Part Pay-Off Investment Mortgage or invest.

Hi,

Firstly hope this is the right forum to post this question in.

Here is a current situation with (my mothers) rental property.. Interest only mortgage of €225k at 5.15%.. Current rental income of €735 per month. No other expenses except house insurance at € 45 per month. No other rental income from any other source. House value €255k

Now here is the dilemma.. have lump sum to invest which could actually pay off the mortgage - however then a tax situation would arise. So question really is should she (a) pay off mortgage (b) part pay something off and if so how much? (c) invest elsewhere.

Two things worth noting..
1. House was bought with the view that she might actually downsize from her existing home in future years and live there as location is excellent.

2. As she is a widow she does not really want to invest long term/ high risk or in equities.

Can anybody guide us in the right direction please?

Thank you for taking the time to read this.

It all depends on your mothers age I guess.

By paying off the mortgage effectively what you are douing is giving yourself a guaranteed return of 5.15% net (6.4375% Gross).
It is a guaranteed investment in the sense that you avoid paying out interest next year (and every year) as you have paid that back to the bank.

So - you've gotta ask yourself - do you fancy your chances at getting a return greater than 6.4375% elsewhere?

If you used a lump sum with proper gearing and research you nearly definitely would.
But it depends on the age of your mother and your appetite for risk.

The lump sum available could pay off the mortgage if I reading you right?

Mortgage is €225K int only. Rent €735.

You could split the lump sum.

Pay off half of mortgage and switch to full annunity payments. Rent would now (near enough) cover full payments - and so mortage would start to be paid off.

Keep other half of lump sum to invest, or simply leave in an account with a decent return (rabo/northern rock). Now your mother has mortgage being paid off on investment property and has a decent lump sum/rainy day money in the bank.

Just a thought.

Thank You for your replies..

Yes, splitting the lump sum is what I was thinking of... if I have calculated properly she can pay €75k off the loan and invest the balance. This way she still does not put herself into a taxable position on the rental income.

My mother is in her late 60's btw. BOI (her bank)are offering 4% for 1 year fixed on her lump sum... not sure if this is so great though. She is a bit nervous of online banks although I have opened for her a Rabo(10K @ 5%).

As I haved posted earlier equities are out as are any high risk investments. Any other ideas are greatly welcomed.

Armada said:

My mother is in her late 60's btw. BOI (her bank)are offering 4% for 1 year fixed on her lump sum... not sure if this is so great though. She is a bit nervous of online banks although I have opened for her a Rabo(10K @ 5%).

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Her nervousness is irrational, Rabo are regarded as having a better credit rating than any Irish bank. If you want your cash at a moments notice, you won't do much better than Rabo.

It's not irrational for people with no internet access or the ability to use same to avoid Rabo. They do exist. There are other high rate deposit accounts on offer that don't require internet access if that is a problem. Check the Financial Best Buys forum.