# Buy to let losing money, but I have savings...



## aireire (7 Oct 2013)

Hi Everyone,

First post. Presently I have a buy to let. Mortgage E238,000 21yrs variable rate 5.4% AIB. Interest only but due to start paying principle in Jan 2014. Rent E900. Its a killer!! I can reduce this debt down to E168000 with savings. The value of the house is E130000.

I am wondering if it is worth holding on to this property. Even if I pay off and reduce the debt, the house will still cost me E300 (mortgage, mort protection, house insurance, house tax - rent) per month at present variable rate 5.4%. 7.4% will cost E500 per month. Tax in October roughly will cost E3000.

So best case scenario is E6600 per year. As rates go up, say 2% (they will), this rises to hopefully! worst case E9000 per year. 

I think my only option is to pay off as much of the debt as I can and then sell, but can anyone convince me otherwise. Should I use my savings at all. I know I should have been on a tracker so no need to rub it in in this regard. Reality has finally caught up. 

Many Thanks in advance.


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## Brendan Burgess (7 Oct 2013)

Complete the 

Standard Format for unsustainable mortgage Case Studies


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## aireire (7 Oct 2013)

Thanks for the reply, please see below.

Income details
*Net (i.e. after tax) Income self:* E3750 p/month, PAYE Full time, my salary scale indicates my net will rise to E5200 p/month over the next 5 years.
*Income history:* Employed full time all my working life(17 years)
*Net income partner/spouse:* E2500, PAYE Full time
*Income history:* Employed full time all my working life(15 years)
*Amount of child benefit received:* E260 p/month 
*Amount of Mortgage Interest Supplement:* Nil 

Personal circumstances so we can calculate your reasonable living expenses 
The Insolvency Service has published Guidelines for reasonable living expenses based on the family size, whether or not you need a car for work, childcare costs and other exceptional circumstances. By filling in this information, we (or you ) can calculate what your reasonable monthly living expenses should be. 
*Two adult family*
*Do you need a car for work or do you use public transport?* 2x Cars no loans
*Number of children 0- 2 years old:* 2
*Number of 3 years old children:* 0
*Number of 4 - 11 years old:*0
*Number of 12 - 18 years old:*0
*Monthly childcare costs:* E1100
*Montly spend on special circumstances: * E100



Home loan
*Lender:* AIB
*Amount outstanding:* E325000 
*Value of home:* E230000
*Interest rate:* 4.4% V/R
*Monthly repayment* E1750
*Amount in arrears* Nil

*Summary of discussions and agreements with the banke.g.* NIL 

Investment property  
*Lender: * AIB
*Amount outstanding:* E238000
*Value of home:* E130000
*Interest rate: * 5.4% V/R
*Monthly repayment* E1580 p/month from Jan 2014, E1050 presently interest only 
*Amount in arrears*: Nil 
*Monthly rent received*: E900

No other loans


*Other savings and investments* E110000


*How important is retaining the family home to you?*
*Which of the following best describes your situation?*

I really want to keep the family home even if it means having a large mortgage and negative equity for years to come.


Any other relevant information

*What is your preferred realistic outcome?* Sell Buy to Let but see original question. Quite clearly I am not financially minded, but I do realise in the long term it may be worth something, however I feel if I put the money I spend p/month on keeping the buy to let into savings I would probbe better off even considering the savings interest rate.  

Many Thanks again


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## venice (7 Oct 2013)

> Tax in October roughly will cost E3000./QUOTE]
> 
> Surely that figure is not correct?


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## Luternau (7 Oct 2013)

It would make no sense to pay a lumpsum of the mortgage just to sell it. Each month you are paying capital back (3-400 pm) so this is not a pure cost.
The upside is that you are eating into some of the negative equity with each payment. With 110,000 savings, you could easily afford to keep paying the interest plus capital for 10yrs. In that time, the interest portion will decrease, capital portion will increase and rents should increase a bit too. 
At the same time, even the most pessimistic would assume some increase in prices-especially in main cities. (speculation on house prices is not permitted)
So, I would not recomend getting rid of it at this juncture.


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## Brendan Burgess (7 Oct 2013)

Net income €6,250 
Home loan:  €1,750
Child care and other: €1,200
Available for other expenses : €3,300 

so you have plenty left over

Rent received: €900
Interest cost: €1,050
Loss: €150 per month. - €1,800 per year + the other costs of ownership

OK, so this is not a great investment, but it's not that bad either. It's not losing you too much, although it will be a drain on your cash. 

You won't get any deal from the lender as you have cash and a very good income. 

Your figures are a bit confusing 



> Mortgage E238,000 ... I can  reduce this debt down to E168000 with savings.


€238k down to €168k is €70k, but you say "
*Other savings and investments* E110000" 

I assume you do have €110,000 which means you can eliminate the negative equity on either loan. 

So, what should you do with your €110,000? 

*Option 1 - *Reduce the mortgage on the Buy to Let to €118,000 and then you can sell it. You won't have an investment property and you won't have an investment mortgage. 

This is probably the best option. It's losing money. Losses will probably increase as interest rates rise.  If property prices rise, you will benefit anyway as you have a house worth €230,000. 

*Option 2 - Reduce the mortgage on the Buy to let but keep it 
*You will save 
€110,000 @5.4% =€ 5,940 
Tax relief =  €2,222   (€5,940 @ 75% @50%)
Net saving: €3,721


*Option 3 Reduce the mortgage on your home 
*€110,000 @ 4.4% = €4,400 

It makes better financial sense to pay down the mortgage on your home, if you are going to keep the investment property.


