# 40yr old with 450k on 2 mortgages in negative equity and 50k savings



## jmurphy1999 (13 Jul 2010)

Age: 40
Spouse’s/Partner's age: 40

Annual gross income from employment or profession: 58k
Annual gross income of spouse: redundant at moment, but around 30k

Type of employment: e.g. Civil Servant, self-employed: Public servant

In general are you:
(a) spending more than you earn, or
(b) saving? saving

Rough estimate of value of home - 290,000
Amount outstanding on your mortgage: 300,000
*What interest rate are you paying? 1% above ECB*

Other borrowings – car loans/personal loans etc - none
- 
Do you pay off your full credit card balance each month? yes
If not, what is the balance on your credit card? 

Savings and investments: 50k

Do you have a pension scheme? public sector one, partner doesn't

Do you own any investment or other property? Yes, current value 120k but owe 170k ovwe 16yrs. Get 550pm in rent but mortgage is 950pm

Ages of children: 1 baby and 1 2yr old

Life insurance: none

My mortgages are made up of a 1%above ECBtracker of 250k on my home plus a top up of 50k at 5.3% fixed which is due to expire in sept. Both of these have 26 yrs left on them.

I have a 170k 1% aboveECB tracker with 16 years left on a buy to let housewhich is currently worth around 120k. This was my first home which I used equity from to buy my new home when i moved to dublin for work. I tried to sell it a couple of years ago but couldn't afford to have it empty while paying the mortgage so I still have it rented out. I get 550pm in rent but the mortgage is 950 so pay 400pm on it. The mortgages on my home costs 950 for the main and 280 for the top up.

My question is. We are managing to pay all the morgages and keep her head above water even though my partner was made redundant. We have really cut back on our spending . I have 50k in savings which I could use in sept to pay off the 50k top up loan at 5.3%. Then the payout per month on mortgages would be only 900 on my home and 400 on the buy to let. Or should I invest the 50k. Really we need a bigger home with the 2 kids as it is about 80sq m and was never intended for a family but if I try to sell my home and buy to let now I would end up owing the banks money. Is it better to sit tight and pay off mortgage debt now ?


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## lionstour (13 Jul 2010)

Could yo sell the investment property and extend your current house.  You are in a tricky situation here alright.  But I think forking out 400 e a month on an investment property is crazy.  

Some banks might be willling to do negative equity mortgages and you dont seem to be in too much negative equity on your primary residence.


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## saintstephen (14 Jul 2010)

There are posters more qualified than me to give advice, however I would try to look at it this way....
If you can sell the primary residence for €290k pay off the 10k from your savings, use the remainder to buy a suitable house for your family.
The rental house you say is costing you €400 a month for the next 16 years, that works out at €76,800, no one knows what the house will be worth but even with rate and tax increases you still have a good margin as you will own an asset that will give you a small income.


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## lionstour (14 Jul 2010)

saintstephen said:


> There are posters more qualified than me to give advice, however I would try to look at tit this way....
> If you can sell the primary residence for €290k pay off the 10k from your savings, use the remainder to buy a suitable house for your family.
> The rental house you say is costing you €400 a month for the next 16 years, that works out at €76,800, no one knows what the house will be worth but even with rate and tax increases you still have a good margin as you will own an asset that will give you a small income.


 
If you sell your present house and have an investment house leaking 400 e a month you are going to have major problems getting a mortgage.  Especially as you have only one income coming in.


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## jmurphy1999 (14 Jul 2010)

Thanks for all of your advice. It is good to get a different perspective on it because it I keep going over and over it in my brain trying to come up with a solution

I could try and sell the buy to let  again but the tenants might get annoyed with viewings and move out leaving me paying the full mortgage of 950, if it took more than a few months to sell  I just couldn't carry that. Houses like it are only getting 120k to 150k and I owe the bank 170k on it so a lot of my savings woudl go in paying off the bank. I can still afford to pay the 400pm and I feel like i am stuck with it for the time being until prices rise again. But then if prices rise again we may not be able to afford to trade up.. arrgghhh

I think lionstour may be right on me having problems getting another mortgage


76k is  alot of money to waste topping up the mortgageover 16 years but on the plus side rents will have to rise and the morgage will start to reduce as I am paying capital plus interest.  

I already extended my home and there is no more room to extend.. now if I sold one of the children maybe..
Am I being thick? is there any other way out of this.


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## saintstephen (15 Jul 2010)

jmurphy1999 said:


> 76k is alot of money to waste topping up the mortgageover 16 years QUOTE]
> 
> 
> Do you consider money put towards your pension as a waste ? in 16 years you will own a valuable asset.
> ...


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## lionstour (15 Jul 2010)

saintstephen said:


> jmurphy1999 said:
> 
> 
> > 76k is alot of money to waste topping up the mortgageover 16 years QUOTE]
> ...


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## saintstephen (15 Jul 2010)

lionstour said:


> saintstephen said:
> 
> 
> > You can put that 400 a month into a PRSA AVC and get significant tax breaks. However having a house leaking money is doing the opposite.
> ...


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## Brendan Burgess (16 Jul 2010)

|Home|Home top up|Investment
  Value|290||120
  Mortgage|250|50|170
  Rate|2%|c.4%variable|2%
  Monthly interest cost|400|170|300
  Monthly rent|||550
  Repayment|950|280|950 
  First of all, it’s important to look at the interest cost and not the repayment. The answers so far have suggested that the investment is leaking €400 a month. Actually, the investment property is profitable. The rental income comfortably covers the interest cost because you have such a cheap tracker mortgage. 

  The yield on the investment property looks good. You are getting 6,600 on a property worth 120,000. This is 5.5% compared to an interest cost of 2%. 

  The investment property stays. 

