or disappear.

.. and as any landlord will tell you, renting out is getting more and more of a costly hassle in so many ways....

Can you bite the bullet and approach the bank and get yourself a bigger house that you say you need ? Get rid of the apt.

O.K. you've lost a lot , but the new house will also be 40% cheaper than it was three years ago. Don't enter the rental thing at present - there'll be more anti-landlord measures coming soon.

Other than that I'd return the keys and shove off to Oz or NZ or anywhere else but here.


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## Maggs065 (6 Jan 2011)

oldnick said:


> You must inform both bank and Revenue. No ifs or buts. And insurance company.
> 
> Other than that I'd return the keys and shove off to Oz or NZ or anywhere else but here.


 
You're been very sanctimonius on the one hand (having to inform bank - no ifs, buts etc.) but on the other hand you're telling him to skip off to Oz and leave the tax payer to foot the bill! Ridiculous advice.
If he can afford to pay his mortgage on the current interest rate, then i think the bank is doing alot better than him shoving off to God knows where!


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## DB74 (6 Jan 2011)

oldnick said:


> You must inform both bank and Revenue. No ifs or buts. And insurance company.


 
Unless OP's mortgage contract specifically states that they must inform the bank if the use of property changes then there is no legal obligation to inform them.

Whether it's common practice or not or whether the bank expects you to or not is irrelevant. Every mortgage contract is different.


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## oldnick (6 Jan 2011)

Legally and morally may not be the same thing - indeed, they may be the opposite.

Legally,or at least contractually, it is likely that he should inform the bank ,especially if the bank deducts MIRAS; and certainly legally he must inform Revenue and insurance company. Nothing sanctimonious about that advice.

Morally -  if its a choice of feeding and clothing my kids or making sure that our beloved banks get every penny of a negligently given loan that will take for ever to pay  then it's not much of a moral dilemma. 

Anyway, the main point is to give advice to OP and it's more relevant to look at the  downside of his proposed actions than nitpick and juxtapose quotes.


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## enoxy (6 Jan 2011)

Handing the keys back and skipping off to Oz is pretty rubbish advice though old nick - best not to give advice if that's the best you can come up with.


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## ariidae (6 Jan 2011)

tipping said:


> Income Tax @ 41% €930.7
> USC @ 7% €158.9
> PRSI @ 4% €90.8
> *Tax Payable €1180.4 *



Hey,

So good news - PRSI will not apply on your Rental Income. 



> Q. I am an employee paying Class A PRSI. What rate of PRSI do I pay on my investment rental income?
> A. You are classed as an “excepted self employed contributor” and as such not liable to PRSI on your investment / rental income. This exemption applies to employed persons whose only source of non-employment income is passive income (i.e. income other than from a trade or profession). This exemption does not apply to the Health Contribution.


 


I am unclear as to whether USC will apply either. From what I can see the answer is no. Does anyone else know?


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## oldnick (7 Jan 2011)

For those who can't read properly...........................
..

... my advice to O.P. was that he should consider the strong possibility that interest rates may increase and that interest relief may diminish and possibly disappear depending on what type of govnt we have . Generally, the trend of govnts is anti-landlord.

Considering this, it may make renting out his apt less attractive and perhaps he should bite the bullet and approach the bank and consider buying the house he needs. 
Getting rid of the apt will be a loss, but the new house will also be much cheaper than 4 years ago.

That was the thrust of my opinion, not the perhaps rather flippant remark at the end.

So, can anyone actually give him real advice.....
For example,  confirm the real PRSI/USC figures which the OP had got basically right and which the previous poster got wrong.


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## ariidae (7 Jan 2011)

oldnick said:


> For example,  confirm the real PRSI/USC figures which the OP had got basically right and which the previous poster got wrong.



Am I? Can you give me more information?


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## Bob_tg (7 Jan 2011)

I think we should go easy on Oldnick. Overall, it was an excellent post.

It is actually a viable option for some people in debt to default. Perhaps Oldnick's wording (re "skip off...", etc.) was a little blunt and could have been better.


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## DB74 (7 Jan 2011)

oldnick said:


> Anyway, the main point is to give advice to OP and it's more relevant to look at the downside of his proposed actions than nitpick and juxtapose quotes.


