Value in holding onto my existing home with tracker, while buying a new house

[poolfanabc]

in summary, I have a tracker mortgage on a house, however now hoping to purchase a 2nd house to cater for family with separate mortgage (already approved in principle without need to sell 1st property).
What I hope to do is rent out the current property for a few years, hopefully until out of negative equity and then sell on to reduce property exposure. The figures on current property are as follows:

Current property value = 230000
Remaining mortgage = 247000
Expected rental income per annum = 14400
Mortgage interest per annum = 3200
Estimated housing expenses (30% of rental income) = 4320
Taxable income = 14000-3200*0.75-4320 = 7680
Tax to be paid on income (52%) = 3994
Annual mortgage payments = 13032

Based on the above, (assuming 100% tenancy)

• From other threads, I see calc for yield is 14400/230000 = 6.3%. Don't understand relevance of this value to my situation really. Anyone care to explain?
• My net spend on property would be €6945 (13032+3994+4320-14400), however the mortgage amount is reduced by 13032-3200 =€9832, which is a form of saving.
  • If I could continue for 2years, I could consider to sell without any negative equity shortfall to make up.
  • However for only a net property value gain of €2887 (9832-6945) per year, I leave myself open to additional risk of 2nd mortgage during this time.

Can someone please comment on interpretations that can be made on above figures.

 

[Brendan Burgess]

Expected rental income per annum = 14400
Mortgage interest per annum = 3200
Estimated housing expenses (30% of rental income) = 4320
Taxable income = 14000-3200*0.75-4320 = 7680
Tax to be paid on income (52%) = 3994
Annual mortgage payments = 13032

Don't worry too much about %age yield

Income: 14,400
Interest 3,200
Expenses 4,320
Tax 4,000
Net profit after tax: c. €3,000

If you sell the property now, you will have a shortfall of €17,000

So you are getting a return of €3,000 a year on a negative investment!

This property is worth keeping.

However, which lender is the tracker mortgage with?

If it's with one of the lenders still doing business in Ireland, they will allow you to transfer your tracker (and negative equity) to the new property and charge an additional 1% interest.

This would be by far the best option.

Brendan

 

[poolfanabc]

Don't worry too much about %age yield

Income: 14,400
Interest 3,200
Expenses 4,320
Tax 4,000
Net profit after tax: c. €3,000

If you sell the property now, you will have a shortfall of €17,000

So you are getting a return of €3,000 a year on a negative investment!

This property is worth keeping.

However, which lender is the tracker mortgage with?

If it's with one of the lenders still doing business in Ireland, they will allow you to transfer your tracker (and negative equity) to the new property and charge an additional 1% interest.

This would be by far the best option.

Brendan

Property was with ICS, now BOI. I had approached BOI to explore options of the negative equity tracker transfer , however they came back offering too low a mortgage principal if I sold present property, the other banks (KBC, AIB UB) offered a larger mortgage if we kept existing mortgage I kept the existing mortgage. Didn't make much sense to me, however that's banks for you.

presumably in the future, if BOI still offer that package, I could then move the 2nd mortgage to BOI, at same time transfer the tracker from 1st mortgage whilst selling 1st property to avail of the +1% of tracker rate for 5years, if that makes sense?

 

[Brendan Burgess]

Hi

That makes no sense at all.

Could you give us the figures?

How much is the new house?
How much of a deposit do you have?
What mortgage do you want?
How much did BoI offer you and how much did the other lenders offer?

Sometimes banks make no sense, and BoI is the most conservative lender, but this just sounds as something has not been communicated correctly.

presumably in the future, if BOI still offer that package, I could then move the 2nd mortgage to BOI,

Very unlikely. If you want to move your tracker, now is the time to do it.

 

[poolfanabc]

Hi

That makes no sense at all.

Could you give us the figures?

How much is the new house?
How much of a deposit do you have?
What mortgage do you want?
How much did BoI offer you and how much did the other lenders offer?

