Rent Existing Home or Sell in NE to buy a new Home

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random2011

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So I will try my best to summarize:

Current Mortgage: 25 yrs left @ 270K on 4.3% SVR
Have offer of 185K therefore 85K NE. We are Sale Agreed.

New Home I plan to purchase is 230K and the bank have approved a NE trade up mortgage which requires a deposit of 25K (exempt of new CB rules due to NE so only 10% deposit required) Also Sale Agreed on this house.

New mortgage is at 4.3% for a value of 285K (230-25k=205k + 80k NE) so LTV is about 125% ..the max for NE trade ups.
New monthly payments on new home are 1450

Now I started to think if I rented out the home I currently live in. That would mean
New Second Mortgage for new home of 230K - deposit. APPROX 190k

So I would end up with 2 mortgages for estimated 260K (existing mortgage on house rented out) + 190k (new mortgage for home I would live in)=450K

Renting out existing home would not completely cover the monthly mortgage. I estimate I would need to pay in about 250 EUROS every month which seems mad but without having done the maths I am wondering if this 250 would be offset against the new mortgage payments estimated at 950 per month. So outgoings would be 1200 (950 MORTAGE PAYMENT FOR NEW HOME +250 SHORTFALL FOR EXISTING HOME MORTGAGE PAYMENT) per month providing house is rented out versus 1450 (new mortgage which includes NE) where I simply have just 1 house.

Hope I explained it well enough and I understand the con's of having to maintain and pay for a rental. Out of interest would you still pay rental income even if the rent does not cover the mortgage?

Appreciate any input. I'm thinking about this as property rises I could reduce the NE and sell the house in a few years. If I sell it now I have a loss of 80K but in 5-10 years I could be clear of the NE or alternatively I could keep it long term and sell it when's it's profitable.
 
While there is merit in exploring the option will a bank give you a mortgage for €190k on a €230k house when you have NE of €85k?

The reality is the current mortgage repayment is circa €1500 pm. So I assume the rent is €1,250 pm or €15,000 pa. the interest would be approx €11,600 75% allowable €8700. Tax €3000. So really it's like to be at least another €250 on top of your €250. So then the question is how much of the negative equity will be eleminated over the next few years?

You don't give any details of your income so it's hard to know but I'd doubt the bank would let you keep the current property.
 
Hi Joe..So yes the bank have issued me a loan offer for this new to be outstanding loan of 285k. Thats all done. It means we sell our existing home and buy a new one. No rental.

The current mortgage is 1200pm a month and not 1500 but current rent is about 950 or 1000 so I'd be left with the difference each month of 200-250 per month and that on top of the new mortgage of 190K.

Income is 80k + 55k Spouse. Bank have said the figures are ok and we would qualify.

My question is whether or not this is not a good idea or is it best to simply sell the current house now versus rent it out and take the NE hit if we sell or ride it out for a few years by renting the house and contributing to the mortgage along with servicing a new mortgage on the new house.

My monthly outgoings would probably be the same in either case approx 1500 per month whether its for 1 or 2 houses but having 2 houses would be extra hassle but might save me thousands if the NE gets reduced or even removed completely.
 
random2011 said:
If I sell it now I have a loss of 80K but in 5-10 years I could be clear of the NE or alternatively I could keep it long term and sell it when's it's profitable.
Click to expand...

...or the other alternative is that you could be even deeper in NE if the market turns south again.

I very much doubt your house would be profitable from an income perspective as a rental given the mortgage rate and it will certainly be significantly negative from a cash-flow perspective.

So that, frankly, leaves a gamble on the direction of house prices.
 
Thanks for the replies. I'm not even looking for it to be profitable as I know this is not possible given the above. Thank you for the input however. It seems that this is neither a straight don't do it or yes it makes sense so I think looking more closely at the figures is required.
 

Just on the tax query does having a higher interest rate actually benefit the person who is renting out their house as you can effectively write off 75% of the mortgage interest. So the more interest you pay the less rental income you are liable for. Also are there things to write off from the remaining yearly rent i.e the 3000 above; maybe home insurance etc I ask because we pay 4.3% interest and maybe that increases to 5.3% if you rent out the property so very little is actually coming off the capital today. I realize this will eventually improve and less is paid on interest and more comes off capital but I'm still a long way off that.
 
I can't understand people who say it's better to pay more expenses than pay tax.

Think about it you have to pay €1,000 in expenses to save €500 in tax!! So your down €500!
 
