Advice please on purchasing new home

Hi everyone, I am currently a home owner with no mortgage or loans. My partner and I are interested in expanding to a larger home and are looking to buy a place for around 900k between us. I currently only have about 20-30k in savings (I intend to keep most of it). Our joint income is probably about 5-6k per month and we are in a very stable jobs.

I had considered remortgaging the place I currently own (valued approx 350k) to use as a deposit for the new place (repay over 20-30 years).

When i move into the new place, I would then rent out my current one-bedroom city-center place (I can get >1k/month) and apparently i wouldn't have to declare tax on the rental income as the property is mortgaged. My feeling is that that piece of property may be able to finance itself over time. Is this legal? Am I missing something?

Please let me know if this whole deal sounds feasible or if it is a dream not worth chasing after. Maybe such a venture isn't even possible at all (we're probably missing a lot of hidden costs).

All your expert opinions are very very welcome.

Thanks!

Heps

A few basic calculations...

Assuming you remortgage for 300k and by some miracle you can cover repayments with rent (very unlikely), then we can look at the other transaction minimum loan requirement as follows...

900k (price) - (300k (remortgage cash) + 30k (savings)) = 570k required (min)

So your combined annual salary is about 66k per year (5.5pm)... so in effect you are looking to borrow at a bear minimum of 8.6 times your gross annual salary.

Add in the fact that you will continue to have a 300k mortgage/property exposure and you seem unwilling to use your little bit of savings... the outlook is not good.

You will be doing well to get 4 times earnings.

What can you borrow?

Well the [broken link removed] suggests a maximum of 291k borrowing. So added to your 300k and 30k, you are looking at approx. 620k being your max price limit.

Obviously this assumes rent = repayments (unlikely) and that you can convince the bank.

If you really wanted a bigger budget, perhaps selling the apartment (+50k to max price) might be an option.

Sorry to be so negative, but you asked for a straight reply. BTW: I have assumed you have (nor your partner) have any other significant assets.

And you will have to notify the Tax authorities whether you like it or not. In fact if your rental income equals your your mortgage interest, you are losing on this part or in fact making a profit, the taxman must be notified or you could risk and give youirself probably the largest headache you could ever achieve by directing a Revenue Audit on to yourself. May not happen in the current year but at any time in the future.

Thanks CGorman for your reply. i prefer a negative reply to a falsely positive one! (Which is why I posted here).

One thing though... our income will increase with each passing year and in fact it will probably double within 5 years. Does this fact have any leverage to a bank or are we still building sandcastles in the air?

Also is it true that if a property is mortgaged, I can rent it out without having to claim tax legally?

I like straight answers, so go on and hit me.

mercman said:

And you will have to notify the Tax authorities whether you like it or not. In fact if your rental income equals your your mortgage interest, you are losing on this part or in fact making a profit, the taxman must be notified or you could risk and give youirself probably the largest headache you could ever achieve by directing a Revenue Audit on to yourself. May not happen in the current year but at any time in the future.

Click to expand...

Thanks mercman. I understand that either way I have to notify the tax authorities. don't get me wrong I have no intention of avoiding them! I'm just wondering if I would be slammed with paying the full amount of tax from renting out a place if it is being mortgaged. Someone told me that I wouldn't have to pay tax because I don't fully own the place... but I just wanted to check to be sure to be sure.

Heppie -- The banks will work on your existing salary coupled with your present position and job security -- nothing more or nothing less.

Whoever told you concerning rent the property and the mortgage issue has not got a clue. It is as already posted.

Hey Mercman thanks for your reply again. Actually in fairness to this friend of mine... he never suggested anything about repaying mortgages with rents etc. (He actually works in a bank himself) All he did was ask us why we didn't consider remortgaging the place when renting it out so we could avoid paying tax (we are in the higher tax bracket). I ended up stroking my chin because I didn't know this was possible and I had been renting it with tax and all in the past. All I wanted to know was whether this was true or not...

On another issue, the figure of 66k per year is a figure after tax. Am I right in assuming that the loan is based on your net salary and not your gross salary? If it works by gross salary then the combined salary would be significantly higher (maybe we could then afford the place...)

Sorry for making it all so messy! I still appreciate all your good opinions though...

Thx,

Heps

Heppie. No need to apologise. The circumstances are, and you must check with your accountant, is that the interest cost of your mortgage plus any costs directly incurred for the property can be offset against the rental Income.