Sometimes banks make no sense, and BoI is the most conservative lender, but this just sounds as something has not been communicated correctly.

presumably in the future, if BOI sti

ll offer that package, I could then move the 2nd mortgage to BOI,

Very unlikely. If you want to move your tracker, now is the time to do it.

Have been offered 2nd mortgage up to a value of 400k with KBC, similar from other lenders. I would put a 20% deposit towards 2nd property to avail of the 80% LTV. mortgage rates.

To be honest, when dealing with BOI, when asking questions on their tracker mover policy, they were shocking bad in understanding it themselves, I was correcting them (two different advisers at different branches) on the explanations on certain items, and these were the mortgage advisers i.e. experts.

I must have received the mortgage estimate in phone conversation and stopped further communication as only relevant figure quoted in email from advisor was a monthly repayment of €2988, didn't say if this is the stress tested repayment, but presumably it is. Local mortgage advisor wanted evidence we could afford this payment before sending application to underwriters for review. From memory, I think the max. mortgage they offered excluding NE portion was €350k.

 

[Brendan Burgess]

Hi poolfan

So, are these the correct figures?

What is your gross income?

I suppose it is possible that KBC is prepared to offer you €400k and not take your existing mortgage into account, whereas Bank of Ireland just see the €417k mortgage and think it's too high for your salary.

Brendan

 

[Sarenco]

in summary, I have a tracker mortgage on a house, however now hoping to purchase a 2nd house to cater for family with separate mortgage (already approved in principle without need to sell 1st property).
What I hope to do is rent out the current property for a few years, hopefully until out of negative equity and then sell on to reduce property exposure. The figures on current property are as follows:

Current property value = 230000
Remaining mortgage = 247000
Expected rental income per annum = 14400
Mortgage interest per annum = 3200
Estimated housing expenses (30% of rental income) = 4320
Taxable income = 14000-3200*0.75-4320 = 7680
Tax to be paid on income (52%) = 3994
Annual mortgage payments = 13032

Based on the above, (assuming 100% tenancy)

• From other threads, I see calc for yield is 14400/230000 = 6.3%. Don't understand relevance of this value to my situation really. Anyone care to explain?
• My net spend on property would be €6945 (13032+3994+4320-14400), however the mortgage amount is reduced by 13032-3200 =€9832, which is a form of saving.
  • If I could continue for 2years, I could consider to sell without any negative equity shortfall to make up.
  • However for only a net property value gain of €2887 (9832-6945) per year, I leave myself open to additional risk of 2nd mortgage during this time.

Can someone please comment on interpretations that can be made on above figures.

To answer your first question, a gross yield of 6.3% is distinctly average - it's not awful by any means but it's far from spectacular - even with a cheap tracker.

When you worked through your own numbers, I think you came to the correct conclusion that you can only realistically expect to receive a relatively modest return (particularly on an after-tax basis) at that yield for taking on a significant amount of additional risk. Is the level of expected return sufficient to compensate you for the risk involved? It might be. But then you have to ask yourself whether you have the capacity to take on the risk in the first place.

If, for any reason, a tenant stopped paying rent and you had to go through an eviction process would you have the resources to comfortably pay both mortgages and all the other costs that go with property ownership for an extended period? If the answer to that question is no, then it doesn't really matter what the potential return looks like - you simply don't have the capacity to take on the risk involved with retaining your current property as a rental.

If it is the case that BoI has taken the view that a mortgage of €417k is too high having regard for your income then you would have to ask yourself whether it would be prudent to take on total borrowings of €647k (using Brendan's figures). I suspect you may have to lower your expectations in terms of what you can realistically afford.

 

[poolfanabc]

Thanks for the feedback guys.

Gross combined salary ~140k.

Brendan - can you explain the 183k net equity value you have in table, as don't follow what this refers to.

In relation to whether we could pay for both mortgages, worst case to worst - I think we could get by yes, however far from ideal
Cheers.

 

[Sarenco]

At that income level, I would have thought that retaining your current property as a rental is certainly a viable option.

