Pay off mortgage or better keep to offset against rental income?

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Seastheday

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Hi all,
1. 54 months remaining on a mortgage for a house that I rent annually.
2. Mortgage is a tracker with Ptsb at +0.8% on original loan of €159,000 which has been steadily increasing with recent ECB increases
3. Latest notification this week has signallled an increase to just under €800 per month total mortgage payment at a rate of 3.3%.
4. My best estimate is that there is approx €44,285 remaining (will be confirmed when annual statement arrives in Jan 2023)

I have always operated to the model that due to being on a really good tracker and being able to offset 75% of the interest paid against the tax owed on rental income it made sense to not over pay or pay it off early.

My question is now that the rates are increasing to much higher levels, and I suspect more to come, at what point does it make more sense to pay off the mortgage versus keeping it to be able to offset the mortgage interest against the rent? As the mortgage reaches its maturity it is now mainly capital that I am paying back so my gut says if I could clear it off it would be a smarter financial move. Incorrect assumption? Is there a simple calculation that could be shared to help steer me or a business rationale shared that explains why it would be best to stick versus clear it off?

Thanks for any advice on the best course of action
 
I suggest the first question is, what is the money to pay it off doing now? If it is sitting in an account earning very little interest then pay off the mortgage. If you will need that money for something else don't pay off the mortgage
 
Seastheday said:
€44,285 remaining
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Seastheday said:
3.3%.
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It's not a huge decision either way.

You are paying €1,400 interest this year, and less next year as you reduce the capital.

After tax, it is costing you about 2%.

Can you get a risk-free, tax-free return of 2% somewhere? Probably not.

cremeegg said:
what is the money to pay it off doing now?
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So, if you have it in a current account earning nothing, then pay it off.

If you have it in a safe deposit account earning 4%, leave it there.

If you have to sell shares to clear the mortgage, probably don't bother selling the shares.

Brendan
 
His rate is 3.3% so assuming he's on top rare if tax, with tax relief on interest @ 100% (not your 75% quoted) the load is costing him net 1.65%. he either pays the bank interest or else pays Revenue more tax.
 
PebbleBeach2020 said:
His rate is 3.3% so assuming he's on top rare if tax, with tax relief on interest @ 100% (not your 75% quoted) the load is costing him net 1.65%. he either pays the bank interest or else pays Revenue more tax.
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This seems wrong.

If he pays €1,400 interest he reduces his tax bill by approx €700. Net cost to OP €700.
If he pays off his mortgage, no interest cost, no tax relief. Net cost to OP NIL
 
Seastheday said:
Hi all,
1. 54 months remaining on a mortgage for a house that I rent annually.
2. Mortgage is a tracker with Ptsb at +0.8% on original loan of €159,000 which has been steadily increasing with recent ECB increases
3. Latest notification this week has signallled an increase to just under €800 per month total mortgage payment at a rate of 3.3%.
4. My best estimate is that there is approx €44,285 remaining (will be confirmed when annual statement arrives in Jan 2023)

I have always operated to the model that due to being on a really good tracker and being able to offset 75% of the interest paid against the tax owed on rental income it made sense to not over pay or pay it off early.

My question is now that the rates are increasing to much higher levels, and I suspect more to come, at what point does it make more sense to pay off the mortgage versus keeping it to be able to offset the mortgage interest against the rent? As the mortgage reaches its maturity it is now mainly capital that I am paying back so my gut says if I could clear it off it would be a smarter financial move. Incorrect assumption? Is there a simple calculation that could be shared to help steer me or a business rationale shared that explains why it would be best to stick versus clear it off?

Thanks for any advice on the best course of action
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Was in similar position early in the year. Had tracker .75. Payed final 70k off BTL.
Just felt good to owe nothing.
 
cremeegg said:
This seems wrong.

If he pays €1,400 interest he reduces his tax bill by approx €700. Net cost to OP €700.
If he pays off his mortgage, no interest cost, no tax relief. Net cost to OP NIL
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You have 10000 rental income and 2000 bank interest. You pay for easy calculation 4000 tax (half of 8000). You have 4000.

With no mortgage. You have 10000 rental income. You pay 5000 tax (half of 10000). You have 5000.

The interest saved (2000) you pay half and taxman pays half.
 
This odd one comes up from time to time where people have this weird sense that it’s somehow good to incur a cost so you can get a tax deduction for it.

3.3% on €44k with 100% deductibility (I’m assuming the OP made a mistake but it could be that 25% of the loan was used for other purposes).

So a “real” cost of 1.65% or €725ish.

BOI and the like aren’t paying 1.65% for deposits and interest is subject to DIRT.

I’d pay it off.
 
The only reason not to pay it off is if you have a fair probability of needing the cash in the near term.

Once the mortgage is cleared it's cleared and 1.65% isn't a huge opportunity cost.

But in general it makes sense to pay it off.
 
Brendan Burgess said:
Yeah and very hard to shift.

People seem to prefer paying money to banks rather than into the Exchequer.

Brendan
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If it’s a straight choice between paying the same amount to revenue v bank is there an argument that it’s better to hold cash rather than pay off the mortgage? I am thinking of potential investment opportunities that might come up? I guess inflation is still eroding the value of that cash on deposit.
 
Midtown said:
is there an argument that it’s better to hold cash rather than pay off the mortgage?
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Yes, as cremeegg put it

cremeegg said:
If you will need that money for something else don't pay off the mortgage
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Borrowing at a net 2% for something else is good value.

For example, it would make no sense to pay off this mortgage and then borrow €40,000 to buy a new car.

Brendan
 
Thank you very much for all the helpful replies. My mistake on the 75% versus 100% deductible - sorry for that.

Based on everything shared above it seems clear that the best option is to go ahead and pay it off. I have the money available sitting on deposit from a recent share sale that made sense to pull the trigger on when it hit a high marker ( and has since dropped again) so I think it will be a good next move to use this money and clear the loan.

Thanks again, really appreciate the level of the advice shared especially on New Year’s Eve.

Best to all for 2023 and thanks Brendan and all the regular contributors for the posts made every week. I am a daily/weekly reader and really enjoy the site!
 
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