# Repay rental mortgage or invest at low interest rate?



## Logo (8 Aug 2016)

I can repay my mortgage on a rental property. To me it seems like a no-brainer - I'm paying about 4% for mortgage and getting very little interest on savings. However I've been advised by an accountant to mortgage the property to the maximum to avail of tax efficiencies. We had a discussion about it and I'm still a bit stumped Any thoughts appreciated.


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## Brendan Burgess (8 Aug 2016)

Do you have any other borrowings e.g a mortgage on your home, credit card or overdraft? 

The net cost of the interest on your rental property is 

Interest paid: 4% 
Allowed for tax purposes : 3% (75%) 
Tax relief: 1.5% (50% of 3%) 
Net interest cost after tax: 2.5% 

If you have a home mortgage at 3.5%, you should pay that off first. 

If you have no other borrowings, it's 50/50.  
It would certainly be better paying off the mortgage with money you have on deposit which could at most be earning 0.5% after tax. 

If you think you can earn 2.5% net after tax from investing in shares or something else, then maybe hold onto it. 

As you probably won't earn 2.5% after tax with any degree of safety, then the best option is to pay it off. 

Brendan


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## cais (9 Aug 2016)

Brendan, I assume 4% rate includes capital repayment, hence net interest would be lower than 2.5%?


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## Brendan Burgess (9 Aug 2016)

cais said:


> I assume 4% rate includes capital repayment



I assumed he was referring to the interest rate. I have never heard of anyone referring to the "repayment rate".

Logo - could you confirm please? 

Brendan


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## Logo (9 Aug 2016)

Yes Brendan I am referring to the actual interest rate on my rental mortgage. I have no other borrowings.


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## Marc (9 Aug 2016)

Funny, I remember having a similar conversation with an accountant in the early 1990s.

They told me my client shouldn't borrow money from the, then, building society as if they borrowed it from the business they could deduct the borrowings against tax.

This was a very textbook way of thinking about things and didn't reflect the differences between the net and gross interest rates.

Even allowing for the tax differences the building society loan was much cheaper and didn't require the client to deposit their children in the bank's vaults as additional security.

There is a good phrase here that you shouldn't let the "tax tail wag the investment dog."

A good financial planner will consider each case on its merits and assess the various options before presenting a balanced and considered solution.

I gave up on being a Chartered Accountant when I was presented with an exam question "a couple are divorcing; for tax reasons who should have the children?"
I mean seriously.....


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## Steven Barrett (9 Aug 2016)

I've never heard anyone complain about not having any debt...


Steven
www.bluewaterfp.ie


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## T McGibney (9 Aug 2016)

Logo said:


> However I've been advised by an accountant to mortgage the property to the maximum to avail of tax efficiencies.



Did he also tell you that if you break all the windows in the house every year, the expense of repairing them will also help cut your tax bills?


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## Brendan Burgess (9 Aug 2016)

Logo said:


> I can repay my mortgage on a rental property. To me it seems like a no-brainer - I'm paying about 4% for mortgage and getting very little interest on savings. However I've been advised by an accountant to mortgage the property to the maximum to avail of tax efficiencies.



Hi Logo

I presume that your accountant did not actually suggest that you mortgage the property? In other words, he did not suggest borrowing additional money?  There would be no tax relief on such additional borrowings. 

Brendan


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## Gordon Gekko (9 Aug 2016)

I posted in the other thread but it was deleted.

Odd advice indeed. Additional borrowings wouldn't qualify (unless for improvements) and repaying something that costs 2.5% after tax is a guaranteed return that is hard if not impossible to beat.

I think I'll go off and have a root canal so I can get 20% of the cost back...or stick my mother in law in a nursing home and get a whopping 40% back.


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## rob oyle (9 Aug 2016)

Gordon Gekko said:


> ...stick my mother in law in a nursing home and get a whopping 40% back.



Your poor mother!


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## Logo (9 Aug 2016)

No Brendan. When I bought the house a few years ago the accountant advised at the time to maximise the mortgage amount. Since then, I have re-paid lump sums from time to time - reducing the monthly payments and leaving the term at 19 years. At this stage the repayments are manageable but I'm tempted to clear it completely as only 75% is tax efficient.


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## Sarenco (9 Aug 2016)

You would be well advised to pay it off if you have no need for the liquidity and it's not restricting your ability to maximise your pension contributions (if relevant).  A guaranteed net return, after tax, equivalent to 2.5% pa is a no brainer in the current environment.

You might also want to start thinking about looking for a new accountant...


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## Logo (9 Aug 2016)

Thanks for the replies. Its is more or less what I suspected but I needed reassurance before I acted.
Logo


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## Brendan Burgess (10 Aug 2016)

Logo said:


> When I bought the house a few years ago the accountant advised at the time to maximise the mortgage amount.



This would be the wrong advice now. But it could have been the right advice then.  If 100% tax relief was available at the time and if you had a mortgage on your primary home. 

Brendan


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## T McGibney (10 Aug 2016)

Logo said:


> No Brendan. When I bought the house a few years ago the accountant advised at the time to maximise the mortgage amount.





Brendan Burgess said:


> This would be the wrong advice now. But it could have been the right advice then.  If 100% tax relief was available at the time and if you had a mortgage on your primary home.
> 
> Brendan


A few years ago? The 75% mortgage interest restriction has been in place for over 7 years now (April 2009).


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## Brendan Burgess (10 Aug 2016)

I just would not be telling Logo to change his accountant, without knowing the full context and timing of the advice.  

It may have been poor advice.  But it may well have been reasonable. We just don't know. 

Brendan


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## T McGibney (10 Aug 2016)

Neither would I. I'm sure we all give poor advice from time to time (that's why it's perfectly fine to act against advice btw) but it's very easy to be wise in retrospect and in a different context.


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## Logo (10 Aug 2016)

I bought the house two years ago. I'm not sure if it's relevant but I have another house that is rented for 10+ years with no mortgage involved. The accountant has been doing my tax returns during that period.


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## Brendan Burgess (10 Aug 2016)

Did you need to borrow at the time?  It would be poor advice that you should borrow the max, if you had the cash at the time. 

Brendan


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## Logo (10 Aug 2016)

I didn't have the full property price at the time so had to take out a mortgage but the advise meant the difference between taking out a €300k mortgage v a €170k mortgage. I decided to take out €170k at the time. In retrospect, I would probably have been better off taking out €300k and reducing it after one year of mortgage repayments. So maybe the accountant was giving me good advice at the time.


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## Sarenco (10 Aug 2016)

Logo said:


> In retrospect, I would probably have been better off taking out €300k and reducing it after one year of mortgage repayments.



Why so?

Also, when did you get this advice - I thought from your initial post that it was fairly recently.


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## Logo (10 Aug 2016)

Sarenco said:


> Why so?
> 
> Also, when did you get this advice - I thought from your initial post that it was fairly recently.


It was two years ago. Maybe if I had taken out €300k then it would have been more tax efficient.


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## Sarenco (10 Aug 2016)

Logo said:


> It was two years ago. Maybe if I had taken out €300k then it would have been more tax efficient.



No, the advice then was as poor then as it would be today.


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## Brendan Burgess (10 Aug 2016)

Hi Logo

If you only needed to borrow €170k and your accountant advised you to borrow €300k, two years ago, then it was terrible advice and you did well to ignore it. 

I think you should switch accountants. This guy obviously thinks that being able to claim tax relief on something is valuable in its own right. 

Brendan


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## Logo (10 Aug 2016)

Thanks for the info. I tried to change accountants a few years ago but the firm I approached refused to accept my custom  - something about my files being with my current accountant.


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