 
I was giving advice, contradicting your incorrect statement.

I was pointing out that if you don't legally have to inform the bank then don't. It could potentially cost money in the long run as they try to wriggle out of a situation more beneficial to the homeowner than to the bank, eg tracker mortgage.

I never mentioned the Revenue or the insurance company


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## ariidae (7 Jan 2011)

oldnick said:


> For example,  confirm the real PRSI/USC figures which the OP had got basically right and which the previous poster got wrong.



Here they are discussing that they were considering making PRSI payable on other "unearned income". They did not bring this in.

[broken link removed]


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## oldnick (7 Jan 2011)

If ,really, one is not obliged to advise the lender who provided the home mortgage that the property is no longer the main residence and is used for rental purposes , then i am surprised - but sorry for incorrect information.

If, really,  there are no charges on rental income (other than income tax) then ,again, I am surprised - but sorry for stating that, basically, there are.


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## tipping (7 Jan 2011)

Thanks everyone for the useful contributions. I have corrected the Original Post for 11 months rental and removed PRSI based on the input above. 
The overall resulting change is fairly marginal at about €40 per month.

I have recalculated for stress tested interest rates of 4.5% and 5.5%. No need to show all the maths this time but the figures now come out at.

For 3.5% APR
Interest Only Annual Cost: €1187.6
Interest and Capital Annual Cost: €7699.6

For 4.5% APR
Interest Only Annual Cost: €3562.12
Interest and Capital Annual Cost: €9130.72

For 5.5% APR
Interest Only Annual Cost: €6533.8
Interest and Capital Annual Cost: €11330.44

This does indicate that the higher interest rates will turn this from a manageable (for me) annual loss on the rental to something much more significant. Also if interest and capital repayments are required increasing interest rates will push us out of our comfort zone financially.


On the other points raised. I will have a scan through the mortgage agreement and see if I am obliged to tell the bank if it is no longer our PPR. However they will probably pick it up anyway as the Mortgage Interest Relief will no longer be deducted at source so it is probably irrelevant in the real world.
Anyway my general approach to these things is to be upfront and discuss these things in a frank manner so in all likelihood regardless of being obliged to or not I will inform the bank anyway. 

I don't blame the banks for giving us a loan on the property in the first place. We made a (now) bad decision to purchase a property at the time but that's what you do when you are settling down and starting a family. At least we bought a property and took out a loan that was well within our means, significantly less than the maximum mortgage amount that we would have qualified for, the only problem is that the property no longer suits our needs. 

Oldnick I don't see a way of getting rid of the apartment. If I could I would. I would prefer for it to be gone but to sell now would leave us approx 100k in personal debt, which would probably wipe us out financially and ruin our standard of living for years to come. If I had 100k in the bank I would sell, take my loss, move on and be done with it. 
There is no good reason for the bank to do a deal with us as from their point of view the loan is being paid and currently there is little risk of issues with it. 

Moving to Oz etc is not an option, I have no interest in abdicating my responsibility to my debt and even in these days I like living here (a whole other thread).

Reluctantly becoming a landlord is probably the best/only way to deal with this situation. Other than that it is to stay put in an unsuitable apartment, whatever is the lesser of the 2 evils..

I will also re-calculate for scenarios of the interest relief being reduced from the 75%, cos you're probably correct, landlords may be a tax target for the next few years.. 

Thanks
Tipping


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## Greta (7 Jan 2011)

If you do decide to become a landlord, try to get rent insurance, i.e. insurance that would pay rent to you, if your tenant defaults. It will cost you extra, but at least will protect you if you get a tenant who stays in your property but doesn't pay rent. I think this is your biggest risk, as, if you have difficulty renting a bigger house and renting out your apartment, you can always move back in (subject to giving your tenants required notice). It's not ideal to live in the apartment that is too small for you, but at least you won't be ruined in the same way as if you have to spend 2 years evicting a bad tenant, all the while getting no rent. You said you can cover that from your savings but rent insurance may still be very useful


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## oldnick (7 Jan 2011)

I didn't mean sell the apartment full stop. I said approach the bank to look at trading up from  the apartment to a house. 

If you are going to pay a few hundred extra for your plan (i.e. letting the apt and renting a house) why not use those extra few hundred on top of your present mortgage ,but live in your own house  ? (  with none of the ever increasing hassle of renting ,which cannot be arithmetically calculated ?  Assuming of course the bank is willing to help.

