Does it make more sense to stay on a higher mortgage rate?

phantom60

Registered User
Messages
48
Mortgage balance on my rental property is €319,587, with 28 years left.
I’m on a 4% variable interest rate, paying €1,507 per month.

I have the option of 2yr fixed at 2.45%, paying €1,318 per month or 4yr/5yr fixed @ 2.75%, paying €1,368 per month.

I’m currently receiving €2000 per month rental income = €24,000 per year gross rental income earned.

Approx mortgage interest for next year would be as follows:
  • €12,560 @ 4%
  • €8,600 @ 2.75%
  • €7,660 @ 2.45%

I’ll be paying tax on the higher rate on the rental income so using an overall income tax rate of 52% gives the following tax bills (not taking into account other allowable expenses):

  • (24000 – 12560) * 52% = 5950 tax owed
  • (24000 – 8600) * 52% = 8010 tax owed
  • (24000 – 7660) * 52% = 8500 tax owed

Monthly gain from changing mortgage rate would be as follows:
  • 0
  • €139 per month = 1668
  • €139 per month = 2268
These don’t cover the amount of extra tax I would owe.

Even though getting the lower mortgage rates would mean a lower monthly mortgage repayment it would also mean a higher tax bill at the end of the year.
So based on this it seems to make more sense for me to stay on the higher mortgage rate.

Am I correct here or am I missing something ?

Thanks :)
 

Protocol

Frequent Poster
Messages
2,944
Save 4,900 in interest.

Pay tax on the extra net rental profits.

Profits up by 4,900, tax up by approx 2,550.
 

Delboy

Frequent Poster
Messages
1,578
I’m on a 4% variable interest rate, paying €1,507 per month.

I have the option of 2yr fixed at 2.45%, paying €1,318 per month or 4yr/5yr fixed @ 2.75%, paying €1,368 per month.
May I ask where your getting a rate like that on an investor mortgage (if that is what it is on)?
 

admin

Administrator
Messages
8
Yes. You are missing something.

You are comparing the savings in repayments will the extra tax. You should be comparing the savings in interest.

When the interest rate reduces , the repayment does not fall by the full amount as the capital element of the repayment increases.

I have not verified your repayment calculations but they might be a bit out.

Brendan
 

Homelandfan

Registered User
Messages
12
Hi Phantom,
I think you may have a typo - should that read?
------------
Monthly gain from changing mortgage rate would be as follows:
  • 0
  • €139 per month = 1668
  • €189 per month = 2268?
Also when you say "These don’t cover the amount of extra tax I would owe. " I think you have that wrong - these figures do include the extra tax
so as Protocol says, with the 2.45% 2-year fix you would save 4,900 in interest per year but pay 2550 extra tax, leaving you 2350 approx better off in year 1 and similar in year 2
 

Gordon Gekko

Frequent Poster
Messages
3,655
This is a cousin of the old chestnut that borrowing saves money because you get a tax deduction.

Income €100
Interest (€30)
Tax (€35)

Cash at Bank €35

If the interest is only €20, Tax does of course increase to €40, but more importantly ‘Cash at Bank’ increases to €40.
 

landlord

Frequent Poster
Messages
875
When you calculate tax owed you must first deduct expenses, not only mortgage interest, but also Managment fees, letting fees, RTB fees, repairs, capital allowances etc.....This may significantly reduce your tax liability.
 

moneymakeover

Frequent Poster
Messages
484
With any of those amounts of interest, it's hard to believe you have any profit

You will have the USC as that can't be avoided
 

phantom60

Registered User
Messages
48
Thanks all for the replies. I was making the mistake of just looking at the rental income and the tax to be paid. I wasn't factoring in the amount of interest I'd be saving, the capital repayments or the mortgage balance at the end of the 2/4 years.

Thanks for pointing me in the right direction.
I guess now the decision is whether to go for 2 or 4 years. I think I'm leaning towards 2 years in the hope that rates will be somewhat similar then going by opinions on other threads.
 

elcato

Moderator
Messages
3,174
As long as you use the same bank for changing rates there should be no problem but as Leo states do they now have a different address for you and will smell a rat ? If your current tenants keep your mail for you this would avoid that as well of course.
 
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