# Nearing 40 and wondering if on right road



## coolaboola12 (2 Jul 2019)

*Age:* 39


*Spouse’s/Partner's age:* 34

*Annual gross income from employment or profession:* 80,000
*Annual gross income of spouse:* 50000

*Monthly take-home pay:* Varies, 3400 - 4200 for me. Wife around 1450 every two weeks

*Additional monthly Income:* Rent on second property (945),

*Type of employment:* Private Sector (me), public sector (wife)

*In general are you:* Saving. I save roughly 600 per month after all deductions and mortgages etc are paid (this is for car replacement, house improvements etc). Wife saves around 300 pm

*Rough estimate of value of home:* 310000
*Amount outstanding on your mortgage:* 106000, 580 PM
*What interest rate are you paying?* 2.75% SVR

*Other borrowings: None

Do you pay off your full credit card balance each month?* Yes.

*Savings and investments: 20K savings

Do you have a pension scheme?* Yes, approximately 70,000. My monthly contribution is 15% and employers is 5%. (around 1100 per month)

*Do you own any investment or other property?* Second mortgage, mortgage of 1115 PM. Amount remaining 195k, house worth 225k. SVR of 3.15%

*Ages of children:* one child (3 years old)

*Life insurance:* Life insurance via my employer, illness benefit etc


*What specific question do you have or what issues are of concern to you?*
We are financially comfortable thankfully but i was hoping to get some analysis from the members to see if ye agree with paying 15% into my pension and leaving the mortgage on the second property come down naturally or should i change tact. We top up the mortgage of the second house by around 200 PM as the rent doesnt cover the mortgage. Would we be better off trying to pay down the second mortgage to get a better rate and thereby reducing or removing the top up needed per month ?

What is the best way of getting my pension pot to the most tax efficient level for the lump sum withdrawal etc upon retirement ? 

Thanks for any help


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## Sarenco (2 Jul 2019)

You are obviously doing fine financially but if I was in your shoes, I would sell the rental property and use the net proceeds to pay down the mortgage on your PPR (leaving the term the same).  The (after-tax) net yield on the rental simply isn't high enough (IMO) to justify a financing rate of 3.15%.

I would then use the freed up cash-flow to increase your pension contributions to 20% of your gross annual income - 25% in the year that you hit 40.

I would nudge up the cash reserve slightly, maybe to €30k.  I would then use any after-tax savings, over and above that €30k figure, to pay down the PPR mortgage.

Hope that helps.


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## coolaboola12 (2 Jul 2019)

Sarenco said:


> You are obviously doing fine financially but if I was in your shoes, I would sell the rental property and use the net proceeds to pay down the mortgage on your PPR (leaving the term the same).  The (after-tax) net yield on the rental simply isn't high enough (IMO) to justify a financing rate of 3.15%.
> 
> I would then use the freed up cash-flow to increase your pension contributions to 20% of your gross annual income - 25% in the year that you hit 40.
> 
> ...



Thanks. The way i was looking at the rental is that for roughly 4000 per year (top up and some maintenance) we own an asset where the mortgage is reducing 6k per year and "possibly" appreciating also in value


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## Sarenco (2 Jul 2019)

coolaboola12 said:


> The way i was looking at the rental is that for roughly 4000 per year (top up and some maintenance) we own an asset where the mortgage is reducing 6k per year and "possibly" appreciating also in value


I don't think that's really the right way to look at it.

You've got around €30k of capital tied up in the rental.  If you realised that €30k and paid it off the PPR you would effectively generate a guaranteed, tax-free, return of 2.75% on that capital and (perhaps more importantly) you would free up sufficient cash-flow to allow you to maximise your tax-relieved pension contributions.

It's important to look at your overall financial position and not just a single asset (or liability).


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## Aurora (2 Jul 2019)

Is that rental income after tax?


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## coolaboola12 (2 Jul 2019)

Aurora said:


> Is that rental income after tax?



Nope, its before tax . Up until now tax is low due to mortgage interest and all the other deductibles. 
Tax has been around 1000-2000 per year


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## Sarenco (2 Jul 2019)

coolaboola12 said:


> Tax has been around 1000-2000 per year


Which means your net rental profit is only around €2-4k, €1-2k after tax.  That's a very slim return for the considerable risks you are bearing, never mind the hassle.

The rental is also cash flow negative, which is restricting you from maximising your tax-relieved pension contributions.


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## Gordon Gekko (2 Jul 2019)

Although €2k on €30k is almost 7% after-tax.

Notwithstanding the point that leveraged income and gains can of course be replaced by leveraged losses.


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## Sarenco (2 Jul 2019)

Well, it's a very risky €1-2k versus a guaranteed €825, after-tax.  One major repair, tenant misses one month's rent, etc., and you're in the red.

But my main point really is that there's an opportunity cost associated with maintaining a cash-flow negative investment - it restricts the OP's ability to maximise his pension contributions.


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## Gordon Gekko (3 Jul 2019)

I agree. In this particular case, I’d sell.

The opportunity cost point is right on the money and €30k is very little insulation. Any material softening of prices and the OP is back underwater.


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## coolaboola12 (3 Jul 2019)

Thanks all. We had planned on selling the house earlier this year but the market has softened somewhat now, plus we would be looking at around 6k in mortgage payments when trying to sell the house (6 months possibly to sell)

Currently we have a HAP tenant in the house and very happy with them, they keep it well and as they are HAP we can claim 100% relief on the mortgage interest so its not any hassle at the moment

I do take your points about the risk though, its not very liquid and has to be maintained . 

The other side of the coin is that its an asset in our portfolio and could be something we give to our son in the future to let him do what he wants with it. Sometimes this can be a better inheritance than cash


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## Oisin19 (5 Jul 2019)

Is your income likely to increase in the coming years? If so id be tempted to keep the property and use any increases in income to max fund pension contributions, increase reserves and pay down debt. If you sell the property now and pay down debt etc and then your income increases you will be looking at surplus cash in the future which will more than likely be spent on lifestyle increases. 

The reason I like the property is that it is an income generating asset and could be very valuable to you in retirement.


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## coolaboola12 (8 Jul 2019)

Fergal19 said:


> Is your income likely to increase in the coming years? If so id be tempted to keep the property and use any increases in income to max fund pension contributions, increase reserves and pay down debt. If you sell the property now and pay down debt etc and then your income increases you will be looking at surplus cash in the future which will more than likely be spent on lifestyle increases.
> 
> The reason I like the property is that it is an income generating asset and could be very valuable to you in retirement.



Yep i would expect income to increase. I am leaning towards that too, to keep the property. We are increasing the rent this month and in 6 months time we will be able to move the mortgage to 2.95% as the LTV will be < 80% so the top up amount is getting much smaller

Thanks everyone for taking the time to reply


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