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

C

CharlieMac

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Hello,

First post on askaboutmoney. Lots of information incoming, apologies, I didn't know how to make it more concise.

My situation:
I have an investment property...
Bought in 2006 (yes, I was one of those unfortunates).
Bought for €450k, €250k balance remaining, currently worth approx €320k (only exited negative equity around 2021/2022)
The mortgage is €1800/month.
It is let out for €1600/month gross.
It is in a rent pressure zone, the rent is not covering the mortgage, I estimate it won't until a few yrs after the mortgage is cleared in 17 yrs time.
It's a tracker currently 4.9% (ECB + 1.25%). Even when ECB was 0% the shortfall between rent and the mortgage was about €440/month after costs and taxes are paid on the rental income.

I'm 48 and have only been paying in to a HSE pension for 2 years. I don't have any other pension.
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.
I have quite a bit of savings (> 100K) set aside over the past several years as a rainy day fund to prop up that investment property, if any emergency arose.
I really should have been investing it or putting in to an AVC but instead it has just been accumulating in my current account.
I'm not 100% sure about the fees and limits with AVCs, or how much I would need to put in to top up my HSE pension.

My question:
Should I plow all my savings in to an AVC and max out the tax benefits of that "going in" or put it all in to the mortgage?

Who I have spoken to so far:
Aside from worrying about this for the last 18 yrs of my life...
I spoke to a financial adviser, but the focus was on getting me to sign up for an AVC and to talk to a colleague in the mortgage dept without any interest in doing a deep dive of my situation.
I see no reason to change the mortgage. I called up the bank and worked out that if I put €135k in to the mortgage that would bring down the repayments to a sum that would be covered by the rent. I use rent generated by that property for that property only but I can only spare about €850/month from the gross rent even then, at least in recent years when ECB was 0% I still ended up with an annual tax bill of a few thousand. Altho, now that I am paying €100s more each month in interest I got a refund on my latest tax return.

What I am thinking of doing:
Put €135k in to the mortgage which would then be around €850/month and then at least the rent would cover it. But then continue to overpay about €40k more in to it over the next two years.
I estimate that would bring the monthly mortgage down to about €500/month which would finally give me peace of mind with affordability. After that I could comfortably manage that mortgage (as well as my own) any time it is temporarily unoccupied by tenants. I would then put everything I can in to an AVC until I retire.

The dilemma:
I am torn between doing the above vs selling it vs finding some way to hold on to it as things are currently and at the same time put all my savings and everything I can going forward in to an AVC. Selling would be hard emotionally but I want to make the right decisions now. I'm worried about having enough of a pension. I have left this very late but my assumption was that the property would be a pension... It might be worth around 500k by the time I reach 70. But then having a property costs money and would an AVC/pension (or another investment?) be a more cost efficient and financially gainful choice?

What I really need:
Is a nuanced analysis of the opportunity cost to me of choosing one option from a range of options. It was this thread that brought me to post this question on these forums. I'd really like to talk to people with the depth of knowledge that Brendan Burgess and Duke of Marmalade demonstrated in that thread.

Any advice from anyone much appreciated. Also, if someone knows a really good financial adviser I could meet in the real world I am happy to pay them for the service I need to make the best choice.

Charlie
 
Are you sure your overpayments will reduce the monthly repayment? Usually it just shortens the term.

Secondly, do you intend to keep the property in retirement with the rent providing an income stream, or sell to raise a lump sum?
 
You mention the rent shortfall at ECB rate of 0% being €440, but what was the shortfall at the peak of the rate cycle?
 
Tbh, you’ve let this investment dictate enough of your financial decisions, regrettably so. I would start paying AVC’s asap (might even get 2023 relief if you move fast enough!) and deal with the property on its own merits. It’s a sell or keep-while-underwater decision, after max’ed out ‘23/24/25 AVC’s have been taken from your cash pile.

You could clear 70k tomorrow, or tbh you could easily spend 70k propping it up for the next few years.
 
Hi conor_mc,

I called up the bank and asked that question and was told the default situation is that overpaying reduces the monthly payment. You can make it reduce the term instead but have to specifically ask for that. In my case I would be happy for the monthly repayment to come down.

In an ideal world I would keep the property and it could supplement my rental income so I could leave it in a Will. But I don't really think that can be an option. It's in a rent pressure zone and my concern is only being able to increase the rent by 2% per year doesn't sound like rental income would keep up with inflation in real terms over the longer term. I think this was why a lot of private landlords sold their rental properties?

I don't know what is the exact shortfall between rent and mortgage now. Roughly speaking: the monthly rent is €1600/month gross, the mortgage is now €1800/month with the rate now at 4.9%. When ECB was 0% the rate was 1.25%, the mortgage was around €1350/month and the shortfall was around €450/month so I guess the shortfall must be €900/month now but that will come down a bit over the next two years as rates fall further.

I'm sorry but I didn't really understand what your advice was in your third comment?

