Mortgage on Rental Property - pay capital or not?

T

Tweety

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Hi,

We have a rental property with a 25 year mortgage of €255,000. This mortgage is interest only for the first 3 years (fixed at 4.99% for 1 year).

As we are currently only paying interest, my question is this:
Should we save separately the amount of capital we would be paying if it was an annuity mortgage and pay this off at the end of each fixed period??
or
Should we continue to pay interest only for the 3 years & worry about the capital when the 3 years are up??

My fear is that as we will only have 22 years left on the mortgage at that stage, if we have to revert to annuity the repayments will be quite high as it will be the full mortgage spread over less time?

Any advice welcome.

Thanks,
Tweety
 
We do not have a mortgage on our PPR at the moment.... although we may wish to put an extension on in the coming years which may require us to get a small mortgage on same.

Would it still be advisable to stick to Interest only on the RIP?
 
The interest on an interest only loan of €255K at 5% is c. €13K p.a. If you are collecting €13K p.a. or more in rental income then surely it would make sense not to pay off any capital since you are able to write off 100% of interest against rental income?

What is your business plan with this investment property - i.e. where are you expecting to make a profit - on rental income, or capital appreciation, or both etc.?
 
ClubMan said:
The interest on an interest only loan of €255K at 5% is c. €13K p.a. If you are collecting €13K p.a. or more in rental income then surely it would make sense not to pay off any capital since you are able to write off 100% of interest against rental income?
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Not necessarily. In general, you are better off cutting your overheads to the minimum, if and when you can. If there is tax relief available on an overhead, it is still worth cutting the overhead. In this case, the overhead is bank interest. Every €1 you spend on interest will only attract at most, 41c in tax relief. You will still be 59c worse off.
 
We originally bought about 4 years ago as a pension ... not sure now this was the right way to go but it seemed a good idea at the time. We were not in it for a quick profit .. we had intended keeping it for the 25 yrs and paying off the mortgage. Then we might have either sold it and used the proceeds to invest somewhere as a pension or held it and used the rental income as a source of income for retirement.
 
ubiquitous said:
Not necessarily. In general, you are better off cutting your overheads to the minimum, if and when you can. If there is tax relief available on an overhead, it is still worth cutting the overhead. In this case, the overhead is bank interest. Every €1 you spend on interest will only attract at most, 41c in tax relief. You will still be 59c worse off.
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Fair enough. Good point.
 
Sorry, I forgot to mention that the monthly rental income is slightly short of the monthly interest figure so we are topping it up a little together with any capital payments we might make.
 
It's a tough one - I think it depends on your own current financial situation. If you're happy with your current level of savings - short-term and longterm and have some extra money to put by then it's a consideration. It also depends on your risk status (by paying off the capital you're lowering your exposure to risk).

You could save it separately ready to pay off some of the capital if you needed to i.e. if interest rates rise suddenly.

Then you would have to weigh up the benefit of paying the extra each month v. where else you could invest the extra cash.

In general I think I would wait until the rent pays more than the mortgage (fingers crossed that it does) and use that excess at the end of each year to pay off some of the capital if you wanted to especially as you're in it for the longterm.
 
Tweety said:
Sorry, I forgot to mention that the monthly rental income is slightly short of the monthly interest figure so we are topping it up a little together with any capital payments we might make.
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So your rental income losses are eating into your gross "paper" capital gains (if any) to date? Doesn't sound great...
 
ubiquitous said:
Not necessarily. In general, you are better off cutting your overheads to the minimum, if and when you can. If there is tax relief available on an overhead, it is still worth cutting the overhead. In this case, the overhead is bank interest. Every €1 you spend on interest will only attract at most, 41c in tax relief. You will still be 59c worse off.
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I'm not sure this is true;

For every €100 the op pays of the investment mortgage he saves interest of (€4.99 minus the 47%(41% + 6%prsi) he would have saved anyway) so real saving is only €2.64.
If the op could get 5% on deposit for every €100 the return would be 5.00 minus 20% dirt. €4.00. €1.36 better off.

So I would have thought it depends on what alternative return the op can get
 
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