# To fix or not to fix



## Trebledigit (29 Jun 2004)

As an investor with a single let property (2 years into a 21 year lease)am I right not to be concerned about increases in interest rates ?  My rental income far exceeds the interest payable and is likely to continue like that unless: 

a)  Interest rates climb back into double figures
or
b)  The A#se falls completely out of the Dublin rental scene.

In effect, the taxman covers me for any increases in interest rates as a deduction against the income tax on my rental income.  Am I right or is there something I'm missing ?

Trebledigit


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## ragtimeband (29 Jun 2004)

*.*



> a) Interest rates climb back into double figures
> or
> b) The A#se falls completely out of the Dublin rental scene.



I would think a dramatic rate hike (not even a great as you suggest) would be the only likely cause of b) anyway. I expect rates will rise slowlyy over the next few years, with a quarter point by the end of the year already forecast.


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## rainyday (29 Jun 2004)

*Re: .*

There is always the possibility that the current rules about mortgage interest relief for property investors will be changed by the Govt, or a future Govt. I'm not saying that this is likely (unfortunately), but it is a possibility.


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## Tommy (29 Jun 2004)

*Re: .*



> In effect, the taxman covers me for any increases in interest rates as a deduction against the income tax on my rental income. Am I right or is there something I'm missing ?



This is only partly true. If your interest costs increase, for example by €100 per month, the increased tax deduction will only compensate you at most by €42 per month. You will still be at least €58 per month worse off.  If interest costs were to increase to a point where you made a loss on your rental activities, the extra tax deduction is useless to you, except for carrying forward against future rental income.


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## Trebledigit (29 Jun 2004)

*Re: .*

I'm not clear how the taxation calculation is made.Is the interest netted off in full against my rental income as follows:

     (1) Monthly income 900;  Interest 400; tax payable 210
     (2) Monthly income 900; Interest 500; tax payable 168

Or, is the tax calculated first on the income (i.e. 378 on monthly income of 900) and the mortgage interest set off against that amount ?  In this case

If neither is correct, what is the correct calculation please ?  Going back to my original dilemma, should I be thinking about fixing ?

Trebledigit

Thanks for your help.


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## Tommy (29 Jun 2004)

*Re: .*

Interest and other costs are netted off against rental income and tax is paid on the balance. 

BTW, this is basic stuff and if you have been receiving rental income for 2 years, you should have made a tax return by now. Unless you have a thorough knowledge of the subject,y you should get appropriate professional advice and/or assistance.


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## Fix or not to fix (30 Jun 2004)

*25635h*

"  There is always the possibility that the current rules about mortgage interest relief for property investors will be changed by the Govt, or a future Govt. I'm not saying that this is likely (unfortunately), but it is a possibility. "


You would imagine in that scenario that any changes would NOT be retrospective EG Bacon and would only apply to any new purchases,  No  ???


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## Guest (30 Jun 2004)

*25635h*

I would not presume anything of the sort. For example Budget 2002 introduced the measure that allowed 100% of mortgage interest relief on rented residential properties to be offset against rental income for ALL such properties. This measure was retrospective in the sense that it applied to such properties that were already purchased (as well as those subsequently purchased) although not retrospective in that it allowed previously incurred interest costs to be offset against rental income. One should be very careful about assuming that the current tax regime will remain constant into the future. As with any business venture one should take a realistic and conservative view to projecting the figures and crunching the numbers when assessing the viability if any particular property investment.


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## Trebledigit (30 Jun 2004)

*Re: .*

Quote
"Interest and other costs are netted off against rental income and tax is paid on the balance. "

If that is the case, which was my original understanding, I would get full relief on the interest paid, not just 42% of it as suggested above !

I've made one tax return so far and received the relevant relief for interest and other costs (management fee, waste collection, advertising, repairs, etc.)  Its hardly rocket science and I believe a good amateur, with the help of AAM and the newspapers, can survive without the help of 'Professionals'.

I'm still no wiser about the advisibility of fixing my mortgage rate.

