Releasing Equity in a PPR to fund a Buy to Let

D

Debaser

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Hi all!

I am in the following situation and was looking for some input....

I inherited a property in Dublin a year ago that is worth approximately €500k; I now live in that property.

I wish to hold on to the property but want to use it as collateral or to release equity from it to fund a buy-to-let mortgage on a newly purchased second property in Dublin.

I had a quick chat with a large Irish bank about this and they were pretty unhelpful and alluded to "lessons they learned from the past" regarding releasing equity to fund a BtL!!

I was approaching it from a (relatively) limited risk situation, whereby I would:
  • Release approximately €150k in equity from my PPR (c. 30% LTV);
  • Add approx €30k in cash;
  • Then borrow c. €320k to fund a new €500k BtL purchase (c. 64% LTV).

The entire portfolio would have:
  • Debt of c. €470k against value of c. €1,000k;
  • Full P&I mortgage repayments of 20yr term at 5% would be c. €3,100 p/m;
  • Interest only repayments would be c. €1.958;
  • Rental income on both properties, at 100% occupancy, would be c. €5,700 p/m;
    • 75% of the €320k mortgage interest would be tax deductible (approx. €1,125);
  • With my own income providing a buffer on top of that at around €4,500 p/m (net)

Does anybody have experience of this type of arrangement and how best I might proceed?

(I understand the various risks involved and am comfortable with the risk profile.)

Thank you!

Debaser.
 
Banks don't allow equity releases to be used to purchase additional properties. BTL require 30% down, you are proposing putting down 6%.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
A few initial comments

1) You can claim tax relief on 75% of the interest on both loans and not just on the one secured on the rental property. Although the other is secured on your home that is irrelevant. The loan is being used to buy a buy to let.

2) You are living in the €500k property but you say "Rental income on both properties, at 100% occupancy, would be c. €5,700 p/m;"
Are you planning to rent your current property out?

3) Usually, the yield on €500k properties is not as good as the yield on cheaper properties.
You should work out the yield on the new property on its own as follows:
Rent: €20,000
Expenses and voids: €4,000
Interest: €23k (470k@5%)
Loss before tax €7,000
Tax nil (€16k - 20@75% €15k)

It doesn't look like a good venture to me.

Brendan
 
I agree that the risk is low as the gearing will be only around 50%.

But why take that risk at all? It doesn't look like a profitable investment.

Many people are in big difficulty now because they invested in property when they were already comfortably off. I am glad to see the lender refusing this.

If you are determined to go ahead, you might get a loan from Dilosk or one of the sub-prime lenders but you will pay a higher rate and it will make the investment even less attractive.

Brendan
 
Thanks for the quick reply Brendan, some confusion there on my numbers..... for clarity:

1) & 2) I am using the rent a room scheme to bring in €1,000 p/m;
3) On its own, the new property's gross yield is about 11.2%:
  • Pays rent of c. €56,400 (€4,700 p/m) [not the €20k you have in your figures?];
  • I have expenses at €7,500;
  • Interest on new property (360k mortgage * 5%) is €16k;
  • Approx. interest deductible is €12k
  • Profit before tax is thus around €34,500
 
A few comments

I am guessing that Brendan assumes €20K rent, because that is a realistic rent for a house in Dublin worth €500K. Where do you get €56K
You are not planning to borrow €360K, you are planning to borrow €470K. Hiding the second mortgage when doing the figures is just incorrect.
 
SBarrett said:
Banks don't allow equity releases to be used to purchase additional properties. BTL require 30% down, you are proposing putting down 6%.
Steven
Click to expand...

Thanks for the reply Steven.
It seems inefficient to sit on an asset that is completely unlevered, so I'm surprised the banks don't allow limited equity release.
Are there other routes to increasing effective leverage that I am missing?



I think you've misunderstood my second post huskerdu; I am purely breaking out numbers for the new property only as Brendan suggested -- my first post contains the full aggregated numbers for both properties i.e. €470k mortgage debt with €5,700 monthly rental income and LTV of c. 50%.
 
OP I don't think there is anything wrong with your proposal.

Perhaps you could elaborate on the nature of the property that's yielding 11.2%. House v apartment.

Is it currently let at the €4,700 you refer to.
 
OK, it seems unusual to be getting a rent of €4,700 per month on a property costing €500k. Where is the property? What type of property is it? How have you estimated the rent?


Correcting your figures
  • Pays rent of c. €56,400 (€4,700 p/m) [not the €20k you have in your figures?];
  • I have expenses at €7,500;
  • Interest on new property €23,500 (470 @0.05%) and not (360k mortgage * 5%) is €16k;

  • Profit before tax is thus around €25,400 and not €34,500
  • Interest claimable €17,600 (75% of 23,500)
  • Taxable: €8,000
  • Tax : €4,000
  • Net profit after tax: €21,000
If your rent figures are correct, and if this high rent continues for the future, that is a great investment.

