Should I use savings to start an AVC or pay down a mortgage?

I feel so sorry for you getting stuck in negative equity. Rough calculations tell me you've spent 140,000 of your own money covering the gap between rent and mortgage over the past 18 years. Your return on that has been 70,000 equity. Including 18 years of maintenance that could easily be 180,000 outlay.

You'll continue to pay minimum 8,500 per year to cover the shortfall, plus maintenance, and hope that property prices rise by 5+% per annum just so you can add to that equity.

I think theres a sunk cost fallacy here. You've poured money and emotion and stress into that property and it's given you nothing positive back (not even money!!). You need to sell it, and focus on the rest of your life.
 
@Seaniemed sums up my thoughts re the property really well. To put it another way, put aside the equity you already have and imagine someone else owned that apartment (i.e. the bank!) and offered you the chance to buy into it - let's call it 160k for convenience sake for a half-share of a 320k apartment, you get €800 a month before tax or a net yield of 5% ((10x 800)/160000) with limited scope for the rental income to grow due to rent control, and it's already at an elevated price so limited capital appreciation too. Or you can put that 160k into an already globally diversified fund of equities with a track record of returning a long-term average of ~7.5% growth per year after inflation. Both are priced at lofty heights, both may crash, but one is liquid and accessible in small chunks if necessary, while the other can only be liquidated in one fell swoop.

Tbh, if you really feel living in a Dublin apartment might be in your future, I'd sooner take my 70k from this one, add it to my 150k in the bank and buy a different apartment in a better location that's not rent-controlled.
 

Put 90% of your €150k against the loan outstanding on the residential investment property and instruct the lender to reduce the loan repayments, do not shorten the loan, following the lump sum repayment.

You'll need the reduced loan repayments in the months to come, as you'll need to give your tenant notice to quit the lease, given you'll be selling, and may have a period with no rent, so you need the reduced loan repayments sorted first. Don't tell the lender you are selling, at this stage - do that at a later point.

Sell the investment property, you are chasing your dreams, thinking you K recover the loss, at this stage - you've made a loss on the purchase of the property, accept it, and move on. If it's still as much underwater as you've suggested, it's never coming back, well not in the next 10-20yrs, at least not imho.
 

Well put @MrEarl

Just to add because OP mentioned it, does anyone know if the capital gains loss on the property can be used to offset gains elsewhere, e.g. shares?
 
conor_mc said:
Thanks @ClubMan, that addresses one of @CharlieMac’s reasons for retaining the property.
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How is that a reason for retaining it? Losses can only be offset if they are incurred by disposing of a capital asset at a loss. And they don't seem to have any other capital asset investments that might yield gains against which capital losses can be offset. They also seem to refer to using capital losses against the sale of their home which suggests a deep misunderstanding of CGT and PPR relief etc.
 
CharlieMac said:
Yes I have incurred massive opportunity cost getting to where I am now but taking now as the starting point: by "investing" €150k in to it now I can "buy" a €450k tax free return in 22 years at little additional cost in the meantime.
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It was this point - OP seems to be mistaken that the CGT loss can only be used against the investment property, when in fact he can sell up, bank the loss and offset the same amount on any subsequent investment.
 
@conor_mc
I have actually been on daft.ie already thinking about selling and buying elsewhere in Dublin but I don't know if there is an eircode in Dublin that is not in a RPZ these days and anything nicer and in a nicer area will be more expensive and cost me more than my current dublin rental property. Realistically I don't have the funds to have this little PPR I'm living in now and also fund another property that is any more expensive than my rental property already is (after selling it and using that money to fund another). And that's the point as I see it: by holding on to that apartment I have a foot in the dublin property market for a price you won't get anymore... if I put my €150k in to the mortgage I then have a 2-bed apartment in Dublin with only €100k left to pay for it. Yes I know I would incur a huge opportunity cost to get to that place but I've understood for years that I will never get my money back on that place I am not chasing that pipedream. I'm not only looking at this as a pure investment decision. I'm a single man with no ties and I like the option that place would give me to move back to Dublin. After all these years of stress far from being relieved to sell it I feel it would be crushing to let it go when I endured so much for so long to hold on to it only to accept defeat right when it was within my means to keep it... for good or ill, and eventually pay off that debt.