Joe_90 said:
I can't understand people who say it's better to pay more expenses than pay tax.

Think about it you have to pay €1,000 in expenses to save €500 in tax!! So your down €500!
Click to expand...
Yes but those expenses (which are an interest rate I can do nothing about) are not optional. I just want to see if paying an interest rate of 4% would yield less tax on rental income than an interest rate of 1%.
 
But you can do something about those interest expenses - you can sell the house and discharge the loan.

Think of it this way - if somebody comes to you in the morning and offers to sell you a house for €270k (that has a real value of only €185k and would only rent for ~€12kpa) would you take that deal if somebody offered you 100% finance @ 4.3%?

You would be mad to take that deal, right?

So why is that different to what you are contemplating now?
 

I think it is obvious that you wouldn't take that deal now but the unfortunate situation is that whatever decision is taken it is going to cost the OP money, I am in a not unsimilar situation and I can see the merit in the OP's reasons for keeping the house rather than taking a one off hit €85k now. In the OP's case the negative equity is not going anywhere it is simply being transferred to the new property.

Between tax and shortfall in monthly cash between the rent received and mortgage paid it will cost c. €6k per year annum. However the mortgage will reducing by c. €5k per annum and if there is any positive movement in property prices the overall picture improves. I know you are taking a gamble and possibly the difference is between pulling the plaster off slowly or ripping it off.
 
Hi Random

You are thinking about this all wrong.

1) "as property rises I could reduce the NE and sell the house in a few years. If I sell it now I have a loss of 80K but in 5-10 years I could be clear of the NE"

Let's imagine you have a mortgage of €270k on a house worth €185k in Dublin. You want to move to Galway and someone there has a house worth €185k and agrees to do a swap with you. I presume you would be happy to do so? You wouldn't regard yourself as crystalising your NE.

But because you are buying a house at a different price, you seem to regard it as crystalising NE. This is a common mistake and makes no sense.

If you sold your existing house and rented, then you might think that you are crysalising a loss.

2) The way to think about this is very simple

Say you have a loan for your wedding from 5 years ago of €85k .

You want to buy a home for €230k with a €40k deposit.

Would you also buy a house for €185k with a 100% mortgage as an investment as well?

The rent would be €1,000 per month

The interest on that mortgage would be €185k@4.3% or €8,000

So you have only €4,000 to pay for voids, repairs and tax.

As the mortgage rate on the investment is 4.3% , you should not buy this house.

The right way to assess a property investment is to compare the rental income after expenses and tax with the interest paid and not with the repayments as they include capital.

3) This is the position after you trade up



Your net negative equity will be the same. If prices rise, your NE will reduce. If prices fall, your NE will increase.

When interest rates rise, you will be far less exposed with a mortgage of €275k than €450k

You have a comfortable income for a loan of €275k. You would be very stretched at €450k if anything were to go wrong.

Sell your house. Buy your new house and focus on paying down your negative equity.

Brendan
 
Thanks Brendan.i agree and we will sell our house and work on reducing the NE.the EA who valued the house suggested the house we are buying is worth a bit more than 230 maybe 245 and once we get some work done we should increase value. Not that we would be wanting to sell again but at least we could be eligible for switching mortgage providers. Thanks for everyone's input.greatly appreciated
 

After doing the maths it appears the difference in having 1 mortgage after selling existing NE property versus having 2 mortgages (including rental shortfall) is the same. In one case depending on the term of the mortgage, keeping the second property was 20 euros less expensive. That includes losing the TRS also on the NE property and without taking into account any new TRS entitlement for new property - not even sure if we can get TRS on the new property at least until next year.

Obviously then we have the standard outgoings - rental income tax, insurance, property tax, repairs, no tenant for a period. So it may not add to 6k but it will certainly be a few grand a year. If property continue to rise then it could in fact be worth the gamble considering the amount of NE we have at the moment i.e 85K.

We would also be entitled to the cashback offer the bank is offering @ 2% which we are not entitled to with a NE Trade-Up loan. Conveyancing costs will also be lower if only buying a home and not selling one.
 
You won't get any TRS on the new mortgage (or on the existing mortgage if the property ceases to be your PDH).

I also think you are significantly underestimating the costs associated with operating a rental property and the tax "bite". If you want to go into this business (and it is a business) you really need to research these thoroughly.

I would echo Brendan's advice - take the NE trade up option and forget about retaining your existing property as a rental.
 
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