Applying for new mortgage and renting current apartment

[CashNoob]

Probably a very obvious one this, but hoping someone can clarify.

I bought an apartment by myself about 10 years ago and am now looking to buy a home with my partner. I intend to keep the apartment as a rental property as it's on a tracker mortgage and the rental income will cover the repayments. The apartment is currently in negative equity but there has never been any issue with paying the mortgage.

In applying for a new mortgage, do I include the current mortgage payments as a monthly expense, thereby limiting the amount I can borrow?

Or just work on the basis of our salaries alone dictating how much we can borrow for a new home?

Thanks

 

[44brendan]

In applying for a new mortgage, do I include the current mortgage payments as a monthly expense, thereby limiting the amount I can borrow?

Yes. If you exclude this borrowing the bank will find that you have omitted information and would likely decline the proposal for that reason.

 

[CashNoob]

Yes. If you exclude this borrowing the bank will find that you have omitted information and would likely decline the proposal for that reason.

Thanks for the reply.

I'm probably not being clear enough - I don't mean withhold the information from the bank.

I mean, in figuring out how much I can borrow for a new home do I work on the basis that rent will cover that mortgage payment?

On mortgage calculators there's about an €80k difference between putting this in as a monthly commitment or not. Get me?

 

[Learner2015]

Hi cashnoob, I was in a similar situation. When I applied the bank deducted my investment property monthly mortgage amount from our monthly income but they included 6/12 of the annual rental income as part of my income.

 

[Monbretia]

Mortgage calculators won't be that accurate in your case as banks differ on how they will treat your existing repayments and rental income. They may want to stress test the rental property repayment and will probably only take a percentage of the rental income as extra income.

 

[Sarenco]

I intend to keep the apartment as a rental property as it's on a tracker mortgage and the rental income will cover the repayments.

Are you absolutely sure that it makes sense to retain the apartment as a rental? Does your lender have a negative equity "tracker mover" offering?

If you have no previous experience of running a property rental business, I would suggest that you spend some time reading up on the taxation of rental profits, and understanding what expenses you are likely to incur, before you make your final decision how to proceed.

Just because you have a tracker, and the prospective rent will cover the current mortgage repayments, doesn't necessarily mean that it's a good investment prospect (when you take expenses and tax into account). It might well be but you really need to run the numbers.

 

[Brendan Burgess]

Does your lender have a negative equity "tracker mover" offering?

This really is the key.

What lender are you with? Most have tracker mover products and you should avail of this instead.

You will need to do a formal written agreement with your partner as to what proportion of the mortgage each is responsible for and what proportion of the home you each own.

Brendan

 

[CashNoob]

Hi cashnoob, I was in a similar situation. When I applied the bank deducted my investment property monthly mortgage amount from our monthly income but they included 6/12 of the annual rental income as part of my income.

Thanks, that's a handy indicator.

 

[CashNoob]

Are you absolutely sure that it makes sense to retain the apartment as a rental? Does your lender have a negative equity "tracker mover" offering?

If you have no previous experience of running a property rental business, I would suggest that you spend some time reading up on the taxation of rental profits, and understanding what expenses you are likely to incur, before you make your final decision how to proceed.

Just because you have a tracker, and the prospective rent will cover the current mortgage repayments, doesn't necessarily mean that it's a good investment prospect (when you take expenses and tax into account). It might well be but you really need to run the numbers.

Thanks for the reply, this makes a lot of sense.

I'm not certain about retaining the apartment but think it makes sense. Mortgage is €1k a month, rent would be probably €1,300 pm. I'm not expecting to run it as a rental business, simply to rent it to cover the mortgage. If I made a small loss over the year with repairs, tax etc I'd be okay with that. My thinking is that renting it out for 5-10 years, all going well, would leave me with an asset. I could sell or continue renting at that point.

Of course this is all predicated on life going smoothly, and things can change.

 

[CashNoob]

This really is the key.

What lender are you with? Most have tracker mover products and you should avail of this instead.

You will need to do a formal written agreement with your partner as to what proportion of the mortgage each is responsible for and what proportion of the home you each own.

Brendan

With BoI. I'm not exactly won over by their 5-year tracker switcher which is another 1% on top and then losing the tracker altogether.

Hadn't thought about the formal written agreement to be honest but I guess that's modern life. Will look into it. Thanks for replying.

