About to clear home mortgage, €950K IO RIP loan remains

incamera

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Age: Both 43

Annual gross income from employment or profession: €90,000 as employee in a large company
Annual gross income of spouse: €60,000 as a public sector employee

Monthly take-home pay: c.€8,000

In general are you: (a) spending more than you earn, or (b) saving?
Saving. Our monthly mortgage payments exceed the contracted amount and we made a lump-sum payment of €45,000 (from accumulated savings) which has reduced the balance on our home loan from €300,000 to €70,000 over the past five years. We also set aside €2,500-€3,000 a month on deposit which is drawn down for occasional outlays (tax return, property repairs, change of car, etc.). Savings have been higher for the past ten months.

Rough estimate of value of home: €450,000
Amount outstanding on your mortgage: €70,000, repaying c.€3,200 capital a month
What interest rate are you paying? ECB + 1.1%, €70 interest a month

Other borrowings – car loans/personal loans etc.: None.

Do you pay off your full credit card balance each month? Yes, when used (rarely)

Savings and investments: c.€50,000 on deposit, negligible interest

Do you own any investment or other property? Yes, 3 x residential investment properties
Estimated Value: €950,000.
Loan: €950,000 (all properties are covered by the same loan).
Rate: ECB +0.75%.
Current repayment: €600 month interest-only (expires 2032).
Monthly rent: €3,850. Properties are in long-term leases with the LA with annual rent reviews (subject to RPZ restrictions).

Do you have a pension scheme? Yes, both on defined benefit with 20 and 17 years’ service plus contributing €250 a month to a matching AVC scheme.

Ages of children: 14, 11, 8 (no recurrent childcare costs)

Life insurance: Both with €400,000 life cover and €80,000 accelerated serious illness cover. €90 month. Declining based on original 35-year term and assumed 6% interest rate.

What specific question do you have or what issues are of concern to you?
In the last five years we have followed the recommendation to reduce our level of borrowing – and, within that, focused on reducing the balance on our home mortgage. A look back at the other advice given is also interesting. [Can't include link.]

If we maintain our repayments at their current level of €3,300 the home mortgage will be cleared in another 22 months or so. And given current monthly savings we would actually be in a position to clear it and leave a reasonable buffer on deposit by the late summer/early autumn this year.

Our question is what to do after the home mortgage has been cleared?

The interest-only loan on the investment properties expires in 2032. At current interest rates clearing the loan by then would need monthly payments of c.€7k a month. We could switch the money now used for the home loan repayments to making some capital repayments on the RIP loan. Or we could do something different entirely: increased pension contributions, look at other investments, sell one or more of the properties…
 
Our question is what to do after the home mortgage has been cleared?

If you want to hold onto the RIPs, you are going to have to start paying them down. You have €1,000,000 of debt and €950,000 of that is on interest only loans, so it isn't reducing at all. If there is a crash in the property market you could find yourself with a negative net worth.

On the plus side, your debt is cheap and you are receiving rental income on your rentals. You need to formulate a plan for paying down the RIPs. Having them mortgage free would have you set up. Once you have your own home paid off, I would be looking to aggressively pay down this debt.

You also need to look at diversifying your investments. You have your emergency fund but otherwise, your assets are illiquid, long term investments. You should be looking to invest in the global stock market too.


Steven
www.bluewaterfp.ie
 
Your RIPs are very profitable. The rent received after tax well exceeds the costs and the interest paid.

So you hold onto these until the end of the mortgage term. You can then decide what to do with them.

You have €1.4m in property, €50k cash and €1.02m in mortgages

The risk you face is a sustained reduction in property values so that you would be in negative equity in 2032 when you have to redeem your mortgages.

Properties are in long-term leases with the LA with annual rent reviews (subject to RPZ restrictions).

How does this affect your ability to sell them? Will the leases expire before 2032? If so, then you should not renew the leases. You need complete flexibility to sell the properties.


We also set aside €2,500-€3,000 a month on deposit which is drawn down for occasional outlays (tax return, property repairs, change of car, etc.). Savings have been higher for the past ten months.

I don't think you need this. You have two incomes and three properties. You don't need an emergency fund. You have a tax bill of around €20,000 and you know it's payable in November. So you can start building up towards this in June. You can anticipate major house repairs and car replacements in a similar way.

So clear the mortgage on your family home with the €50k and your monthly savings.
 
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When you are in a strong financial position, the strategy should not be to maximise your wealth. The correct strategy is to identify the risks which could disrupt your very strong financial position and to mitigate them.

There are three approaches to clearing the RIP loans in 2032

A) You can hope that the values will exceed the mortgages in 2032 and sell the properties to clear the loans. You can then put your savings into your pension fund which is the best long-term thing to do.

The problem with this is the risk that you could be in negative equity in 2032. It might be a small risk, but the impact would be devastating.

So I would rule this out.

As you are aged 43 with good pension funds already, pensions are not the urgent problem they are for other people.

B) Because your mortgage is so cheap, it makes financial sense to put your savings into a stock market fund and hope that the fund will be big enough to clear most or all of the mortgages.

This would be a lot safer than Option A) so it's a better option.

But the risk is of a fall in both the stock market and property prices. So while it's less risky than A, it's not risk-free.

C) You can start paying down the mortgages. This is the lowest risk option. I am not clear from your post how much are saving, it seems to be about €6,000 a month or €72k a year. That means that over the next 11 years, you will have paid off about €770k. Your savings will probably increase, so you will probably have cleared the mortgages at that stage.