Anyway, your calculations are impressive ( I note that you have removed PRSI, but not USC which you rightly said at start is applicable).  I hope that I'm wrong in my feeling about your idea. Good luck.


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## Steve D (8 Jan 2011)

Tipping - I admire your sense of responsibility and your ethical conduct in your difficult situation. In recent times it is unusual to come across somebody who is not trying to blame somebody else for their predicament and then trying to find an easy way out.


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## Bronte (10 Jan 2011)

Your figure for depreciation on furniture is low.  

If your bank contract does not require you to inform the bank the property has changed from PPR then do not say anything to them.  Banks are going after investors currently.  Here on AAM (and in my own case) people are battling banks who are changing the interest rates to much more punitive rates and this will continue.  They are not allowed go after homeowners so are focusing on investors.  

If you can afford capital and interest then by all means do so.  Before you move could you renegotiate your mortgage to a longer term to bring down the payments.  

Or if you have a very secure job can you see if the bank will let you sell and keep the 100K negative equity as a loan at the current mortgage rates.   

Be aware that being a landlord is not for everybody.


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## tipping (10 Jan 2011)

Bronte said:


> Your figure for depreciation on furniture is low.
> 
> Thanks for this. Thought it was a bit low but do I need the original receipts from the furniture in order to claim this or are you allowed claim a reasonable estimate.
> 
> ...


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## oldnick (12 Jan 2011)

wELL, ONCE AGAIN,TIPPING GOOD LUCK..

Just to comment on a couple of your points
- the fact that the bank has nothing in the contract about making your PPR and rental home does not mean that you should say nothing.  You are getting 180euros MIRAS and Revenue make it quite clear that this isn only for PPR not forn a making it a rental place. (See Revenue.ie)  Anyway that's not realy important -just felt a bit annoyed at posters inferring you say nothing.

- you are already ,in effect, on a negative equity mortgage BY100K mybe more.
And you hope that your new rental income will cover this, and indeed help towards renting a house.
You may be right -but as I keep repeating  there are many trials and tribulations in renting and if you peruse the various posts concerning rent, here and in irishlandlord.ie, you will see that it is not a black-andwhite accounting excercise. It can be a real pain which may not get you the income you need.

I dont know where you live and the type/size of the apt you have or the type of house you need, so I cannot say this with certainty....
_- if your bank extends another 100k on hopefully good terms, would not this pay for a  house in your area ? Assuming you sell the apt._

Yes, your apt has collapsed in value - just as that  house you can buy has.
I am convinced , but who knows, a house in the same area as an apt will hold its value better (or decrease less)


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## Bronte (13 Jan 2011)

Tipping does not have to tell his bank anything about renting if it is not in his contact.  *Whatever you do Tipping do not tell the bank.*  He just informs revenue that he no longer wants mortgage interest relief.  

In an ideal world you should have receipts for everything (you may have bought things on credit, your bills are as good as a receipt).  Take a reasonable cost for the furniture.


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## Bronte (13 Jan 2011)

tipping said:


> []
> 
> I must still go in and have a chat with them though about what options may be available to us, the 100k left there at mortgage rates might not be the worst option, I could probably see a way around having this wiped out in 5 years or so if we tried hard!!


 
This is actually a really important point. Here we have someone who can move on in life, they would be able to sell the house, repay the negative equity if left at mortgage rates in 5 years and could then start again. A point our banks/politicians/economists ought to looking to as part of the solution. 

It's a very important debate in our current economic situation.


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## RichieRich (18 Jan 2011)

If it's not in the mortgage terms and conditions - does the bank have the right to force you off a tracker if you rent out your PPR?  I'm not sure there's a definitive answer to this.  Any/all responses appreciated!


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## River (2 Mar 2011)

Seems to be a grey area! I plan to inform the Revenue but I do not plan to tell the bank that I will be renting out property. It does not say anything in my T&C's that I have to. I will also inform the prtb once I rent the property. If the bank continue to provide mortgage interest relief I will make sure to repay it when I complete my annual tax return. Whilst this may not be perfect, I feel I am being clear with the Revenue and not doing anything untoward.


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