 

[Clara16]

if you have an estate agent report for apartment with likely rental income this will help with new mortgage application. most will do it for free.

 

[Sarenco]

I'm not certain about retaining the apartment but think it makes sense.

It's a tricky decision but it looks like retaining the apartment as a rental might be a viable option in your circumstances.

However, you need to try and figure out whether the projected after-tax profit on the rental over your projected holding period is likely to exceed the additional interest costs on your new PPR mortgage by not opting for the tracker-mover product. If the numbers are close, which is often the case, you should opt for the tracker-mover product over retaining the apartment (because it’s the risk-free option).

Be careful not to confuse cash-flow with profit – a rental can be profitable on an after-tax basis but still take money out your pocket every year (because you are paying down the principal on the mortgage). Also, be careful not to underestimate the expenses associated with managing and maintaining a rental (I would suggest using 30% of projected gross annual rent as an estimate) and remember that 25% of mortgage interest payment and LPT are not deductible expenses.

In arriving at your decision, you should also have regard for your overall financial position (pension, insurance, cash reserves, etc.) so you are not putting all your assets in one basket.

Best of luck.

 

[Brendan Burgess]

With BoI. I'm not exactly won over by their 5-year tracker switcher which is another 1% on top and then losing the tracker altogether.

You have the mortgage 10 years. You will have it for another 5 years. By then you will have made big inroads into the capital.

I would expect that by then, normal rates and tracker rates would be much closer anyway.

So what I am saying is that the 5 year limit is not a huge problem.

Overall, you are just better getting rid of it.

Brendan

 

[CashNoob]

It's a tricky decision but it looks like retaining the apartment as a rental might be a viable option in your circumstances.

However, you need to try and figure out whether the projected after-tax profit on the rental over your projected holding period is likely to exceed the additional interest costs on your new PPR mortgage by not opting for the tracker-mover product. If the numbers are close, which is often the case, you should opt for the tracker-mover product over retaining the apartment (because it’s the risk-free option).

Be careful not to confuse cash-flow with profit – a rental can be profitable on an after-tax basis but still take money out your pocket every year (because you are paying down the principal on the mortgage). Also, be careful not to underestimate the expenses associated with managing and maintaining a rental (I would suggest using 30% of projected gross annual rent as an estimate) and remember that 25% of mortgage interest payment and LPT are not deductible expenses.

In arriving at your decision, you should also have regard for your overall financial position (pension, insurance, cash reserves, etc.) so you are not putting all your assets in one basket.

Best of luck.

Thanks for the advice, much appreciated. Bit to think about here.

Overall I like the thought of being 20 years down the road, having put a dent in a mortgage on a house and having the apartment almost cleared and effectively paid off by tenants but am aware this is in the ideal situation and things can go wrong.
That was my thinking on actually not putting all my assets in one basket - trying to make the apt cover itself and seeking a new mortgage on a separate property and, in a way, trying to keep them somewhat separate.

The thought of switching, putting negative equity debt on top of a new mortgage is less appealing but maybe more sensible long-term in a lot of ways.

Anyway, thanks all for the input.

 

[trasneoir]

That was my thinking on actually not putting all my assets in one basket - trying to make the apt cover itself and seeking a new mortgage on a separate property and, in a way, trying to keep them somewhat separate.

It sounds like a lot of your assets are in the property basket, and you're borrowing more to invest in more property. This sounds a little too familiar.
I appreciate that it looks feasible from a cash-flow perspective, but it did in 2006 too.

 

[CashNoob]

It sounds like a lot of your assets are in the property basket, and you're borrowing more to invest in more property. This sounds a little too familiar.
I appreciate that it looks feasible from a cash-flow perspective, but it did in 2006 too.

Yeah I take the point, although 'borrowing more to invest in more property' is probably a bit misleading. I'm looking to buy a family home that I intend to live in from now on.

 

[trasneoir]

Yeah I take the point, although 'borrowing more to invest in more property' is probably a bit misleading. I'm looking to buy a family home that I intend to live in from now on.

I chose my words quite deliberately there. You are making a purchase on credit with the expectation of a return. That's an investment.
Your return will take the form of accommodation rather than cash, which makes the deal more tax efficient.

Everybody involved in property encourages punters to think of the "family home" as some kind of magical special class to which economics and logic should not apply. Resist.