# 32. Couple. Leveraged for 3rd mortgage?



## presidenttttt (1 Feb 2021)

*Age:* 32
*Spouse’s/Partner's age:* 32 

*Annual gross income from employment or profession:* €70,000 (guaranteed annual increment ,plus any pay rise)
*Annual gross income of spouse: * €100,000;  80,000 basic  plus 10% bonus, plus stock

*Monthly take-home pay:* €7600
*Type of employment:* Permanent

*In general are you: * Saving circa €1,900 a month - although we have overpaid mortgage with much of it.

*Rough estimate of value of home: *€320,000
*Amount outstanding on your mortgage: *€190,000, 980 a month, with about 20 years left.
*What interest rate are you paying? *3.4%, 

*Other borrowings: *Property; €200K outstanding at less than 2% interest. Repay 900e/month.  Value €320,000 pre Covid (and post hopefully!!!). No other loans/credit cards etc.
*
Do you pay off your full credit card balance each month? *Yes, always.
*If not, what is the balance on your credit card? *N/A

*Savings and investments: €70K savings (have overpaid mortgage too) 

Do you have a pension scheme? Yes. *I pay 5%, company pays 10%. Partner pays 5%, company pays 5%.

*Do you own any investment or other property? *See other borrowing above

*Ages of children:* One, preschool age.
*
Life insurance: *7x salary through employer which can be topped up, and I believe 2x via taken with mortgage. Partner, not sure, say 3x salary.

*What specific question do you have or what issues are of concern to you?* 

Two questions, firstly if there is any wisdom of upsizing, say to a 500K property,  and trying to do so in a way we retain current property and how to do it, if its even possible?  The current primary residence is in a very good location and good property, and one we could see ourselves wishing to utilise when retired and kids grown up, hence the thoughts around holding it. 

The second property abroad is for family use only, so not attracting income. Upsizing was not on radar on the time. I suspect now it is most unhelpful in terms of leverage e.g lender limits on  net 3.5-4.5 times salary, and net disposable income limitations (which vary from 38-49% depending what you read).  Therefore I ask, how would banks account for the rental income from our current PPR in terms of cashflow, I gather some will not factor it at all, some do? if they do factor rental income, is it only a cashflow factor, or can it also assist in reducing the headline debt for loan to income ratio?  There is also a small CGT consideration if we hold it. 

That brings me to the retirement planning. I don't mind a certain amount of risk while young, as above that includes being fairly highly leveraged, so long as there is a clear plan and an exit strategy. I am thinking long-term, and not chasing yields in the here and now. In my mind, after upsizing, I would likely turn investment focus away from property and start considering trackers/equities, once rainy day fund rebuilt. In my mind I am thinking the younger we invest in property the better, avoiding mortgages in our 60s, and ideally earlier. I see mortgages as a way to force savings too.  Is there better ways to look at all of this?


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## Brendan Burgess (1 Feb 2021)

You have €130k equity and €70k in savings.   You have €120k in an overseas property. And you have a reasonably well funded pension scheme.

You have two good salaries. 

Stop thinking of investing for the moment. 

Think about lifestyle. What type of house would you like to be your final home?  

With €170k of salary you could borrow €500k comfortably. You have €200k available as a deposit if you sell your home. 

So why not buy a house for €700k? 

In itself a Principal Private Residence has good tax advantages as an investment. The extra benefit you get from it is not taxed.  Any gain in value if you sell it is not subject to CGT. 

There is no need to spend €700k if you can get your final home for €500k.  But don't buy with a view to trading up in a few years. Moving is very expensive and risky. So move as high up as you can stretch to now.

Brendan


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## Brendan Burgess (1 Feb 2021)

presidenttttt said:


> could see ourselves wishing to utilise when retired and kids grown up, hence the thoughts around holding it.





presidenttttt said:


> *Age:* 32
> *Spouse’s/Partner's age:* 32





presidenttttt said:


> *Ages of children:* One, preschool age.





presidenttttt said:


> Upsizing was not on radar on the time. I suspect now it is most unhelpful in terms of leverage e.g lender limits



As you can see plans change quickly.  Don't be making an investment decision now just in case that the property might be suitable for your children in 25 years time, or for  your retirement in 35 years. 

Keep life simple. You have plenty of property and plenty of borrowing.  No need to take on a lot more property and borrowing and risk to be even better off.

Brendan


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## NoRegretsCoyote (1 Feb 2021)

Lots of negatives here to keeping existing property when trading up

You could get a bad tenant;
Any profits taxed at 52%;
Any capital gains taxed at 33%;
Your mortgage would switch to a BTL rate of >4%

I would put any surplus income into tax-relieved pension contributions.