Thanks for clarifying that if I sold I could carry the CGT loss to another investment. If I sold the apartment I think I would max out AVCs from my salary and put everything else in to an ETF which I would add to monthly until I retire. You mentioned that a globally diversified equity fund might achieve: "~7.5% growth per year after inflation". That sounds encouraging, even with the DD tax, but I'm concerned that this is unrealistic and sounds like the kind of hype talk I was hearing in 2006 that got me in to this mess in the first place. I think there is no chance equities will see the same returns in the next 20-30 years as they did in the last 20-30 years. Forgive me for being a cynic and not trusting anyone!

Nonetheless, in relation to ETFs I read: "Losses on funds cannot be written off against other capital gains." I wonder is the reverse possible? Could my rental property CGT loss be offset against the deemed disposal tax on an ETF or would I need an investment that is subject to capital gains tax? In that case I suppose I would need to go instead with Berkshire or investment trusts like Mnks, FCIT, JAM, SMT (which I know nothing about only saw them mentioned in another AAM thread).

@ClubMan
Yes, as @conor_mc was saying one reason I had not to sell was because since the rental cost me €450k and is currently worth maybe €320k then, while I am letting it out, I can accrue a decent amount more equity from it tax free. No I wasn't thinking I could transfer that CGT loss to my own PPR I was thinking more that holding on to the rental property would give me the option to move in to it to live and I would then rent out my current PPR instead. But as I think more about that idea I realise that if I made that apartment my PPR I would:
1. Be unable to offset its sizeable CGT loss against gains on any other investment I may get in to.
2. Have to forgo using any equity increase from it as an addition to a pension fund because I would be living in it (also my current PPR is worth a lot less than the rental and likely always will be so that choice would be another hit to the potential size of a future pension fund).

@MrEarl
That was very helpful advice thank you and that's what I will do if I choose to sell. But for the record I am not expecting to ever make my money back on this property and that is not my goal at this stage since I agree it has no chance. That apartment was always about three times over-valued and it has found its level. I accept I am at cross purposes about this: I want to keep it so as to have the option to move back to Dublin, but I also want the option to use it as an addition to a pension fund after selling it or to else to draw a pension income in retirement by renting it. I think all are possible options but agree that probably none are going to maximise my retirement fund.

@Seaniemed
Thank you for your kind words. It also cost €40k to get the mortgage in the first place, I borrowed €410k. A year after I drew down the mortgage the financial crisis was starting to hit and I realised I bought myself a pair of handcuffs I could never escape from. By the early 2010s it was in about €200k negative equity and I could only charge tenants about €850/month rent. My whole life since 2006 has been controlled by the decision to buy that apartment. In fairness it wasn't all on me I've had some help too.

But it's exactly because I have been through so much with this rental property that I find it so hard to walk away now. For many years I dreamed of being in the situation I am now in. I've managed to save enough rainy day fund I could put it all in to that mortgage and then with only €100k left to pay over 17 years it could pay its own way. But now I'm 48 with hardly any provision made for a pension. In 2006 I thought that apartment could be my pension but realistically it won't be enough as a lump sum for a pension fund or generate enough in rental income to fund a weekly pension either. I have to make peace with that and maybe I have time to salvage a liveable retirement fund the question is do I absolutely have to sell the apartment? I'm not convinced that I do.

Thank you everyone.
 
ETF’s currently have an exit tax which is different to CGT. Your loss would only be allowable against CGT-taxed assets, e.g. directly held shares.
 
CharlieMac said:
But as I think more about that idea I realise that if I made that apartment my PPR I would:
1. Be unable to offset its sizeable CGT loss against gains on any other investment I may get in to.
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Even if you made the erstwhile rental property your PPR, the eventual sale of that property would still be partially assessable for CGT and any loss arising could be offset against capital gains on other investments if applicable.

Persisting with an investment just because it's at a loss, in the hope that it will eventually break even or make a profit isn't really a prudent investment strategy. Someone else mentioned the sunk cost fallacy. In some cases it may be better to cut your losses. Only you can decide if/when that is the case.
I don't really understand this.

