36 - huge mortgage

Nicetoknow said:
7. Build up cash reserve in company
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Nicetoknow said:
7. I think this could be a better option than funelling money into the directors pension yearly as I was intending to do. I need to better understand the rules around backdating contributions.
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This is the wrong idea. You should pay the profits each year as income and use the net receipts to pay down your mortgage.

Building up cash in a company is bad. You pay Corporation Tax on the profits retained each year. Then you pay income tax (or CGT) when you get them into your hands eventually.

I think the point made was that with a company, you are not subject to the use it or lose it pension rules facing employees and the self-employed.

In other words, if you focus on getting your mortgage down to a safe level over the next 5 years, you will have lost some of the opportunity to contribute to a pension from your salaries. However, at that stage, you can stuff the pension from the company's profits.

Brendan
 
DeeKie said:
It can be hard, if you are a high earner and high achiever to step away from that
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yes, especially when you are relatively young, this talk of downsizing isnt really sensible, i assume you are in the house you want to be in, and you can afford it.

if i was you id rather the mortgage was a bit lower, but that should be achievable in the medium term.
 
Brendan Burgess said:
This is the wrong idea. You should pay the profits each year as income and use the net receipts to pay down your mortgage.
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As the OP has the benefit of a PAYE job and a Ltd company, there are options to build up reserves in the company and look at options such as Entrepreneurial relief, Retirement relief , termination payments pension funding, and liquidation at CGT rates etc to get funds out of the company in a much more tax efficient manner. Build up the reserves in the company and invest in the company name if you so wish ( i.e. treat it as a pension to generate some returns ) and at some point down the road you may well be able to generate a large lump sum to materially pay down mortgage debt rather than in increments when you have already paid an effective tax rate of 50%.
As the reserves in the company are liquid you have the flexibility to change your strategy if required and pay yourself a salary in any year you so wish.
The tax efficiency will reduce the time it takes to become mortgage free instead of paying down debt out of after tax funds.

Just a different approach to meet the OP's objectives

Vincent
 
3 years on - money make over update


Personal details

Age: 39
Spouse’s/Partner's age: 41

Number and age of children: 7 year old + 4 year old


Income and expenditure
Annual gross income from employment or profession: self-employed 125,000 PAYE + variable bonus of between 8K-15K + pension cons of 25K a year
Annual gross income of spouse: 50K (3.5 day week) + pension cons of 5K a year + 2K bonus

Monthly take-home pay

Type of employment: both self-employed in our own company (40% share holding)

In general are you:
(a) spending more than you earn, or
(b) saving?

We are spending what we get i.e. we are not getting into debt but not saving

Summary of Assets and Liabilities
Family home worth €1m with a €540k mortgage, needs work but is more than livable. We've done some work since my last post but with the way prices are gone, there is a least another 100K we need to spend.

Cash of €6k
Defined Contribution pension fund: €300k across 4 different funds
Company shares: 40% shareholding in own small company, no plans to short/ medium term plans to sell

***we run our own business any rely on adhoc bonuses of e.g. 5K as a rainy day fund (rightly or wrongly). We keep a minimum of 6 months plus worth of operating costs in the company and if we know we have a surplus, and we need the cash, we take a bonus***

Family home mortgage information
Lender: Avant
Interest rate: 1.95%
If fixed, what is the term remaining of the fixed rate? 5 years, 4.5 years remaining

Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month? yes
No car loans (1 old car).

Buy to let properties - none

Other savings and investments: none

Other information which might be relevant

Life insurance:
- mortgage protection and I have 400K key wo(man) policy
- nothing for spouse

Other info that might be relevant
- Childminder @ €220 a week
- Montessori €250 a month
- Private dental and health insurance
- Extra-curricular activities (art, swimming, tennis, gymnastics)
- holidays a year since covid lifted (europe)...I'd say we are at 10K
- heating bills are quite high as the house is old and drafty
- sports club membership 1K a year + €40 a week
- we don't spend much on clothes etc but we probably do buy too many take away coffees

What specific question do you have or what issues are of concern to you?
Posting as we have just copped that we will more than likely have increased costs in 4.5 years time when our fixed rate ends and trying to figure out the best way to be ready for that. We have private school fees coming at us in 5 years time also (7K a year going up to 14K in 7 years).

Since our last update we have tried to reduce the mortgage, increased the pension fund and done some essential house maintenance. We have both quit our days jobs and now only have income from the small business (which is going well but obvious risk there). Work life balance is much better, a lot of flexibility which we value.

Advice gratefully received.
 
