Pay extra off negative equity buy to let or save for college?

Income: none, stay at home parent
Spouse: aged 40, income: €75k, private sector employment, he pays into company pension scheme, cancelled avc's few years ago.
Take home pa: €4038 pm

In general: saving, €17,000 in credit union
No loans, pay credit card off every month

Value of home: €330,000, 23 yrs left, €287,000 outstanding
Interest rate: tracker .85%, €993pm with PTSB

Value of buy to let: €120,000, 13 yrs left, owe €145,000 with PTSB
Interest rate: 5.8%, €1,363 pm, €625 received in rent we add €738 to pay mortgage, we bought this house as investment but paid interest only for few years due to worry re uncertainty of husbands job, things have settled recently so we started paying back capital last year.

We have three children aged 12, 10 and 3

I think we have enough in the credit union savings for a "rainy day" and think we should do something else with the 300/400 we can save monthly. My question is should we:

A. Continue to pay the buy to let mortgage as is and save the extra money separately for kids college. The money should be safer that way as who knows what way house prices will go. If we can manage to hold onto second house we could sell it when paid for and possibly clear or take big chunk off our own house

Or

B. Add extra money each month to buy to let therefore getting it out of negative equity quicker, giving us option to sell it sooner, hoping we could get back some of money put into it when college time comes, ie in six years.

Many thanks for your opinions.

Unlike many of the questions posted on here, which involve personal opinions about risk vs security or expectations of the future, I think that this is actually a fairly easy question.

You should pay down the buy to let mortgage. Nowhere else will you get a risk free, after tax return of 5.8%

Thanks cremegg we're going to take your advice.

Maryann

I think that the issues are bigger than the question you have asked.

You are getting €625 a month in rent or €7,500 a year

The interest on the current value of €120,000 is €7,000 a year

After expenses, you are losing money on this. So, it does not look like a good investment to me at all. So you should get rid of it as quickly as possible.

You have €137k between cash and the sales proceeds, which will leave you with a shortfall of around €8k.

At €738 a month, you will have that paid off within a year.

You will have reduced your risk.
You will have eliminated your expensive borrowings.
You will have eliminated the hassle and risk of being a landlord.
If you ever choose to trade up to a larger home, you will find it easier to get a new mortgage.

You will free up cash flow of €738 per month which you can invest in the stockmarket and get a much better return. It will also be a much more liquid investment which would eliminate your need for a rainy day fund.

Or you could put the extra cash flow in your pension fund.

Brendan

If you decide to hold onto your buy to let, you should still use your Credit Union savings to pay down the buy to let.

It's crazy paying 5.8% to borrow money which you then put in a Credit Union at probably 0.5%

That is costing you about €1,000 a year to have a rainy day fund.

With a reliable job and good monthly savings, you do not need such a large fund, unless you anticipate some big expenditure like a new car in the next year or so.

If you do need money suddenly, you can get it on your credit card or by bank overdraft and pay it down quickly.

Brendan

Maryann it's better to get a few different opinions before deciding what to do.

I disagree with putting any more in the pension, we never know what way the government might go after this in the future. We also don't ever know if pension funds will actually be there for us (remember Waterford workers).

I'd agree with Cremeeg about overpaying the investment. To a level where the rent is covering most costs. When out of NE negotiate a better interest rate.

What about you though, no income, I realise stay at home parents have some rights re PRSI contributions, but you need to think about that for your future and the state contributory pension is very important in that regard. Don't take your eye off the ball in relation to this. Potentially precarious that only one person is earning. Youngest child will be going to school soon.

I presume there is life insurance on the investment, given it's NE that's very important.

You haven't mentioned future costs, kids education for example? How is this to be funded. In 13 years or less (if you overpay) you may have 600 a month from the rental, (less tax) or you can sell the property and have a lump sum of around 120K for education or old age.

Bronte said:

I presume there is life insurance on the investment, given it's NE that's very important.

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There is absolutely no need for life insurance on the investment. If the breadwinner dies, then sell the investment.

If it were in huge negative equity, it might be worth taking out life insurance. But as you can pay off the NE, then it's not needed.

Brendan

Well if that happens BB she would be left with just a house and state benefits, and maybe an income from the husband's job. If however she had what is relatively cheap life insurance she would have a paid off house in addition to the home, plus her 17K.

It may be the case that her husband's in work benefits are fantastic of course. And I'd recommend life insurance on both their lives for the investment.

Many thanks for the advice guys.

The plan for now is to use the majority of the savings to bring down the NE on buy to let and continue to pay it until it's out of negative equity. I think wer more likely to get rid of it then as Brendan suggests as its a constant worry and it's going to need money putting into it shortly, money we don't want to spend on it.

Bronte, I am planning on going back to work part time in the next few years so that will bring in extra money. I paid into two company pensions during the years before I gave up work, they aren't worth a whole lot but I'm sure we'll be glad of them when the time comes. My husband has very good sickness/death/pension benefits thru work and we have life assurance for 500k on both of us.

I always thought it was prudent to have savings in case of unexpected expenses and am happy to hear we don't need to have so much sitting there earning little interest. We have no loans other than mortgages so we could borrow/use credit card short term if need be, as Brendan suggests.

Thanks again, Maryann