You seem determined to convince yourself that you should persist with a loss making investment, at least partly for emotional reasons (e.g. cutting your losses would be "a defeat" etc.) and to rebut feedback that suggests that you might take a different approach. That's your prerogative but it may be the wrong approach for your overall circumstances.
 
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This thread has been really helpful and I appreciate it very much.

A problem I have, which must be frustrating to you guys, is that I don't have a clear and focused goal: on the one hand I want to keep the rental property so as to have the option to move back to Dublin, but I also want the option to use it as an addition to a pension fund after selling it in the future or to else to draw a pension income in retirement by renting it. At the same time I want to keep my current PPR and grow a pension fund too which I only started two years ago. But I'm 48, not 28 and my salary is €84k and not €184k.

Given these facts:
1. I am not hoping or expecting I will ever make my money back on the rental property.
2. I never bought it as an investment. I bought it in 2006 to live in but my circumstances changed and I had to rent it out.
3. I am not solely considering (or depending on) that rental property as a financial investment.

What is wrong with this plan:
1. I have a permanent HSE job... so I keep working until I'm 70 and then have approx €18k DB pension from that.
2. Maximise AVCs. I can do this from my salary, I don't need to use any of my savings to do this. No idea how much of a pension this might get me in the future but I suppose it would be a few €100k after 22 years.
3. Pay down the mortgage on the rental property with €150k. Now the mortgage is €100k and costing me €730/month (4.9% on €100k over 17 yrs). It's making €1600 rent/month gross now so at that point the rent will fund the apartment, mortgage payments and costs (most of which I can offset against gross rental income anyway). Now I have a rental property in dublin giving me the options already mentioned above and tax free growth on that property until it appreciates to €450k.
4. Even after all this I will still have something small left over from my monthly salary to add to a separate ETF type investment and dollar cost average in to that as well over the next 20+ years. Maybe it will be harder for me to keep this up in a few years when I'm paying 40% of my gross income in to AVCs.

What are the objections to that plan just so I am clear why people think that would be a terrible idea?

Are these the reasons or are there any others?
1. I could make far higher returns by putting my €150k savings in to equities.
2. Easier to get hold of cash tied up in equities rather than in property.
3. At my age (48), with only two years of pension contributions made, I cannot afford to make choices that will not maximise my retirement fund.
4. I am being naieve to think the apartment will "pay its own way" after reducing the mortgage by €150k to €100k. There will be unforeseen costs and they will never end.
5. Owning a rental property in our nations capital, in a portfolio along with other pension investments, has no function or value whatsoever.

Any advice means a lot to me thank you.
 
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1. Maybe not far higher, but definitely higher returns at lower risk
2. Yes - imagine requiring a semi-expensive medical procedure in your 60’s - sell some shares in 2 minutes or sell an entire apartment in months?
3. You probably can afford to make sub-optimal choices tbh, you’ll have at least 18k HSE pension plus 14k state pension. And you still have the ability to max out 20+ years of AVC’s. If, and this is the main point, if all goes according to your plan.
4. You’re not being naive regarding the post-150k investment - it will be easier to manage for sure. I think most posters have advised again it because it is a sub-optimal investment and a higher risk investment. But hey, it’s a finance forum and we all get to be impartial with no skin in the game.
5. Is not true. Your rental property earns you rent, and post-mortgage that money goes into your pocket. Certainly not valueless.

In short, I think you have your heart set on making the most of the situation rather than cutting your losses. It’s not a bad plan, just not the optimal plan according to the collective wisdom here. Assuming keeping the apartment is therefore a condition of the advice, I agree paying down just enough to allow rent to cover ongoing monthly mortgage repayments/expenses is the next best plan. After that, max out AVC’s if you can and make sure they’re largely invested in a passive fund of world equities. Finally, I don’t think your retirement needs require you to do further investments in ETF’s, etc., so that’s up to you to decide how to spend/enjoy any remaining disposable income.
 
In the overall scheme of things, you are not doing too badly for your age. You have almost ~€400k in cash and equity in your properties.