  Make sure that you are up to date with declaring it for tax. Some people rent out their former home and forget about the tax implications. 

  Ask the bank will they switch it to interest only. I suspect that they won’t but there is no harm in asking. 

  The only downside of the investment property is that it could delay you trading up. The bank might consider that your cash commitment is too high. 
The other downside is that it may fall further in value. 

*Forget the pension scheme. *
  Your priority now is having cash available to trade up. 

*Pay the 50k or most of it, off the top up*
  When the fixed rate expires, you will probably be paying around 4%. So it makes sense to pay this off as the rate you will be charged is most likely to be higher than the rate you can earn on deposit. .

*Trading up*
  If you pay off the top up, you will have around €40k equity in your home. So you will be free to sell your home assuming  there is no cross security with the investment property.

  You should delay this as long as possible as you have a cheap tracker and this is giving you a good opportunity to save. 

  Don’t pay off the tracker mortgage as you can get a higher deposit rate on your savings than you are paying on your deposit and the cash may be useful.

  When you absolutely have to move, you should give serious consideration to just selling the house and renting for a while. This would allow you get the house you want. You would still have the investment property which gives you exposure to the ups and downs of the Irish property market. 

  My guess is that the bank would be delighted to give you a new variable rate mortgage on a new property in exchange for getting rid of the cheap tracker which is costing them a fortune.


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## canicemcavoy (16 Jul 2010)

> "Actually, the investment property is profitable. The rental income comfortably covers the interest cost "


 
Is that the definition of a profitable investment property?


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## Brendan Burgess (16 Jul 2010)

Yes, if you read that statment in conjunction with the warning that 



> The other downside is that it may fall further in value.


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## canicemcavoy (16 Jul 2010)

But surely you have to include _actually paying off the principle_ before you can consider it "profitable"?


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## The Pool Boy (16 Jul 2010)

RIAD_BSC said:


> If the OP holds on to the property and the rent generated is more than the interest costs, then the investment is profitable.....




Not always the case - when only 75% of the interest is allowable for tax purposes.


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## callybags (16 Jul 2010)

It still generates a profit.

Just that the profit is taxable.


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## Brendan Burgess (16 Jul 2010)

canicemcavoy said:


> But surely you have to include _actually paying off the principle_ before you can consider it "profitable"?



Hi Canice

This is a mistake that is easy to make. It's the failure to distinguish between income, expenditure and capital.  Profit is the excess of income over cost. You are confusing profit with cash-flow which most people do. 

Financial Services providers often take advantage of people's difficulty in grasping this. One particular example is where they guarantee "10% return on your capital", but they don't guarantee the capital. 

To assess the profitability of any particular investment, you should really do a Discounted Cash Flow analysis over the period of ownership of the investment. 

From jmurphy's point of view, the key thing is that the current income (rent) exceeds the current cost (mortgage interest).


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## Brendan Burgess (16 Jul 2010)

The Pool Boy said:


> Not always the case - when only 75% of the interest is allowable for tax purposes.



Hi Pool Boy

I agree that the after-tax profit is more important than the pre-tax profit.

In JMurphy's case, the investment is clearly profitable pre-tax and after-tax.

Brendan


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## Purple (16 Jul 2010)

Brendan Burgess said:


> Hi Pool Boy
> 
> I agree that the after-tax profit is more important than the pre-tax profit.
> 
> ...


I agree but this isn't just an investment. For nearly all part time landlords the speculative aspect of the purchase is key. It's about the "sure it'll be like my pension" view. 
I suspect that's the case here and if so the OP has a negative cash flow on a depreciating asset. Personally I am of the view that you should, in most circumstances, get rid off depreciating assets.


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## jmurphy1999 (6 Aug 2010)

I think that brendans advice is sound. It does not make sense to sell the buy to let now anyway, i owe 170k on it and I would be lucky to get 120k so all my savings of 50k would go to the bank. When i say it is costing 400pm to top up the rent that is paying back interest plus capital, if I paid interest only I would make 50 euro per month profit on it. 
We will probably do nothing  for a few years before moving or try to extend our home a bit more as the area is great and suits our family.  The Bank 0f scotland offered me a new rate of 2.5% variable on the 50k top up loan (it was fixed at 5.3% for 3 yrs) which is lower than the deposit rates on my savings of 50k. I will probably now get advice to keep the savings on deposit but I would like to reduce my mortgage debt and negative equity So I think i will pay 40k off the top up and keep 10k on de[osit until we decide if we should try trade up  or add a conservatory for a bit more room. I have the 50k spread in a few accounts.The irish nationwide is offering 3.5% so I might stay with that unlessanybody has any better suggestions.
My partner and I aren't married so if we did trade up in a few years I think he could seen as a first time buyer otherwise I would have to factor in stamp duty and considering I already paid 20k on my home i don't fancy paying it again


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## txirimiri (8 Aug 2010)

If only one of you is considered a first time buyer, I think you would have to pay the stamp duty anyway?? Unless you partner bought it solely in his name, but then he would have to raise the mortgage solely on the basis of his income and assets I think, which sounds as though it would be a problem. And even if that were possible, IMO its not a great position to be in to be living with a non-marital partner with 2 children in a home that belongs solely to him/her (unless the Civil Partnership Bill has reclassifed such a house as a Family Home as defined in the Family Home Act? I don't think it has?)


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## niceoneted (8 Aug 2010)

I'd suggest you use the 40 k you intend to pay towards the mortgage to split it between both so as you are reducing the negative equity on both. Clear off the top up and then put the remainder of the 40k to the buy to let. 

How is your disposable income - are you saving much, managing bill etc. 

Also just keep an eye on how you figure things out and deal with your finances, your post says mortgages of 450K when you then indicate mortgages of 470k (300 + 170). Then you say your mortgage on your PPR is 950 and then 900.


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