It is curious though that you got such a poor response from BoI. I would have thought that you are model candidates for their tracker mover product - both from the bank's perspective as well as your own. I wonder would it be worth having one more go at trying to reach somebody sensible to explore this option?

 

[44brendan]

Brendan - can you explain the 183k net equity value you have in table, as don't follow what this refers to..

I make it 83k rather than 183k!!

 

[poolfanabc]

Thanks Sarenco.

Yeah, based on comments from you both here today, I've already contacted them back again and arranged for a meet with a mortgage advisor to reassess the situation.

Unfortunately, as circumstances would have it, we have found a house we like, so if we wanted to move forward with that, we would have to go with 2nd mortgage option, as seller not interested in chain, wants a quick sale.

I'm trying to fully explore the difference in monthly cash outlays with both options to see which makes more sense.
1) If mover tracker, then €417k mortgage (i.e. 400k new mortgage with 17k negative equity) at tracker +1% rate for 5 years = 2.3%. For a 25yr mortgage = 1829/month. = 22k per year.
2) If have 2 mortgages, then have 247k@1.3% = 1237/month, and 400k@3.8% (25yr mortgage) = 2067/month, total = 3300/month mortgage repayments, then allowing for ~300/month gain from rental, outlay is 3000/month = 36000/yr.

So cash flow difference is huge at €14k. If house prices stay the same as currently, only benefit in Option 2 id that I reduce the 1st mortgage principal by ~10k/annum, so ~4k worse off per year if I go with Option 2.

Does that seem like a correct analysis to you? If so, does shine a different light for me obviously.
would have to avoid a chain sale of houses and associated time delays. however if we are outbid for the house we like, then no harm in exploring BOI tracker mover in more detail.

 

[Brendan Burgess]

Brendan - can you explain the 183k net equity value you have in table, as don't follow what this refers to.

Hi poolfan

Your net equity is simply the your assets less your liabilities?
House value €230k
Mortgage €247k
Cash €100k
Net equity : €83k

Ah, my table is wrong. I double counted the €100k

Corrected now.

 

[Brendan Burgess]

The borrowing figure of €417k is correct, which is three times your salary.

The loan to value will be 417/500 or 83%

I am very surprised that BoI don't go for this.

1) They get rid of their negative equity
2) They improve the margin on their tracker
3) They lend another €170k at 4.5% LTV.

I think you should talk to BoI anyway and try to get approval. If they give it to you, put your own house on the market promptly.



Brendan

 

[poolfanabc]

Thanks for the info guys, much appreciated.

Brendan, in post number 2, you stated that the tracker mover option is by far the best. In simple terms, is that because you consolidate into one mortgage so avoid any potential extra risk with managing tenants etc, or did you reach conclusion from the figures mentioned?

 

[Brendan Burgess]

I suppose it's a general rule.

Borrowing a lot of money at SVR to buy a house is very risky. You are very vulnerable to interest rate rises and house price falls.

If you can transfer your tracker, you keep the cost of housing down to a very low level.

Having said that, renting out a house with a tracker attached is a good investment. But I think it's better to "invest" in your house.

Brendan

 

[Butter]

We looked at a similar possibility last year poolfanabc.
I ran all the numbers - with the idea of holding the first house on a tracker rate for a few years & borrowing 90% on our next house at an SVR. The bank gave us the go ahead to do it - although there was one difference - we weren't in negative equity & had a decent equity cushion.

I started off very gung-ho about doing it - even for a few years - but the more I looked at the numbers the more reluctant I got. It was all do-able - even with stress testing the mortgages & taking account of void periods. We're not clueless about property investment either & have experience as landlords.

But the extra tax bill was going to be substantial & I felt that in the event of interest rate rises &/or dodgy tenants then our own lifestyle & spending could be impacted. So we decided against taking the extra risk & put our house on the market in order to move & have the money to do up & extend the new place.

I'm not saying your circumstances are the same but I would say that a spreadsheet of all outgoings/ savings/worst case scenarios/interest rate rises/loss of a job etc should be really looked at before you decide. €140k is a decent income but you're looking at high borrowings with little equity if you keep both properties.