CharlieMac said:
I will only have 24yrs of HSE service if I work until I'm 70. At the moment I hope to keep working until that age, out of necessity.
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This is part of your problem, why do you believe it is a necessity? Maybe you might want to work till 70 but I don't think it will be a financial necessity. You should be more than comfortable by your mid 60s

CharlieMac said:
I'm earning about 85k now and by the old-fashioned measure it would be great to have half my final salary when I retire.
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Again why are you arbitrarily targeting 50%? What is your current yearly spending to live comfortably? That is your target.

If you spend €30k on everything other than mortgage payments, then you need to replace €36k of gross income. That's a lot less than 50% and would provide a very comfortable standard of living.

If at 66, you have a full state pension and still have a mortgage free rental, that is already >€30k. Any additional pension you have should have you in a very comfortable position

CharlieMac said:
Expenditure pattern:
I spend as little as possible.
Saving about €3500/month.
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This doesn't sound right? You have €84K in income and probably have ~€4k rental profit. How are you saving €3.5k from your take home pay?

I think you need to take some time and properly assess your financial needs before making any big decisions either way about the rental.

But in the short term, there are things you can do that don't depend on the rental decision such as:
- use your cash to clear PPR mortgage first and then use the rest clear some of the rental. 3% PPR is more expensive than the 5% BTL. It's also a shorter term so clearing it frees up a little more monthly cash flow
- start maxing your AVC's up to allowable limits. Make a lump sum AVC for 2024 in January 2025.
- Give yourself a timeline to make a decision on the rental. If keeping, all excess monthly funds should go to clearing the mortgage. If selling, you probably need to find a fee based financial advisor who can help you choose the right investments to use the capital loss on the property
 
Hello _OkGo_

Great to hear your insights and that you are relatively optimistic about my situation.

But here is my take on some of your points:
I am managing to save €3000-3500/month currently, I have almost no out-goings except the two mortgages and basic living expenses. About €1000 a month of the rental mortgage is interest so I get all that back in my tax return. In years to come that will change as more of the monthly repayment is principle.

Even if I work until 70 I still won't have the full 40 yrs of PRSI contributions. I would be due around 90% of the OPA by age 70.

I also don't have high expectations for rental income from that rental property. It's €1600 gross rental income/month currently which works out at €960 net. Even if it didn't have a mortgage I don't think I would feel comfortable spending more than around €600/month of that currently because I would always need to keep putting something into a rainy day fund for when a tenant moves out or something has to be fixed. Most costs can be offset against rental income but you have to pay them up front and wait potentially a year until you do your tax return. I have heard owners of other Celtic Tiger era apartments have been hit with many €1000s bills to have their developments brought up to code, maybe that will happen to me in the future. It's in a rent controlled area and there's a limit by how much you can increase rent each year. I think this is a major reason for small time landlords selling up. Over time that its not going to be enough to allow rent keep up with the overall inflation in property rental costs (management fees, letting agent fees, insurance and property taxes will likely all increase by more than 2% per year). When I reach retirement I doubt that I will be able to take even €600 (adjusted for inflation) out of the monthly rent it generates for that reason. So I can see the arguments in favour of selling it no doubt. But I have other reasons why selling it is the last thing I want to consider.

For that reason I really appreciated your different perspective. I have already spent years dwelling on what to do. I'm burdened with guilt about not having gotten on with a pension. I have also considered paying off the rental and my PPR over the next four years. Three years paying off the rental first then one year for the PPR after. That is realistic at my current rates of savings if I put all my savings either all in to the rental or a combination of the rental and the PPR. And you seem to think this is a good idea if I plan to keep the rental?

But then I think that can't be a good idea to waste four more years of not getting on with maxing out my AVCs? Surely that would be worth more to me in the long run? Not to mention the approx €238k of my savings I would have to put in to the rental to pay it off over the next 3 years. I think I would need to pay down the debt and pay in to AVCs simultaneously just not sure what would be the most cost effective way. And then if I thought I could for sure have a way bigger retirement fund by investing my savings now in the market then well that would be hard to say no to. But I think now would be a bad time to put €150k in to the stock market. I could keep it aside until there is a sizeable correction... that might or might not ever come!