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## Brendan Burgess (7 Oct 2013)

*Another way of looking at your investment 

*



> *Amount outstanding:* E238000
> *Value of property :* E130000
> *Interest rate: * 5.4% V/R
> *Monthly repayment* E1580 p/month from Jan 2014, E1050 presently interest only
> ...



Assume you have two loans - one for €130,000 and one for €108,000 

Treat the €108,000 as a historic loan against which you have no asset. 

You have a property of €130k which is earning you €900 a month and which is costing you €600 a month in interest. So it's generating €300 a month profit before costs. 

That might be worth keeping. 

You won't pay any CGT on any increase in value from €130k to the price you paid for it.  Maybe this is not a huge consideration, as if you sell it , you can also use the losses against other capital gains in the future. 

On balance, I think you should sell it. It reduces your risk,  and simplifies your life and your finances.


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## Bronte (8 Oct 2013)

As Burgess pointed out, it is better to reduce the home loan rather than the investment as there is tax relief on the interest on the investment.  

I cannot tell you whether to sell it or not.  That depends on what your long term goal in relation to it is. 

Make sure you stress test your mortgage to at least 2%.  But the good news is the ECB have signaled rates staying this low for a good while yet, apparently.


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## cremeegg (8 Oct 2013)

You should certainly use your savings to pay a chunk off one of the mortgages.

As Brendan outlines in his option 2 above you will get a guaranteed, after-tax return of 3.38% if you reduce your mortgage on the investment property (€3,721/€110k). 

If you reduce the mortgage on your home as outlined in Brendan's option 2 you get an even better 4% return, again after tax and guaranteed. (€4,044/€110k).

This way exceeds any other risk free or low risk return you could expect.

You might consider holding on to some of the cash as a rainy day fund. Although if the pay rises you mention are reliable you probably don't need much rainy day money.

The difference between option 2 and option 3 if you use €100,000 to pay off mortgage debt is €617 per annum.

There is another strategic consideration. As things stand at the moment you could not sell either house, due to the negative equity.

If you use your savings to reduce one of the mortgages, you would be close to being able to sell that house, however you would have no possibility of selling the other.

If your present home is for ever, use the cash to reduce the mortgage on the investment property. If you are thinking of trading up in the future, keeping the cash gives you flexibility.

As for should you sell the investment property. If you use the cash to reduce the mortgage that will be an option, no need to rush into that, it is a different question.


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## aireire (8 Oct 2013)

Many Thanks everyone for taking the time to reply. 

Brendan your observations re my savings not adding up are correct but I was hoping to hold over some cash as we may in the near future look to move our principle residence. 

Brendan, are options 2 & 3 savings I would make by not having to pay as much interest on a reduced mortgage. I think this is what you mean. 

I am minded to sell it if we could, by using all the money. But I'm unsure if this is wise. I cant figure out where the line between this making money or costing me money is. Maybe I'm short sighted but I just see paying a lot of tax each year to the gov a waste of money. 75% of the interest only is a right pain in terms of write off. 

Again, I'm not financially minded. We have this place after we moved in together, there was no long term plan, although I do appreciate it might be useful when the kids go to college in 15 years or so. But if I was to save or invest the amount I put into this house each year I feel I would have more money in the end. 

Once again guys really appreciate your time Thank you.


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## Brendan Burgess (8 Oct 2013)

You can't do everything. You can't do everything all at once. 

I am not sure that you will be able to move even  if you pay down your home loan or keep cash available. If you pay down your home loan and then sell your home, you will have €15k cash available. 

But you will still have a €238k mortgage on an investment property which is worth around €100k less, so I think lenders will be reluctant to give you a new home loan. 

If you want to move home in the near future, then you will most likely have to rent a new home rather than buy one. Your existing home will become an investment property as well. 

You might be better off holding onto the cash and putting both homes on the market. Sell whichever one gets  the relatively better price or the quickest sale. If you pay down your home mortgage but are unable to sell it, then you will be stuck with two properties. You won't be able to sell the investment property as it's in heavy negative equity. 

If your primary objective is to buy a new home, then I  think it will take some time to achieve this, so you might have to consider another riskier strategy.



 |net|mortgage|value
home|-€95k|€325|€230k
Investment|-€108k|€238k|€130k
Total|-€203k|€563k|€460k
Cash|110k
Net |-€93k


Your total property is €460k. If and when it rises in value by 20%, you will be out of negative equity. 

If you sell the investment and pay off the shortfall, you will have €95k negative equity on a property worth €230k, so you will need a rise in that property of 41% to exit negative equity. 

Given that you won't be able to move if you do sell, you may be better off retaining both properties and hoping for a price rise. 

Under the circumstances, you should probably pay down the investment property mortgage first.  As you will have eliminated the negative equity, AIB may give you a negative equity mortgage to allow you trade up. 

Brendan


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## cremeegg (8 Oct 2013)

If you want to move home in the near future, you need to keep all your cash.

You have said in both your posts that you are not "financially minded". Well then don't make serious financial decisions until you become "financially minded"


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## BrokeGuy (18 Oct 2013)

No sympathy here... "salary scale" = civil servant = guaranteed job (& pension) = why would a bank even consider a deal ??


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