Trebledigit.


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## Guest (30 Jun 2004)

*Re: .*

> I'm still no wiser about the advisibility of fixing my mortgage rate.

There's no easy answer. In general you should only fix if you need the peace of mind that fixed repayments bring and you are happy to pay the premium that fixed rates generally involve (not to mention the inflexibility) as the price for that peace of mind. Putting some reasonable/conservative hard figures on things and then stress testing the resulting financial "model" of the business might help you discover what set of circumstances in which a fixed rate might be justifiable and then you can try to estimate the risk of this actually occurring in order to determine whether or not you should fix. Not sure if that helps much though...?


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## Tommy (30 Jun 2004)

*Re: .*



> Quote
> "Interest and other costs are netted off against rental income and tax is paid on the balance. "
> 
> If that is the case, which was my original understanding, I would get full relief on the interest paid, not just 42% of it as suggested above !



How do you conclude that? 

look at a practical example
rental income 1,000 - expenses 100 - interest 500 = profit 400 & tax bill @ 42% = 160 or thereabouts

now increase the interest bill to 800
rental income 1,000 - expenses 100 - interest 800 = profit 100 & tax bill @ 42% = 42 or thereabouts

Therefore you save 120 or so in tax but your interest overhead has increased by 300. You are still 180 or so out of pocket.



> I've made one tax return so far and received the relevant relief for interest and other costs (management fee, waste collection, advertising, repairs, etc.) Its hardly rocket science and I believe a good amateur, with the help of AAM and the newspapers, can survive without the help of 'Professionals'.


That's your prerogative, however you also say:


> I'm not clear how the taxation calculation is made.


How then can you evaluate whether you paid too much or too little tax last year, or whether Revenue assessed you correctly? After all, under the self-assessment system, it is your obligation to quantify and pay your own liability. If you pay too much in error, you risk being out of pocket. If you don't pay enough (even inadvertently) you risk the impostion of interest, penalties etc


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## Trebledigit (1 Jul 2004)

*Re: Tommy Advice*

Thanks for your help in explaining this.  I'm now crystal clear and I see where my calculation went wrong.

Regarding professional advice, I take your point about the possibility of errors by the Revenue but I still feel that I am too small a fish to justify spending more money on professional advice.  My impression is that I would have a greater potential for a net loss (arising from professional fees) than any significant gain. Any idea what the charges are (piece of string, I know) or where one would start looking if they wanted to consider getting advice ? 

Trebledigit

P.S.  I have overpaid preliminary tax in the past (which can easily happen)and received a refund.


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## Guest (1 Jul 2004)

*Re: Tommy Advice*

> P.S. I have overpaid preliminary tax in the past (which can easily happen)and received a refund.

It's not good practice for a business to overpay its debts/liabilities and depend on subsequent refunds since this has a negative impact on cashflow. I'd imagine that having a suitably qualified/skilled accountant or tax advisor would avoid such a situation.


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## N0elC (2 Jul 2004)

*Tax relief for mortgage interest*

rainyday said:



> There is always the possibility that the current rules about mortgage interest relief for property investors will be changed by the Govt, or a future Govt. I'm not saying that this is likely (unfortunately), but it is a possibility.



The last time the Government tried this, rents shot up, and the tenants suffered hard. The only winners in that situation were those landlords not declaring their rental income for tax.

Not a desireable situation !


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## rainyday (5 Jul 2004)

> The last time the Government tried this, rents shot up, and the tenants suffered hard.


This was a short-term impact of a long-term measure. Unfortunately, the building trade boyos in the FF tent at the Galway Races got Charlie to reverse the measure swiftly. The longer term benefit would have meant a reduction or stabilising of house prices by taking the steam out of the investment market. This would have made houses more affordable for FTB's and reduced demand in the rental market, which would in turn have reduced prices there also.

This might also be a good time to declare any direct interest in this matter, Noel?