So basically I'm going around in circles. Getting more perspectives is well worth it and that's one reason I am reluctant to go to an individual financial adviser. I would rather hear lots of perspectives and get a consensus view. But maybe that's unrealistic. Maybe I need someone knowledgeable and patient enough to go through all the calculations with me about all the options that are possible. I don't know if anyone exists who would be bothered with that hassle and be so patient with me. I'm the type who needs to see the details, I'm not interested in being blindly told what to do because after all I've been through I don't trust anyone. Can't decide what to do in case I make the wrong move.
 
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@CharlieMac have you put together a reasonable budget of your post-retirement needs, even at today’s prices? It seems your current needs are very low, things like health insurance will climb in cost, etc, but it feels like you’re over-provisioning for your retirement. Just describing the rental income in your post above, it’s all income at the higher rate of tax but it doesn’t feel like you need an income in that tax bracket at all. Same for retiring at 70, doesn’t sound like you need to max out your pension years by working to that age.

Also, why will you be under 40 years PRSI at 70? Have you missed years of working, were you working abroad maybe? Might be additional pension options if so.
 
@conor_mc
I entered the job market much later than most. That's a great idea to put together a reasonable budget of my post-retirement needs. I could put bank statements from the last few years into a spreadsheet and just leave out any mortgage related costs.

Maybe I am over-estimating my income needs in retirement but I would rather over-shoot than under. I've been reading up about annuities and ARFs, playing with mortgage amortisation and annuity calculators. I'm thinking regardless of what I do I should start, and max out, AVCs asap. If nothing else that could give me options to "retire early". If I had a few 100k from AVCs to put in an ARF then withdrawals from that would (apparently) count as PRSI stamp contributions which would help me get the most possible from the OAP even if I retired before turning 70 when I could switch the ARF to an annuity.

A few months ago I spoke to someone from Irish Pensions and Finance. They can arrange AVCs with HSE payroll. I had too many questions for the guy he didn't want to have to or was unable to answer. So I didn't get very far with him.

Knowing what I do now I have these questions about AVCs:
1. By how much will my 2-weekly paycheck by reduced if I max out my AVCs by making payments every 2 weeks via payroll? What would the reduction be for 25% and for 30% of gross salary since I can contribute 30% from Jan 2026.
2. Can I still max out the 2024 AVCs? Can I just make a lump sum payment? How much would that end up costing?
3. I know IPF and Cornmarket manage AVCs but are there any other providers? Should any be avoided?
4. Which have the best fees? The IPF guy told me: "0.75% annual fund management charge 80% allocation in year 1 and 96% from yr2" but sounded like they don't give the same "deal" to everyone? In that case should I NOT max out year 1 since they would take 20% as a fee?

Maybe these questions about AVCs should go in another forum?

If after doing (1.) above and I have enough left over then, as well as using all my savings to reduce the rental property mortgage, maybe I can still save enough to pay it off in 4-5 years. Takes longer to pay it off but at least I didn't delay any more starting AVCs. Still conflicted about handing over €150k to the bank to pay down the rental mortgage vs something else that would offer a high probability of earning me more.

As always, anyone's views on this approach and my whole situation are really welcome. Thank you.
 
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4. Which have the best fees? The IPF guy told me: "0.75% annual fund management charge 80% allocation in year 1 and 96% from yr2" but sounded like they don't give the same "deal" to everyone? In that case should I NOT max out year 1 since they would take 20% as a fee?

These fees are very high.

The 0.75% AMC is fine.

You can get 100% allocation if you use a different broker.

80% allocation in year 1 means that 20% of all your year 1 contributions are taken as charges.

96% allocation means that 4 in every 100 euro you save is diverted to charges.

Personally, I think these charges are crazy. The 0.75% AMC should be enough.
 
2. Can I still max out the 2024 AVCs? Can I just make a lump sum payment? How much would that end up costing?


You can set up an AVC in early 2025, and make lum-sum contributions, and put them against your 2024 income, to get tax relief on the 2024 income.
 
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