Is there any way that it would make sense to keep the property? How about this opportunity cost assessment of putting €135k in to the mortgage today:

1. I miss out on the tax advantage of putting that in to an AVC. I pay income tax at the higher rate so would would a €135k lump sum in to an AVC end up being €225k? (60% of €225k = €135k)
2. Putting €135k in to the mortgage will bring the repayment down to €850/month and rent would cover that... as long as there is a tenant in there and then I might still have a year-end tax bill, not sure. But when I reach 70 maybe the property might be worth €500k.

Yes there will be other costs to keeping the property going until the mortgage is repaid and even after it is repaid but it seems hard to walk away from that potentially sizeable addition to a pension fund and it wouldn't be a huge financial burden on me to maintain that mortgage.... once I put the €135k in to it.

If I sell the property then how much will it cost me to get a pension fund from an AVC only that is equal to what the property could have added when I reach 70 plus any additional AVC contributions I could be making after I put in the €135k so the property could pay its own way?

It's certainly possible that I'm deluding myself but would appreciate insights about where I am wrong there? I think I need to get advice also from an actuary.

Charlie
 
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Sorry if my third comment was blunt, but you’re letting this property dictate your investment decisions, to the point where you have 135k earning nothing for you, not even a deposit rate, just in case the property has a problem.

Looking at the numbers, 1600 a month against a 320k property is a 5% yield. Why would you buy 135k worth of a 5% yielding product with limited growth prospects due to a) existing elevated property prices, and b) rent controls? The alternative is buying 135k worth of bonds/equities via AVC for the knockdown price of 81k (assuming you are paying 40% tax and can max out contributions at a reasonable rate over a few years). Your AVC assets should conservatively yield at least the equivalent 5% after inflation, over the long term, without the risks/headaches involved in managing a property. That’s a no-brainer.

Having done that, what options do you have for your property? Take your 70k profit now and reinvest it, or keep ploughing money into propping up the investment by supplementing the mortgage?
 
Thinking forward to when the property is mortgage-free, it would generate an income of 1600x10 months (2 months for maint, etc) so €16,000 a year, in todays €’s. At 4% withdrawal from an ARF, you’d need a pot worth 400k.

I think if you can push that 135k plus the amounts you’re supplementing the mortgage by into a pension then you’ll easily have that pot and then some. But tbh, I don’t know what amounts you can avc due to not knowing your salary level.
 
Hi both,

This is really helpful thank you. Not at all, send me tough love but the more detail you can offer the better.

Thinking forward to when the property is mortgage-free, it would generate an income of 1600x10 months (2 months for maint, etc) so €16,000 a year, in todays €’s. At 4% withdrawal from an ARF, you’d need a pot worth 400k.
Click to expand...

So in this case I need 400k in an AVC just to replace what the property would offer.
But I feel like I would also need maybe the same again, at least, to have a decent pension overall?
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.

Maybe I have a route to getting 400k in to an AVC quickly...
Put all my cash savings in (150k).
Sell the place for around 70k (I would not have to pay any capital gains).
Would 220k (150k + 70k) loaded in to an AVC become 370k by maxing out the tax benefits?
Then I just continue maxing out my contributions to the AVC and maybe start something like a Vanguard mutual fund as well?

Questions:
1. What is the max you are allowed to put in an AVC and I think there might be a percentage charge each time you load in? Plus an annual fee to administer the AVC? Then there is a max you can put in the AVC anyway I believe?

2. About my capital gains tax situation. If the place is worth 320k today and I bought for 450k by selling am I walking away from lots of capital gains tax, by selling, that I could have used to get tax free gains from the property going up in value (until it reaches 450K) or could I keep that CGT and offset it against something else in the future? Like selling my home house if I wanted to move or buy a different place in the future?

3. Another argument in favour of keeping the property is the wisdom of having a broader pension portfolio. Yes the property market is probably over-valued now but the stock market is also due a correction in my opinion. Equally, in 20 yrs time both of these will likely be far higher than they are today but there is the risk of a stock market correction right when I retire wiping out my pension gains. That risk would be reduced by having some of the pension in property right?

4. That other property is in Dublin, maybe it would be useful to have that as an option if the opportunity ever arose to move there for work. I could lock in affordable housing costs and switch to renting my current home out instead.

5. This is an old thread now but the advice in there was to NOT put any money in to an AVC and instead to pay off a mortgage so it's interesting that you are telling me the opposite. Of course my situation is probably different.

I am definitely over-thinking this but it is a big life changing decision which would commit me to a path and sever other options. No, you are both swaying me toward selling but I need to know more about the exact numbers of how much I can put in to an AVC and what the charges are. If I plan on keeping the property until I die then I agree it won't ever be a substantial source of income going forward, even when paid off, and it will always be costing me.

It would give me some peace of mind to know:
Can I use an AVC to get me to a pension, when combined with my HSE pension, that will be half my final salary? I guess that is an outcome that would be an OK outcome.

I'm happy to continue talking to someone in the real world for a fee if preferred. Otherwise any advice on here is really appreciated. I'm sure there are others in the same boat as myself.

Cheers,

Charlie
 
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