Finally: you imply you are not married, but have a child and >€300k in joint assets. One of you passing away will see the other facing a big CAT bill as you are strangers in law.  I think marriage makes a lot of sense in your circumstances.


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## presidenttttt (1 Feb 2021)

Thanks all, new so not sure how to provide you with a thumbs up on your post.

Brendan, 500/520 would almost certainly be final home unless compelled to move across the country or abroad. Another reason for ascertaining if we can stretch without selling current home.

NoregretsCoyote, excuse me if it wasn't clear, we are married. One of the mortgages is only in my name however but don't think its relevant in terms of securing future finance?

Agree, there is a number of cons associated with BTL in this country at the moment. While discussing that, is there a number of units or level of income that would change the dynamic which makes owning only 1 or 2 BTLs unattractive?


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## NoRegretsCoyote (1 Feb 2021)

presidenttttt said:


> NoregretsCoyote, excuse me if it wasn't clear, we are married. One of the mortgages is only in my name however but don't think its relevant in terms of securing future finance?


Thanks. You had just said "partner" twice!




presidenttttt said:


> While discussing that, is there a number of units or level of income that would change the dynamic which makes owning only 1 or 2 BTLs unattractive?



If you were looking at 10% yields on apartments in Limerick city and/or weren't paying top-rate tax.

But for young people on good earnings a property empire makes little sense.


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## Surviver. (2 Feb 2021)

Hi all.
For what it’s worth, walk away, leave well enough alone, enjoy life with the very comfortable salary that you have.In a very similar situation myself 15 years ago and kept investing in property .Thankfully, I came out the other end and made some money but you know what, it wasn’t worth the stress, worry , sleepless nights that go with bad tenants, damage to property etc.Enjoy your present lifestyle.


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## _OkGo_ (2 Feb 2021)

There are a number of problems with your plan. 

To buy a 500k property, you will need 20% deposit. If this will be PPR and you keep the rental, there will be additional costs to furnish and you will need some overheads/funds available while moving so you should have €150k in cash. You are €80k short on this and only saving €2k/month
If you manage to get the funds together, you would have €1.14m of property, €790k of mortgages, LTV ~69% and LTI of ~5.3 on your base salary. Bonuses and shares are great but you can't depend on them. I don't think any bank would be interested in lending to you if you want to retain both of your current properties and only one of them is generating a rental income
Without running the actual numbers (you would need actual rental figures and costs), it generally does not make sense to own a BTL unless your total equity in all properties is approaching 40%. Effectively the additional borrowings on your PPR negate the 'rental profit' so you are not leveraging anything except yourself. Leverage should increase risk/reward, your plan is only increasing risk and reducing reward
Why on earth do you have a holiday home abroad at 32? This is eating into your wealth. How much value do you even get out of it or are you paying for the rest of your family to have free use of it. You could stay in luxury resorts for the next 20 years and still have spare change for what that property is costing you. Your income is good but it is not at a level where you can afford a holiday home. At least consider trying to rent it 



presidenttttt said:


> *Do you have a pension scheme? Yes. *I pay 5%, company pays 10%. Partner pays 5%, company pays 5%.





presidenttttt said:


> That brings me to the retirement planning. I don't mind a certain amount of risk while young, as above that includes being fairly highly leveraged, so long as there is a clear plan and an exit strategy. I am thinking long-term, and not chasing yields in the here and now. In my mind, after upsizing, I would likely turn investment focus away from property and start considering trackers/equities, once rainy day fund rebuilt. In my mind I am thinking the younger we invest in property the better, avoiding mortgages in our 60s, and ideally earlier. I see mortgages as a way to force savings too. Is there better ways to look at all of this?



There is a disconnect between these statements. If you are truly 'thinking long term' and looking to invest, then you both have 15% extra that you could invest for 30 years leveraging the tax relief and tax free growth and you can be fully invested in equities to achieve the risk you want.
You don't have a clear plan or exit. Is it to own lots of property (at a cost to you) or to grow your wealth?

If you really want to retain your current PPR, you should only do it if you sell the holiday home and because you are very confident of strong rental yields, not because you think you might use it in 25 years.


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## Bronte (2 Feb 2021)

Surviver. said:


> Hi all.
> For what it’s worth, walk away, leave well enough alone, enjoy life with the very comfortable salary that you have.In a very similar situation myself 15 years ago and kept investing in property .Thankfully, I came out the other end and made some money but you know what, it wasn’t worth the stress, worry , sleepless nights that go with bad tenants, damage to property etc.Enjoy your present lifestyle.