This is the by far the safest and most predictable option.
 
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It does not have to be A) to the exclusion of B) and C)

It can be a combination and you can change the mix over time.

So this is what I would do.

1) Clear the mortgage on the family home immediately.

2) Start repaying the RIP mortgage until you have reduced the Loan to Value to 70% - say €700k. That means that if property prices remain unchanged, you need to pay down about €250k which will take you 4 years.


I will be honest and say that I would have great personal psychological difficulty in paying down an interest-only mortgage at ECB +0.75%, but, objectively, it's the right thing to do.

With properties worth €1m and a mortgage, of €700k, you will be a lot more comfortable. You will have complete flexibility.

3) When you have the mortgage down to €700k, switch to building up an equity fund.

4) Keep the strategy under review.
If house prices fall so that your LTV rises back above 70%, then switch back to paying down the mortgage.
On the other hand, if property prices over the next few years, you could be at 70% LTV earlier and then you might switch to an equity fund earlier.

5) When you have more visibility closer to 2032 and you know you can clear the mortgages either with the equity fund or with the sale of the properties, then look at making AVCs. You may decide at that stage that you want to sell the properties when the mortgage matures. If so, you can max your AVCs.

But the key thing at the moment is to reduce the risk of a serious problem in 2032. I think it's a very small risk, but with 100% LTV at present, it can't be ruled out and you need to take steps now.



Brendan
 
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More time in stock market increases the chance of seeing a better return. There is an 11 year from window today.

What about executing 2 (i.e. c) and 3(i.e b) in parallel, rather than sequentially?

Or executing the stock marketing saving for a few years first.
 
I think I’d do a few things.

- I’d compartmentalise the net rent and stick it against the tracker mortgage; paying a 0.75% mortgage from net monies is probably the equivalent of a guaranteed return of 2-3% gross of tax and costs.
- I’d maximise the AVCs so as much of my investments as possible were growing in a tax shelter
- I’d stop saving and invest the excess cashflow (post the two points above) in a 100% equity strategy
 
One way of looking at this is you have 3.85k rental income per month.
Outgoings of €600 interest plus expenses
Allocate 850 to interest plus expenses
Allocate 3k to capital repayments

The 3k will increase slowly over time to maybe 5k in 12 years.
Therefore by the time you reach retirement age, 65, you should have it mostly paid off.

Say 11 years at 3k and another 11 years at 5k
11x 36=396
11x60=660
Total. 1056

The interest rate won't always be 0.75% so to avoid risk keep paying down.

I'm ignoring the 2032 expiry date because that can just be renegotiated
 
What about executing 2 (i.e. c) and 3(i.e b) in parallel, rather than sequentially?

Yes, that is another valid option.

In which case, the LTV should be calculated as follows:

5268

Given the volatility of stock market investments, I would be aiming to get the LTV down to 60%.
 
One way of looking at this is you have 3.85k rental income per month.
Outgoings of €600 interest plus expenses
Allocate 850 to interest plus expenses
Allocate 3k to capital repayments
Is there no tax to pay?

I'm ignoring the 2032 expiry date because that can just be renegotiated
Which lender are you aware of that will extend an interest only BTL at 0.75% tracker?
 
Which lender are you aware of that will extend an interest only BTL at 0.75% tracker?
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Did I say BTL 0.75% tracker??
It's called getting a loan
 
I don't have comprehensive advice, but a few thoughts:

  1. There's a small but non-trivial risk of negative equity in 2032. You can't isolate your family home in these circumstances;
  2. There is risk to the business model. Local authorities provide a good business for landlords now, but that might not last forever;
  3. You have (three) depreciating assets. Landlords tend to underestimate this. Over a three-decade spell your properties will probably need re-wiring, new central heating, insulation, etc. If they don't, the next owner will need to do it, which reduces their value.
 
- I’d maximise the AVCs so as much of my investments as possible were growing in a tax shelter

This would be correct if your objective is solely to maximise your wealth. It is worth borrowing at 0.75% to max out a pension.

And it might be right if you were ten years older and you had access to a tax-free lump sum as your mortgages mature.

However, your objective is to preserve your wealth and so with a 100% Loan to Value, your first objective is to reduce this to a sustainable level.

And you do this either by paying down your mortgage or building up a savings outside your pension scheme.

Brendan
 
11 years is a significant term. I would invest the savings both the lump sum and on going monthly savings. It is a reasonable assumption that you will get a return of more than 0.75% after tax.

By 2032 you will be able to pay off part of the mortgage from savings and then pay the rest by selling the 1 or more of the properties.

This strategy gives you the optimises both wealth accumulation and flexibility. It does not of course minimise risk. Flexibility in my opinion is underappreciated.

While anything may happen in 11 years, certainly property or equities may crash, there is one other scenario that has not been mentioned above. Inflation may rise substantially. Were that to happen the real value of the loans might become eroded.
 
This would be correct if your objective is solely to maximise your wealth. It is worth borrowing at 0.75% to max out a pension.

And it might be right if you were ten years older and you had access to a tax-free lump sum as your mortgages mature.

However, your objective is to preserve your wealth and so with a 100% Loan to Value, your first objective is to reduce this to a sustainable level.

And you do this either by paying down your mortgage or building up a savings outside your pension scheme.

Brendan

I agree, but the nuance here is that these are smaller AVC pots alongside DB benefits, so the amounts going in shouldn’t be massive.

So I’d envisage a decent slug of the outstanding mortgage being paid down.
 
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