Regarding the Salary AFAIK the banks operate on the Gross figure when assessing for a Mortgage. Best way to evaluate your own circumstance is to put the proposal to the Bank and you will find out fairly quickly. Remember the mortgae and lending market is changing day by day.

Mercman you are a fountain of knowledge. Thanks for your patience and help! Hopefully it runs by a gross salary amount so we might afford this place (Its actually more likely to be around 800-850k)

Can I just check about the offsetting interest/costs of mortgage/property against rental income... Does that only apply if I am also living in the said property or can I use the rent to offset while I live in a different place as well?

You can only offset the interest on borrowings used to buy, improve or renovate a property against rental income. By raising a mortgage on an unencumbered property which is to be transferred from your main residence to an investment property you will 'suffer' a double whammy, no tax relief on the interest as it's not your residence and full tax payable at 42% on the rental income with no offset (excluding minor deductions such as management charges, depreciation on fixtures and fittings, etc). If you are serious about buying the new property sell your apartment first.

Sarah W.

Hi Sarah, thanks for spelling it out nice and clear. Looks like the rental option won't work so well but at least it can help finance some of he deficit if I need to remortagage the place to help free up some $$$. Some rental income is at least better than no income!

I really don't want to sell the current place as I consider it one of the best investment areas in Dublin and will always have the potential to rent well at any time of year. Saying so, we could probably find enough money between us to start a 92% mortgage for the place we are interested in (borrowed from family) but it would pretty much leave us penniless and very stretched.

Isn't it still possible for us to remortgage the current place to free up some cash for a downpayment on the new place while allowing us a bit of cash-in-hand for other things? We can probably repay 2/3 of the remortgage immediately as we don't need the full 300k (if that's what we get). Besides, we are earning a joint 66k/year after tax and this will only increase with each passing year... Surely selling the current place isn't the most viable solution... or is it? I think I stand to lose on the long run if I sell this place

Call me naive!!!

Heppie

Call me naive!!!

Click to expand...

I wouldn't do that. It would be an understatement.

That "best investment" of yours will bleed you under the scenario you are considering.

If you manage to rent it 12 months per year (and there is a glut at the moment) ypu should expect to earn around 2% per annum after tax - that is 3% per annum at 40% marginal tax rate (as someone mentioned, any interest cost will not be allowable deductions for tax purposes). That is before you pay for maintenance and upkeep. Why would you do that? Sell it and stick it in the bank for 4-5% after DIRT.

On the other side you will be taking on €900k in debt. That will cost around €45,000 per annum in interest payments to support. Even taking into account that you might be able to get €6.000-7,000 after tax from you apartment, that strikes me as stretching to say the least for somone earning less than €70,000 per annum (combined). add 2% to interest rates (a sensible stress test) and that €45,000 goes up to €63,000. You could be wiped out.

ALso consider the confidence you seem to have about job security. Ireland is at the early stages of a recession. Do you and your partner work in the public sector? If not, don't be blase about job security.

Why do you think you stand to lose in the "long run"? The best indicator of long run potential returns is revealed in the gross yield. At around 3% per annum at the moment even after price fall to date, Irish residential property looks like a dog with fleas.

No, not naive. Mad.

Regardless, under the present climate lenders are behaving more rationally. They will follow the logic I have outlined and probably unlikely to extend to you around 9 times your gross earnings.

Heppie said:

Thanks CGorman for your reply. i prefer a negative reply to a falsely positive one! (Which is why I posted here).

One thing though... our income will increase with each passing year and in fact it will probably double within 5 years. Does this fact have any leverage to a bank or are we still building sandcastles in the air?

Click to expand...

Doesnt really make any odds... if the banks limit is 4.5 times gross... thats the limit, very little leeway around this. Maybe if your friendly with local manager and have an incrediably stable job with certain increases (e.g. teaching), then maybe the limit can be pushed up somewhat

Regarding my above calculations, they were based on 66k being gross, since it's your net; I do apologise, you can increase the max sum you can borrow somewhat (e.g. approx. 4.5 times your GROSS)

Either way, take the advice regarding rent/tax outlined by the other posters - as they have outlined; despite your property being what appears to be a perfect investment - it's actually not that prudent due to the severe tax implications.