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Nicetoknow said:
€540k mortgage
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Nicetoknow said:
Annual gross income from employment or profession: self-employed 125,000 PAYE + variable bonus of between 8K-15K + pension cons of 25K a year
Annual gross income of spouse: 50K (3.5 day week) + pension cons of 5K a year + 2K bonus
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The overall strategy remains the same.

You have a very large mortgage for your income. This puts you at a very big risk. The risk is elevated as interest rates have risen although this won't hit you for 5 years.

Yet, you are still stuck in the "I must maximise my pension" rut. This is wrong. You should be more than ever focussed on getting your mortgage down now that you are both self-employed in the same business.

You are young enough and have plenty of time to max your pension contributions from you company later.

Brendan
 
Nicetoknow said:
Income and expenditure
Annual gross income from employment or profession: self-employed 125,000 PAYE + variable bonus of between 8K-15K + pension cons of 25K a year
Annual gross income of spouse: 50K (3.5 day week) + pension cons of 5K a year + 2K bonus
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This is something you need to think clearly about. Most owners of a limited company have weird ideas on this. They think of themselves as having a salary.

They prepare accounts as follows

Sales €800k
Costs : €500k
Directors' salaries €250k
profit: €50k

Tell your accountant to produce your management accounts as follows:

Sales: €800k
Costs €500k
Profits before Directors' salaries and pensions: €300k

It will help you think far more clearly about your business.

Brendan
 
Nicetoknow said:
Family home mortgage information
Lender: Avant
Interest rate: 1.95%
If fixed, what is the term remaining of the fixed rate? 5 years, 4.5 years remaining
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This was a great rate and you were right to take it. I would be very surprised if anything so favourable will be on the market when you go to re-fix.

Nicetoknow said:
We have both quit our days jobs and now only have income from the small business (which is going well but obvious risk there).
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It's a good living for a "small" business:)

Am not sure if there is an escape hatch if the business doesn't work out, but you are locking in a pretty expensive lifestyle with a prestige address and the most expensive fee-paying schools. I think you need to plan for what happens if the business takes a dip, as in that case you will need liquidity. A big pension pot or a paid-off mortgage won't be much use to you in those circumstances.
 
Brendan Burgess said:
much lower mortgage payments would be a great help.
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Right now OP can overpay mortgage at 1.95% or leave it on deposit at about 0.3% after DIRT, or a gap of 1.65%.

If I had a business subject to a lot of downside I'd keep a five-figure sum on deposit with an opportunity cost of 1.65% pa. I think deposit rates will only increase by the way over the next year or so so the opportunity cost will fall.

If the sun is shining in a few years the OP pay use the funds and pay off the mortgage but I wouldn't be in a hurry to pay down the cheapest line of credit you will ever get in your life.
 
Hi Coyote

A fair point. You are prepared to pay 1.65% insurance premium to have cash available. So if he does this for 5 years, it's 8%.

Personally, I would not pay that insurance premium.

However, if I were facing big costs in a couple of years and would have to borrow at 10% to fund those costs, then it would be justified.

Brendan
 
Nicetoknow said:
3 years on - money make over update


We are spending what we get i.e. we are not getting into debt but not saving

- we don't spend much on clothes etc but we probably do buy too many take away coffees
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Unless getting them flown in from Colombia on a private jet, take away coffees aren't your issue. It's big ticket items you need to look at.

What are you going to do when you have to find another €7k a year (€14k gross) to pay for school fees? When two of them are in school, it's twice that. And all the activities that go with it. There's plenty of them.

You can make tweaks to your expenses now so the changes aren't as big in the future. You need to plan for the expenditures over the next 20 years as well at those when you retire.


steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
NoRegretsCoyote said:
but you are locking in a pretty expensive lifestyle with a prestige address and the most expensive fee-paying schools.
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This is it in a nutshell. I'm struggling to see where the OPs problem is. Yes the mortgage balance is big but they have a high income. The monthly payment should not be a problem on their income. There must be a huge amount of unaccounted lifestyle spend that is the much bigger problem.
 
Brendan Burgess said:
But the monthly payment will probably increase when the fix is up.
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Yes but by what? Another 2pp on the mortgage is €800 a month in 4.5 years time which on a gross €200k should be more than manageable.

I would worry much more about the income than the cost of finance at that point.
 
I would create a spreadsheet with two columns; the first is your current monthly expenses and the second is your future monthly known increases in expenses. It is essentially a stress test to cover the school fees and rising mortgage rates additional borrowing to renovate the house.

That should help steer how you prioritise the next 4/5 years in preparation.

As of now it looks like you need to increase monthly cashflow, so perhaps that is reducing holidays, cutting back on certain things, reconsider private school. At current levels it looks like you won't see a reduction in mortgage payments at the end of your fixed rate.
 
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