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## Tommy (5 Jul 2004)

> This was a short-term impact of a long-term measure



For the record, the measure was increased in March 1998 and repealed in Dec 2001, 3 years nine months later. Hardly short-term, or indeed swift... (When the former Chinese leader Chiang Kai Shek was asked in the mid 20th century what were the effects of the French Revolution, he replied that it was too early to say.)

I wonder how long, Rainyday, you would have been happy to wait for this measure to have its desired effect? One more year? Five more years? Ten more years? It is a matter of public record that the only real effect of this measure was to create a shortage of rental accommodation available to private sector tenants. This drove up rents, perversely fuelling the house price boom. When the measure was scrapped, rents started to fall, and they are still falling as the supply of rented property increases.

At this stage this is a matter of universal public record and agreed as such by practically every commentator in the country. (The failure of the Bacon measures was admitted once again last week by that well-known anti-government campaigner Mary Harney, quoted in this weekend's newspapers.)

I find it ludicrous (and somewhat wearying) that these arguments are again being rehashed on these pages - and the associated "declare a direct interest" calls against anyone who chooses to challenge one particular point of view on this subject. Surely each opinion is valid regardless of its source?


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## rainyday (6 Jul 2004)

There is nothing unreasonable about asking posters to declare any direct interests which they have in this (or other) matters. It doesn't invalidate their post. It may even enhance the validity of their post for some readers. It definitely puts their post in context and all readers can interpret that context as they see fit.

In relation to the original issue, it's an oversimplification to say that the measure failed to work as prices continued to increase. That assumes that nothing else changed in the world at that time to account for those increased prices, which is patently untrue. The Celtic Tiger was driving prices rapidly upwards at that time. The real question is 'did prices increase by less than would have happened without this measure being in place?'.

One thing is for sure - the abuse of the original intention of the measure via interest only mortgages creates a direct transfer of funds from the state to the banks, via property investors. This is a simple state subsidy to the banks and should be outlawed with immediate effect.


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## tyoung (6 Jul 2004)

*Chairman Mao?*

Tommy,
 A small point but, I believe that the quotation is attributed to Chairman Mao not Chiang kai Shek.


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## Tommy (6 Jul 2004)

*Re: Chairman Mao?*



> In relation to the original issue, it's an oversimplification to say that the measure failed to work as prices continued to increase. That assumes that nothing else changed in the world at that time to account for those increased prices, which is patently untrue. The Celtic Tiger was driving prices rapidly upwards at that time. The real question is 'did prices increase by less than would have happened without this measure being in place?'.



How then can you explain the drop in rents which started within a few months of the abolition of the Bacon interest restriction measure - a decrease which has continued in the meantime despite ongoing rises in property prices


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## Tommy (6 Jul 2004)

*Chou En Lai - I stand corrected!*

From [broken link removed]





> When the Chinese prime minister, Chou En Lai, was asked in the 1950s what he thought of the consequences of the French Revolution in 1789 he replied: “It is too early to say.”


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## tyoung (6 Jul 2004)

*Mao or not?*

Interesting!
 I did a google search and came up with this link [broken link removed]
  which contains the following quote
"Chinese leaders, for example, have always had a long-term view of history. As Chairman Mao famously replied when asked what is the impact of the French revolution: “It is too early too tell.”…


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## Trebledigit (13 Jul 2004)

*Re: 3 year fixed interest*

I decided to ask my mortagage provider (ICS) for some quotes for fixed terms and they came back to me with an acceptable quotation for a 3 year term.  I accepted the quote of 4.59% the following day with the projected repayment figure they had also provided.  I was very surprised to read in my confirmation letter that, although the interest rate was as quoted, the repayment amount was  euro 25 per month dearer than the projection in their letter of offer.  When I rang they said that this was due to accrued interest from the date of their offer even though there was only 3 days between the date of their offer and my acceptance !!  Can this be true ?   This would mean increased repayments of 900 euro over the 3 year period of the fixed term.  

Is this a matter I should be taking further ?

Trebledigit


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