Brendan
 

I am a little concerned that this odd calculation suggests that you don't fully understand the figures.

That doesn't matter if there is such a massive yield on the property. You can make serious mistakes and still make serious money.

But if the figures are much closer to break-even as I suspect that they are, and if you don't understand them, then you are in serious danger of losing serious money.

Brendan
 
I disagree with you that I misunderstood your post.
Your rent figure is very high, but if you have found the magic property with such a high yield, good luck to you.

Your rent a room money is completely irrelevant to your calculations. It is not dependent on the mortgages and you can do it or not do it regardless of your mortgages. You should remove it from the calculations.

You are proposing to borrow 470K, (not 320K or 360K), to buy a BtL property, with 6% deposit.
The bank are basing their opinion on this fact ( and I guess that they are assuming a more standard yield that you are)
 
To put an end to this one, banks won't allow you to raise equity on the family home to purchase a BTL regardless of the rent, LTV etc.

Bottom line, they don't want to put the family home in any unnecessary danger. Too many situations during the recession where family homes were repossessed after releasing funds for BTL, holiday homes,cars, boats!
 
Debaser said:
Thanks for the reply Steven.
It seems inefficient to sit on an asset that is completely unlevered, so I'm surprised the banks don't allow limited equity release.
Are there other routes to increasing effective leverage that I am missing?
Click to expand...

The banks won't allow it because of what went on during the Celtic Tiger.

I remember calling out to a clients house during that time. They had a BMW X5 and a second jeep, massive tv, all the mod cons, 2 investment properties. They had a combined income that was the same as mine at the time and I knew I couldn't afford all the stuff the had. Everything was from an equity release on their home. All they had put down was a 10% deposit on their home and absolutely everything else was borrowed.

The banks won't go back down that road of letting people mortgage their homes for business ventures and to finance lifestyles (not that you are doing that here), especially when we haven't cleaned up the last mess that was made.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Pepper Homeloans will consider this sort of borrowing. And as long as your credit history is intact, their homeloan and BTL rates for the proposed mortgages are actually very competitive.

Best Regards,
Dave Curry, Irish Mortgage Corporation
https://ie.linkedin.com/in/davecurryirl
 
Thanks for all the replies -- great forum.

I'm actually employed in finance (fixed income not property!) so I understand the figures perfectly well, and any indication that I don't is merely due to the typical crossed wires of forum discussion! I was, in particular, looking for options regarding the leveraging of the first property and I received that very quickly indeed.

It is, (notwithstanding the reasonable issues communicated by Tim and Steven e.g. buying speed boats!), peculiar to think that I could sell Property A today for €500k (no CGT due); then use the proceeds to engineer almost exactly the same situation as above!
I will investigate the options presented and pursue a reasonable avenue should it present. Any further advice on those potential avenues is very much appreciated.

Thanks again.
 
IMHO the rent : property value you are using seems out of line based on what I see around me.€30 k per annum max gross i would say on 500k property .,
are you sure your 54k is reliable ?!
 
Debaser said:
I'm actually employed in finance (fixed income not property!) so I understand the figures perfectly well, and any indication that I don't is merely due to the typical crossed wires of forum discussion!
Click to expand...

There doesn't seem to be any crossed wires here.

You have made plain wrong calculations. Whether you work in finance or whether you are a Professor of Finance, doesn't really matter. You have got your tax wrong. You have got the fundamental principles of property investment wrong. Or maybe you do understand them, but you have written them down all wrong.

I suspect that you have also got the 11% yield wrong, but there are anomalies in the market, so it's possible that you may have found one.

Brendan
 
I think the confusion was regarding what I thought you were asking for in your first post and how you were calculating the figures you had in that post - my mistake.

My numbers (in post #1) are correct, my tax liabilities and yields are also understood and correct.

I fully understand the risks involved, and (the information I was particularly looking for) I now know the reasoning behind the banks' apparent reluctance to release equity from a PPR.

Thanks again.
 
Property 1: Value 500K
Loan: 150K
Interest 5%

Property 2: Value 500K
Loan: 320K
Interest 5%

Income Property 1: 12K
Income Property 2: 56K ! ! ! ? ? ?
Salary: 54K
Total: 122K (rent total is 68K)

Repayments on both loans: 37K
Annual interest 23K
75% deductable is 17K
Costs: 7K
LTV: Less than 50%

68 - (37 and 7) = 24K taxable. @ 50% leave him with 12K.

Let's take the worse case scenario. Interest rate rises, property price collapses and he loses his job. He's less than 50% LTV, now if you're not safe from property collapses with that we are talking worse than a celtic tiger collapse in Dublin. Loses his job, rent pays for the mortgages. And there's an extra 12K there if interest rates rise in just rental never mind his own salary.

Now this rental figure is just magic to me, as I find it hard to credit.
 
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Can you give us a ball park figure on the interest rate options? I presume Pepper are sub prime.
 
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