I would be of the opposite view as I've only had one seriously bad tenant.  And I've made money on property. 

The OP should sell his holiday home, I agree with OKgo on his points about it.  The logic for keeping current PPR should be based on rental income and tax calculations, not on the fact it might in 30 years be a good place to retire to.  Which at age 32 is way too young to be considering. Savings of 70K, plus 100K cleared on holiday home gives a deposit of 170K.  

OP should in the meantime in case none of this comes to fruition look at his home mortgage rate which is on the high side at 3.4% especially as currently he has 40% equity.


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## presidenttttt (2 Feb 2021)

Hi all,

Small update based on comments; I lived in the property abroad for years, so it wasn't bought as a holiday home. Since then it is used, albeit clearly not at the moment.  I can rent it, but I am assuming zero rent to be conservative, and I feel minor adhoc income from it wont change any decisions, and force some conservative thinking, which is understandable being encouraged on here. Apologies if that background is relevant, I didn't think a full life history was required 

Good points from everyone, in both directions, really helpful.


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## Steven Barrett (3 Feb 2021)

_OkGo_ said:


> Why on earth do you have a holiday home abroad at 32? This is eating into your wealth. How much value do you even get out of it or are you paying for the rest of your family to have free use of it. You could stay in luxury resorts for the next 20 years and still have spare change for what that property is costing you. Your income is good but it is not at a level where you can afford a holiday home. At least consider trying to rent i



This. It is costing you €900 a month and there's €120,000 in equity less taxes. Unless you are going to use it *a lot *it is crazy to keep a holiday home. You can get a lot of holidays for the €10,800 a year that you are paying to keep the property. And that's a legal obligation you have made to repay that amount every year. Sell it, take the profit and put it towards keeping your debts low. There is no point in having an investment that costs you a lot of money to keep but doesn't earn you a return. It is purely a play on capital appreciation but an expensive one. You might as well borrow to invest in Bitcoin.

Steven
www.bluewaterfp.ie


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## presidenttttt (5 Feb 2021)

Previously I have put quiet a bit of cash into the mortgage (something i have probably not really accounted for when suggesting my savings are 2k per month above). I have always paid in order to reduce the term, not the monthly payment. I assume that is the correct way to over pay, with a view to extending term again if the need ever came? I never second guessed it but just wondering if there is something i might not have considered.


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## presidenttttt (13 May 2021)

Brendan Burgess said:


> You have €130k equity and €70k in savings.   You have €120k in an overseas property. And you have a reasonably well funded pension scheme.
> 
> You have two good salaries.
> 
> ...


Hi Brendan,

I would love some further thoughts on the PPR point investment and tax. How does one compare that with putting the deposit into an index fund and remaining in current home?

Our current home is not a shoebox we need to move out of. One of us might argue its not our final home and they would like more space, the other might argue its more than sufficient and our neighbours are nice.  A big assumption perhaps but I believe inflation and house price growth will outstrip the bank interest rates. How do I assess the benefits of upsizing using banks money to invest in PPR, versus simple putting the same deposit into the stock market/index fund? I am also conscious that upsizing means higher running costs so a calculation might need to reflect this too. 

Thanks in advance


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## presidenttttt (13 May 2021)

Not sure that i can link other threads but I did find a thread semi-covering my previous post/question? Search "Invest in a more expensive home" if looking for it.


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## presidenttttt (16 May 2021)

presidenttttt said:


> Hi Brendan,
> 
> I would love some further thoughts on the PPR point investment and tax. How does one compare that with putting the deposit into an index fund and remaining in current home?
> 
> ...


Anyone else with views on upsizing PPRs, and how good or bad it might stack up against alternative heavily taxed options?


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## Brendan Burgess (16 May 2021)

Is this the thread to which you refer? 





__





						Invest in a more expensive house
					

This might be a bit insensitive due to housing crisis, and people generally struggling,  But I wonder if its a good investment to move house and buy something more expensive. The circumstances:  1. Pension contributions use up all tax free allowances as a percentage of salary 2. a buy to let or...



					www.askaboutmoney.com
				




Why can't you post a link to it? 

Brendan


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## Brendan Burgess (16 May 2021)

Ages 31 - Good pensions 

Income : €170k 
Value of home €320k
Mortgage €190k
Equity in home: €130k
Savings: €70k
Overseas property: 120k 
Total net assets excluding pension: €320k 

For simplicity, I will assume you sell the overseas property and have savings of €200k. It does not affect the principle.

