Am I bankrupt?

[shej]

Hi
I purchased 2 investment properties in 2007 and have a tracker mortgage for 25 yrs with PTSB, negotiated interest only loan for first 10 yrs. Both rented generating €1,400 per month which covers current interest only repayments of €1,200 (primarily due to low ECB rate).

Capital outstanding on mortgage €650K, therefore in 5-6 years time PTSB will be looking for capital repayments.

Through a scheme available at the time, I claimed the VAT back on the purchase price (€85,000) which I pay back to the revenue based on the rent received.

Currently I owe revenue €78,000.

I have c.€65,000 (i.e. the VAT money) in cash deposited in various deposit accounts earning c 4% interest p.a. I estimate the houses are now valued at a combined €320K (even if could be sold).

My own principle private residence is worth €300k with an outstanding mortgage of €250k with 10 yrs left on mortgage (standard varibale rate with AIB). My wife and I both work in public sector with a combined income of €150K so jobs secure. Since 2008 and the 'cutbacks and taxes' our take home pay has dropped to €80k nett.

With new baby childcare costs, motoring costs, home mortgage etc very little disposable income now at the end of each month.
C
urrently I have enough expenses to offset any tax implications on rental income but that will probably stop over next couple of years therefore with extra charges i.e household charges, tax relief on mortgage interest cut to 75%, PRSI on rental income etc and if property becomes vacant for a period of time I cant see how I can make capital payments on the two investment properties in 5-6 yrs time,

Should I be looking at the new bankrupcy options?

I am really at my wits end over this overhang of debt, any advice most welcome.

 

[puppy]

I don't think so. (But I'm no expert)

Do you know what the P+I will be at the end of the interest only period?
Just taking one simple thing. If you're paying childcare now, it is going to be a lot less in five years when the wee one is at school, how much of the repayment would your childcare costs cover.

Being an optimist by nature, I'd say the worm will have turned by 2017.

The people that know what they're talking about will be along shortly.

 

[44brendan]

The question is not are you bankrupt, but whether you should be declaring bankruptcy under the new scheme!

You currently have a satisfactory arrangement with PTSB on the 2 investment properties. I.e Forget the negative equity as it's irrelevant at this time. You can continue meeting the interest from the rent until expiry of current agreement. Park that problem for the moment. It's not a priority.

Vat arrangement is very unusual. I've been involved in property financing for some time & I've never come across such an arrangement with Revenue. Are/were you a builder? I.e. In that instance the VAT should have become payable following the RIPS being rented out. Are you currently on a repayment agreement with the Revenue?

Your income appears more than adequate to meet mortgage payment & living expenses. Even with child expenses you should have a reasonable surplus. Have you completed a household budget?

Bottom line from this post is that you are in a better position than most and appear to be overly concerned as to what will happen in 5 years time. You have plenty of time now to prepare for this and that is what I would recommend.

Foregt bankruptcy at the moment as given your income it makes no sense.

 

[Joe_90]

You need to establish your cap & int repayment amount then you can consider your position. Your net salary is €6,666 plus €1400 rent.

In relation to the VAT "scheme" landlords of residential property were entitled prior to, 2 April 2007, waive their exemption for short term lettings and recover the VAT on the purchase price of the property. They have to charge VAT at 23% on letting and remit it to the Collector General. These waiver continue even under the new VAT rules.

 

[shej]

Hi all

Thanks Joe90 for answering the VAT query, I estimate that in 5-6 yrs time my C+I repayments will be c. €5000 pm and thats at current low ECB (my tracker is plus 0.9% over ECB rate)
As regards my nett salary both my partner and i expect a further cut in take home per month to decrease by c. €800 this year leaving us with c. €5800 nett per month from this year onwards. My current basic essential monthly outgoings are €2600 on mortgage (high I understand but have reduced term by 7 years since taking out mortgage), motoring (2 cars needed due to work shift patterns and commuting) €500, utilities/insurances €600, childcare €1100 leaving roughly €1000 between us as '''disposable" in a very loose sense-therefore if simply existed and lived like hermit the most I could possibly afford to put towards investment mortgages would be €1000 per month. I know that in 10 yrs own mortgage will finish and childcare will reduce though for the period from yr 6 to 10 will not be able to meet repayments!!
Also the ECB will eventually rise and with extra charges etc. as I mentioned above I dont see figures adding up

 

[orka]

Your main issue seems to be the time period between when capital should kick in on the investment mortgages (5-6 year) and the end of you PPR mortgage (10 years). You can comfortably afford your current repayments and when your PPR mortgage is gone, you will comfortably afford C+I on the investment mortgages - at 2.5%, monthly repayments on 620K over 15 years will be about 4K = 2,600 after rent which is about the same as your current mortgage. As others have pointed out, a lot can happen before then so you really shouldn't stress yourself about it - you are nowhere near bankrupt (part of your apparent cashflow issues come from choosing to pay off your mortgage quickly - this is consuming quite a bit extra by choice). If it comes to it, it is hard to see a bank doing anything drastic in terms of repossession or bankruptcy if you can point out that it is only a matter of time before you can start meeting your commitments in full.
Time and inflation are your friends - house prices will eventually creep back upwards, salaries, net pay and rents will creep upwards but your mortgage liabilities are fixed so will become relatively more affordable.

 

[shej]

Thanks for that orca,
One thing I didn't include in my cash-flow is groceries so effectively we have c 1000 to feed ourselves and any leisure activity. Basically I'm worried that I'll have this same cash flow for my entire working life! I know I took on IPs myself but the primary incentive was hhe governments incentive with 100% tax relief on mortgage interest,
Maybe just hope things improve

 

[Bronte]

Your current take home pay is 5800 + 800 = 6700

6700 less mortgage of 2600 is 4100

Outgoings

Cars 500
Utilities and Insurance 600
Childcare 1100
Other 1000

That's 3200

4100 less 3200 is 900

What happens the 900, can you confirm how much each car costs could you get rid of one car, also can you itemise the utilities and insurances.

You mentioned shifts, if you both do different shifts why is childcare so high.

Where did all the excess income you had go, from when your salaries were high?

Seems a less than hermit lifestyle, you are overpaying your mortgage, can afford all your utilites and food bills and able to run 2 cars and pay childcare.

The VAT I don't understand.

You realise that you would lose your home if you try to default on the investment properties. What exactly is the arrangment when the 10 years is up. How did you think you were going to pay back the mortgage? If you sold them would you be able to service from your salaries the negative equity (if it were say a 20 year term loan at the same rate as the current mortgage). If you can make savings now to pay off some of the capital outstanding you will be in a far better position to rrepay the mortgage out of rent. Would the bank let you pay back capital now without penalty, I'd imagine they would. Also it would probably be better to return to paying your home loan at normal rates and using the excess money to pay down the investment mortgages.

Roughly doing figures you seem to have an extra 1K a month, plus on your own mortgage another 1K so by 12 that's 24K annually by 5 years 120K you are able right now to pay back? That's bringing your negative equity down a lot, not to mention the interest savings and getting you closer to a doable situation.