Plenty of people need to sell in order to buy - it's not impossible. The new lending restrictions will make it more common with fewer people able to keep a house & buy a house in the future.

 

[Brendan Burgess]

1) If mover tracker, then €417k mortgage (i.e. 400k new mortgage with 17k negative equity) at tracker +1% rate for 5 years = 2.3%. For a 25yr mortgage = 1829/month. = 22k per year.
2) If have 2 mortgages, then have 247k@1.3% = 1237/month, and 400k@3.8% (25yr mortgage) = 2067/month, total = 3300/month mortgage repayments, then allowing for ~300/month gain from rental, outlay is 3000/month = 36000/yr.

So cash flow difference is huge at €14k.

The Key Point here is that to evaluate this decision, you must look at the income and expenditure i.e. rental income less expenses, tax paid, and interest paid. You must ignore the repayments and cash flow in making the initial decision. You should judge it on the profitability. When you decide which is the best option, then you look at the cash flow to see if you can handle it.

Brendan

 

[poolfanabc]

Thanks again all for the info, much appreciated.

 

[Delboy]

Just a word of warning of you do all your mortgage banking with the 1 bank i.e. BoI in this case.
Your rented out house will not be on the SVR...it's be at Buy to let rates which is currently 5.8% with BoI.
You'll get 5 years of your tracker +1% on the new home....but not for the entire amount of the mortgage. It's up to the max value of the mortgage on your original property

 

[Sarenco]

We looked at a similar possibility last year poolfanabc.
I ran all the numbers - with the idea of holding the first house on a tracker rate for a few years & borrowing 90% on our next house at an SVR. The bank gave us the go ahead to do it - although there was one difference - we weren't in negative equity & had a decent equity cushion.

I started off very gung-ho about doing it - even for a few years - but the more I looked at the numbers the more reluctant I got. It was all do-able - even with stress testing the mortgages & taking account of void periods. We're not clueless about property investment either & have experience as landlords.

But the extra tax bill was going to be substantial & I felt that in the event of interest rate rises &/or dodgy tenants then our own lifestyle & spending could be impacted. So we decided against taking the extra risk & put our house on the market in order to move & have the money to do up & extend the new place.

I'm not saying your circumstances are the same but I would say that a spreadsheet of all outgoings/ savings/worst case scenarios/interest rate rises/loss of a job etc should be really looked at before you decide. €140k is a decent income but you're looking at high borrowings with little equity if you keep both properties.

Plenty of people need to sell in order to buy - it's not impossible. The new lending restrictions will make it more common with fewer people able to keep a house & buy a house in the future.

Great post Butter.

You can come at the decision from a number of different angles but the bottom line is you have to run the numbers. There is no one size fits all rule of thumb and no single formula that works in all circumstances. I personally always start with gross yield as my starting point and work from there but I certainly wouldn't pretend that any yield calculation ever gives the full answer.

I know Brendan prefers to frame the analysis in terms of profitability and then overlays a cash flow projection to assess the affordability of holding a particular investment. I'm not suggesting for a second that there is anything "wrong" with this approach but profitability always strikes me as a concept that only makes sense in hindsight - it doesn't project forward.

If the spread between the funding costs of holding an asset and the yield that asset generates is sufficiently high, then you can generally (but not always) assume that an investment will make sense, depending on individual circumstances. Ultimately, however, there is no substitute for getting out a pen and paper (or spreadsheet for the technologically literate) and modelling or projecting different scenarios, using inputs based solely on what you know today in terms of variables such as asset values, interest rates, rents and the tax position. Obviously these inputs invariably will all change in the future but you can't know to what extent this will occur at the time a decision is required.

When you carry out this exercise, then the sheen will often (but not always) fade from an investment opportunity that looks promising at first blush. That's the process; if you skip it you can't subsequently blame bad luck for your outcome.

For what it's worth, I think it is very difficult to really accept the need to run the numbers if you have never made a stupid mistake. With the benefit of hindsight, I personally could have avoided some monumentally stupid decisions if I had taken my own advice.