Increase monthly payment of PPR or investment property ?

Hi ,

I am buying new PPR (B) and remortgaging my existing appartment (A) to investment ( Interst only ) after releasing some equity from (A).

* My existing appartment valued 4 mnths ago @ 350K --> 296K mortgage ( 80% of value ) Interst only 4.35 % , to be turned to investment , paying 1073 / mnth.
* Buying new PPR for 430k --> mortgage of 289K ( 67% of value) , interset 3.8% tracker , 1346 / mnth over 30 years or 1493 / mnth over 25yrs .

I made my calculations and I beleive I can pay up to 1650/mnth for mortgage including extras ( insurance cover ,...etc) .

Since interst on investment property is higher than interst on PPR ( 4.35% vs 3.8% ) , should I reduce life of PPR mortgage to 25 yrs for example or reduce the mortgage amount of investment property ?

The value of my existing appartment ( A ) today is higher than 350K , guess around 370K , would it make difference if I show this difference to the bank , hoping that will reduce my PPR mortgage amount (289K) and might help with calculating CGT when I sell this appartment in a year time or two ?

My apology if you find my questions bit contradicting , I am bit confused , just looking for the best cinareo for my case .

appreciate your feedbacks

hak.

I would reduce term and loan amount on ppr and try and get largest ltv (even if it means getting new valuation on investment property) and term on investment due to more favourable tax treatment of investment property mortgage.

markowitzman said:

I would reduce term and loan amount on ppr and try and get largest ltv (even if it means getting new valuation on investment property) and term on investment due to more favourable tax treatment of investment property mortgage.

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No, no, no! You can only offset the interest on monies used to "purchase, improve or renovate" the investment property against the rental income. So whilst you are free to remortgage the apartment to whatever level you wish, within income criteria, you can only offset the interest on the original mortgage balance.

Sarah

www.rea.ie

SarahW is correct.

Yes, the valuation of your current [now to be investment] property at the point it ceases to be your PPR is highly relevant. Get a valuation carried out when you move out. CGT liability is calculated on the increase in value, if any, between its becoming an investment property and date of any future sale.You can have retrospective valuations carried out, but these tend to be looked on with more suspicion. Have the paperwork done now and it'll save you hassle in the long run.

Don't mess with the size of the mortgage on the apartment - SarahW is right as always, and you're just storing up trouble for yourself if you change it.

With the PPR, I would suggest overpaying the mortgage - fix your payments at a certain sum, rather than shortening the term, at the moment. So long as you specify that all overpayments are to be used to reduce the capital balance of the mortgage, it will have a similar effect to reducing the term. However, the advantage is that if interest rates continue to rise, as looks decidedly possible, you have a certain amount of flexibility - you can choose to increase your overpayment to reflect the increase in the "underlying" payment, but unless they increase significantly you won't be committed to much higher payments. If, on the other hand, you reduce the term and the monthly repayment is then at the limits of affordability, you could find yourself in some difficulty if rate rises continue.

Re:Circumstances just changed before taking the mortgage-to inform the lender or not

thanks all for your valuable replies .

In fact , my circumstances have changed just yesterday (Finally , Bus Eireann has replied to us and they will pick the kids up from our door step), and we are thinking to stay in our current PPR (A) after we buy the other house (B) , and rent out the newly purchased house (B) , so everything has to change now , I guess . In this case I will not have to pay SD claw back on (A) since I am not going to rent it now.

My question is , should I speak to my lender for those changes to take place with mortgage ( I hope the bank doesn't take it negatively against me )? or the bank doesn't really care where my PPR is as long as mortgages are all paid ? Does my lender inform revenue on which property is mortgaged with "Interst-Only mortgage" which could be a conflict point with revenue ?

Appreciate your help and support
hak.

Dreamerb said:

CGT liability is calculated on the increase in value, if any, between its becoming an investment property and date of any future sale.

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This is incorrect. The CGT is calculated pro-rata the amount of time it was your ppr to amount of time investment property. (with final 12 months considered to be ppr). The current value is irrelevant

Example:
Purchased 5 years ago for 100,000
Now worth 350,000
Sell in 5 years for 500,000

CGT = (500,000 - 100,000) * 20% = 80,000
Reduce for ppr = 80,000 * ( 10 - 5 - 1)/10
Tax due = 32,000


And if values were to fall going forward...
Purchased 5 years ago for 100,000
Now worth 350,000
Sell in 5 years for 300,000

CGT = (300,000 - 100,000) * 20% = 40,000
Reduce for ppr = 40,000 * ( 10 - 5 - 1)/10
Tax due = 18,000

Thanks for that.

(Don't suppose there's any chance you could sell in 4 years? - the two 5s are a bit confusing)

So to clarify, the formula is
(total time owned - time ppr - 1)/ total time owned

so for selling after 4 years,
(9 - 5 - 1 ) / 9

Berni said:

This is incorrect. The CGT is calculated pro-rata the amount of time it was your ppr to amount of time investment property. (with final 12 months considered to be ppr). The current value is irrelevant

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Sincere and embarrassed apologies on getting that wrong , and thanks for clarifying. I can't find a detailed Revenue leaflet on this - CGT1 is silent on the matter - can you by any chance direct me to one?

hakouna said:

My question is , should I speak to my lender for those changes to take place with mortgage ( I hope the bank doesn't take it negatively against me )? or the bank doesn't really care where my PPR is as long as mortgages are all paid ? Does my lender inform revenue on which property is mortgaged with "Interst-Only mortgage" which could be a conflict point with revenue ?

Yes, speak to your lender. It may affect the rates they'll give you, and requirements for insurance, etcetera. If you look at your letter of offer, you'll almost certainly see special conditions on term life assurance (always a feature for PPR, often recommended but not a requirement for investment property), and references to it being an offer for a PPR.

Your lender will de facto inform revenue, because of the property on which you'll be claiming mortgage interest relief, so you'll need ensure everyone's clear on which is which; likewise if you rent out one property, your tenants will most probably seek tax relief on their rent - and Revenue is quite good at joining the dots! If they find apparent conflicts, they *will* come checking (I've had the "Um, what are you up to?" letter from Revenue, on acquiring an investment property - hadn't done anything wrong, but they notice things and want explanations!)

Be absolutely clear with everyone - it shouldn't affect your ability to borrow, but it'll be a dreadful headache to sort out otherwise. Do structure the loans for optimal tax benefit - it's worth taking advice on that.

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They don't have a worked example on their site, but this is the section that covers it
"Full exemption may not be due if only part of the house has been used as the individual’s residence, in which case an apportionment is made to arrive at the exempt portion of the total gain."
Page 15 http://www.revenue.ie/leaflets/cgt1.pdf deals with partial exemptions

I saw that, but I had thought it referred only to situations where part of the property had been used commercially (including, I was interested to note, where rooms have been rented - I assume this will include the rent-a-room scheme, and doubt many people will be aware of that?), rather than apportionment across the time a property had been owned in change-of-use situations. Still, I suppose it's sensible in that it avoids issues of dubious valuations - and where there's money in it, you can bet people will be optimistic about what price would have been obtained when! - and works just on the actual costs and prices achieved.