Options: 
1) Buy a €500k property and retain home as an investment 
2) Buy a €820k property and sell existing home 

The guiding principle here should be lifestyle and not investment performance. 
You are well off and will continue to accumulate wealth under most circumstances. 
Being well off, from an investment point of view, your objective should be to preserve your wealth and not take unnecessary risks to make yourself even wealthier. 

So, should you live in a €500k home or a €820k home.  If you are buying a €500k home but intend to trade up in a few years, then you should definitely buy the €820k home now.  You will have a better home and you will save yourself the costs, inconvenience and risks of trading up. 

Let's say you are happy with a €500k home, but would it be worth "investing" the €320k extra in a bigger home?


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## Brendan Burgess (16 May 2021)

If house prices remain the same or fall, you will be a net €75k better off by renting out your home.

But the more house prices rise, the more advantageous it would be to buy a bigger house.

Or look at it another way, it will cost you €6k a year to get an extra €320k worth of home.  And, if house prices rise, that cost will fall.

*Some other considerations *

Renting is a lot of hassle
Having an investment property is more flexible. If you need the cash for your kids' education, you can sell the investment property.  You can't sell part of your home. 
Living in a more expensive house may cause you to have much higher expenses if you try to keep up with the Joneses.   On the other hand, it might be closer to work and so cut your commuting costs.


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## Brendan Burgess (16 May 2021)

The other option is to buy a €500k home, sell your existing home and have a small mortgage 



Given your level of income, you would clear your mortgage in full in a few years. 

This is a very comfortable place to be.  You can then build up an investment portfolio in equities to fund you children's education.


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## Mrs Vimes (16 May 2021)

presidenttttt said:


> Previously I have put quiet a bit of cash into the mortgage (something i have probably not really accounted for when suggesting my savings are 2k per month above). I have always paid in order to reduce the term, not the monthly payment. I assume that is the correct way to over pay, with a view to extending term again if the need ever came? I never second guessed it but just wondering if there is something i might not have considered.



It is generally a bad idea to shorten the term rather than reduce the payment because if you need to lengthen the term in the future the bank will treat it as a request to vary the loan and will need to underwrite it again.

If you are looking to extend the term it may be because you are in financial difficulty which will make the bank reluctant to extend your loan.

If you reduce the monthly payment instead then you can continue to overpay by as much as you want (assuming variable rate loan) and then drop down to minimum payment level without asking the bank's permission at any stage.


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## presidenttttt (16 May 2021)

Good point Mrs Vimes.

Delinking from my original post, Brendan, in terms of investments I am going to explore the numbers assuming the choice is upsize or invest in the markets as opposed to a BTL. The principles are similar with BTLs and stocks being taxed,  so your tables are useful, and I will do some spreadsheets. Thank you. 

I basically want to establish the difference in profit/loss after, say, 15 years between borrowing for a bigger home and investing in the stock market.  I would like to sense check assumptions of mortgage at 2.8% interest, property increase 3.5%, markets increase 5.5%? What about fees related to funds? I am aware it is difficult to make any assumptions on property prices in a decade or so, but ultimately need to use a number


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## Brendan Burgess (16 May 2021)

The answer is very simple.

You should not borrow money to invest in shares.  End of story.

While you have a mortgage on your home, you should not have shares.  If you do, it means that you are borrowing to invest.

Pay off your mortgage.  Then you can afford the potential downsides of investing in shares.

Brendan


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## presidenttttt (16 May 2021)

Agree Brendan, what if the choice is take out a bigger mortgage for a bigger house or buy shares?


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## Brendan Burgess (16 May 2021)

You don't buy shares with a mortgage? 

If you want to buy a bigger house with a mortgage, that is fine.

Brendan


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## NoRegretsCoyote (17 May 2021)

presidenttttt said:


> How do I assess the benefits of upsizing using banks money to invest in PPR, versus simple putting the same deposit into the stock market/index fund?


Maybe I'm not quite reading your question right, but it seems you're asking how and where to keep funds in a way that you might use to up-size your PPR at some stage.

Park the tax question for a second and think about investment performance. If you want to upsize your PPR in 3-10 years then it is best to keep your wealth in a similar asset class like property nearby as prices will track each other very closely.

If that's your objective then it makes more sense to have a second property in Ireland than abroad. Property price performance can diverge a lot across markets.

Please note: tax and interest rates complicate this analysis of course and may even completely overturn it, but use it as a starting point.




Brendan Burgess said:


> While you have a mortgage on your home, you should not have shares. If you do, it means that you are borrowing to invest.



I agree, with a caveat. Carrying a mortgage and buying equities as part of a pension can make sense as over the very long term the tax-free return should be better.

But holding equities outside a pension while carrying a mortgage makes no sense. There is too much investment risk and tax on the upside.


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