Want to trade up but have home and BTL, both in negative equity

Currently my wife and I have a house each which we purchased individually (2006 & 2007) before we got married. Since getting married we are living in one of the houses and the second house is rented out.

Both houses are in negative equity ( 90,000 and 40,000). Standard Variable rate on both mortgages of ~ 4% and total mortgage amount of 400,000 for both properties

We would like to move out of our existing house some time in the near future( within next 2 years preferably) There is a strong rental market for both houses - 700 & 900 euro per month.

Income

Savings of 120,000

Expenses
No loans except for mortgages. No children.

We are trying to figure out our best options that are open to us:

If we were to trade up, the cost of the new house would be around 250,000. This is what we both want to get to.

• Is it best to keep our saving as cash and put it towards the new house which would result in another mortgage of 130,000.
• Rent out the existing houses and use the rental income to service the existing loans.
• Would a bank be willing to lend for another mortgage of 130,000 on top of existing loans

I would be grateful for feedback

This is a very complicated one. I will propose an answer, but it's by no means definitive. My thinking will evolve as we tease out the implications.

The current position is as follows:




This would overexpose you to the property market and to borrowing. So you should sell one of your existing properties before you buy your new home.

In a rational market, I would suggest that you pay the savings of €120k off your home loan as you are getting little or no tax relief on the interest paid. If you were going to be staying in your existing home for a few years, this would definitely be the right thing to do. It makes no sense to be paying 4% interest on a loan while getting around 0.5% on a matching deposit.

But if you do that, you may not be able to buy your new home for €250k as you will not have the 20% deposit required.

When you identify your new home, you should have matters as simple as possible. Therefore I think you should sell the investment property as soon as possible. To be able to do that, you will need to clear the negative equity.

First iteration:
1) Keep €50k as the deposit for your new house
2) Pay €40k off the investment property mortgage to eliminate the negative equity
3) Pay €30k off your home loan
4) Put the investment property on the market

This will leave you in the following position:


1) You will know exactly what position you are in because you will have sold your investment property and won't be just estimating its value.
2) You will have €50k
3) You will be taking less risk as a fall in property prices will affect you less

In two years, you will need a loan of €200k which will bring your total borrowings up to €420k. That should be doable, given your salary.

Alternative approach which is more tax efficient, but messier.

1) Keep €50k cash
2) Pay €70k off your home loan
3) When you are nearer to buying, put both properties on the market and see which sells easiest and for the best price
4) If your home sells, then move into the investment property while you house hunt.

That seems too messy.

On reflection, paying down the investment property loan is probably more tax efficient in the longer term than paying down your home mortgage. It's likely that after you buy your new home, your existing home will be an investment property, so you want most of your borrowing to be on that.

Yet another consideration...

If you pay a lot of money off your home mortgage, what will the resulting loan to value be? Can you use this to get a better rate from your existing lender or to switch to a new lender?

But again, the problem with this, is that you will not be able to sell the investment property as you will be unable to discharge the mortgage.

The more I think it through, the clearer it becomes.
Pay all of your cash off the investment property mortgage
Sell it as soon as possible
Keep €50k of the net proceeds as a deposit
Pay the balance off your home loan.

Having bought the new house, then you should review what you do with your existing house. It would probably be best to sell it at that stage. This will leave you with a mortgage of €250k on a home worth €250k. You don't need any additional exposure to borrowing or property.

If you plan to sell your existing home after you buy your new home, then you will probably need some of the €50k deposit to clear the shortfall on your existing home. So see if the bank will give you a 90% mortgage on your new home.

Don't worry about that until closer to the time you are ready to buy.

In the meantime, pay off the mortgage on your investment property and then sell it. When you have that done, review the situation.

I'm trying to think if it were me being given the advice to sell the investment property right now how I would feel.

To be able to sell you'd be looking at putting €90k of your €120k savings in to pay off the mortgage assuming that you'd sell it for €200k. I know that at the moment it is debt on the balance sheet but I'd also feel that I had just set fire to €90k. Plus you wouldn't have a deposit left for a new house.

It's probably wrong to have that kind of an emotional response to a financial dilemma though.

Is the investment property paying for itself if you are getting €900 in rent every month? How long is left on that mortgage? You're getting good rent on a property only worth €110k - are you sure the valuation is right? Is the property in an area that you could reasonably expect to see the rental potential continuing or prices moving upwards? Just some questions to ask yourself.

If you were to sell your current home & move to the rental property you'd have to pay €40k off the mortgage to sell it. This would leave you with a 20% deposit for the new house, the costs of moving & still some savings. I would never feel comfortable putting all my savings towards paying down debt - even if the debt is 4% and the savings is 0.5%. Everyone should have access to some cash in case of emergencies, big bills etc.

How much of the investment mortgage could you pay down over the next two years between income & savings? Pay down as much as you can. This would leave you in a better position for when you want to move & you may get to hold the investment property if you decide you want to carry on as a landlord.

Thanks for the discussion

I need to clarify a few point and answer questions that were raised during the discussion

It is the home that is 90 000 in negative equity and the investment property is 40,000 in negative equity
The rental market for the investment property is very strong as it is located in the city


Home - Loan 200, Value 110, Negative equity 90
Investment - Loan 200, Value 160 , Negative equity 40
Savings 120

The term of the mortgage of the investment property is 20 years and the term length of the Home mortgage is 25.

OK, you are getting €900 a month on a house worth €160k
That is gross rent of €11,000
Interest on €160k would be around €6,000
Allow €2,000 for expenses
Allow €1,000 for tax
So you are making a net profit of €2,000 a year.

It is definitely not worth keeping for this level of profit for the amount of hassle and risk involved.

It's even clearer to me that you should sell it.
If you agree with this conclusion, then pay the full savings of €120k off the loan immediately. It will save you interest and you will get most of it back when you sell the property.

Brendan

I don't think you should sell anything if you can get a mortgage and if the rents are covering the mortgages and costs.

What are repayments on the two loans, will you move to investmentinvestment