What to do with rent received each month?

Homer J Simpson

Hello,

I currently receive 700euro a month from tenants renting rooms in my house. My mortgage is 1000 a month which I am able to cover by myself.

I am wondering what my best option to do with this extra money is.
Should I pay it off my car loan which costs 300 euro a month ( Loan of 13000euro taken out in April at 300eur per month for 5 years) or would it make more sense to make additional payments off the mortgage each month?.

Regards.

chump

You might assume the car loan as it has a higher interest rate, but you'd have to look more closely at the figures to check for sure.

How long left on mortgage, how much more to be paid?
What are the interest payments etc. etc.

stepbar

I assume you pay tax on your earnings? Cause you might have problems if you dont...

Kimbot

I would say pop it into a different account for the moment until you build up a decent sum and then pay it off the car then when thats paid off buid up again and pay off the mortgage!!

jayok

Ok so you get €700 per month. It appears that you are working under the Rent-A-Room scheme. If so then you can receive upto €635 pm tax free but after this all the amount becomes liable for tax at the standard rate. As such you would be better reducing rent to €635 pm or .. ahem.. declaring that you only receive €635. You could be caught here though if your tenant claims rent relief. (thanks indiewindy)


Now, to address the which loan for you. You'll probably find that your Mortgage rate is in the order of 3.5% - 4% whereas your car loan could be 9%-10%. As such your car loan is costing you more money. It would make normal sense to clear this quicker as you would be paying less for the credit than on the mortgage. However this only applies if you have a variable rate loan on the car. If you have a fixed rate then you will have to pay all the interest anyway. As such you would be better paying the mortgage.

These factors need to be combined with your cash flow would you prefer to have the cash flow saving of the motor loan gone or your mortgage term reduced.

indiewindy

With rent a room if you go over the annual limit, I thought that all the rent become taxable.

jayok

indiewindy wrote:

With rent a room if you go over the annual limit, I thought that all the rent become taxable.

You are 100% correct. Apolgies the brain was elsewhere for a while.

Afuera

That's interesting. So it would be in the interest of the landlord to lower the rent down to 635 per month?

If it currently stands as is...
700 x 12 = 8400
(Tax @ 42% = 3528)
Profit: 8400 - 3528 = 4872

Lowering the rent would do this...
635 x 12 = 7620
No tax
Profit: 7620

jayok

Yes - but what happens in reality is that not all rent gets declared.

Afuera

But surely it's not that hard for Revenue to track down anomalies if tenants are claiming rent relief?

Also, in the rent-a-room scheme landlords still have to include the money they recieve on their annual income tax return form. If all the rent is not being declared that implies that people are submitting false income tax returns which is quite serious.

jayok

It is not difficult to track down - but two things seems to apply here*

1. The don't actually correspond the rent received declared versus the rent amount submitted on the claim form. They can of course but don't seem to do it.

2. The amount that of tax that they are missing out on doesn't make it worth their while

*This is just an opinion I could be well wrong.

Afuera

Yes, it could be a lot of trouble to go to just to track down 3,500 or so.

However, I wouldn't be surprised if they come looking for it ten years down the road once penalties and interest have actually made it worth their while.

davidoco

jayok wrote:

1. The don't actually correspond the rent received declared versus the rent amount submitted on the claim form. They can of course but don't seem to do it.

They don't but will if you are audited and rent a roomers landlords are and can be selected for audit. The landlord deserves a slap if they let or know the tenant put down in excess of 635pm on the Rent1 but they are declaring Rent a Room relief themselves.

jayok wrote:

The amount that of tax that they are missing out on doesn't make it worth their while

For a higher rate tax taxpayer it's 42% of the total rent received although you would have to take into account that landlords could claim the interest paid against rental income.

This is an example of a single person living in a three bed house with 2 rooms let out taking in 800 per month in rental income and income in excess of 32,000 pa. Mortgage is 150,000 at 4% over 30 years


Tax evasion

a. State rental income of less than 7620 received.

Tax compliant

a. Declare rental income of 9600 and pay tax of 4032 leaving profit of 5568 or

b. forgo TRS on mortgage (which is only worth a max of 66 to single person) and declare rental income of 9600 with allowance of interest paid on mortgage of 6000 giving net income of 2600 @ 42% = 1092 leaving profit of 8508.

My option would be Tax compliant b. and for the sake of €1092 be tax compliant.

kluivert

indiewindy wrote:

With rent a room if you go over the annual limit, I thought that all the rent become taxable.

This is write you pay all or nothing.

If you are liability then make sure to deduct a poportion of mortgage repayments and home assurance against it as well as any repairs and maintenance that was undertaken during the period of letting.

Homer J Simpson

Thank you for all of your replies.

Having read Jayok's reply I have decided to clear my car loan as the interest rate is a variable rate of 8.5% with my mortgage having a variable rate of 4%.

I will also be looking into the tax implications of the rent I am currently receiving.

Many thanks to all for the information regarding same.

chump

jayok wrote:

Now, to address the which loan for you. You'll probably find that your Mortgage rate is in the order of 3.5% - 4% whereas your car loan could be 9%-10%. As such your car loan is costing you more money. It would make normal sense to clear this quicker as you would be paying less for the credit than on the mortgage. However this only applies if you have a variable rate loan on the car. If you have a fixed rate then you will have to pay all the interest anyway. As such you would be better paying the mortgage.

These factors need to be combined with your cash flow would you prefer to have the cash flow saving of the motor loan gone or your mortgage term reduced.

Correct me if I'm wrong but isn't the 3.5/4 % on a much larger sum
If you can pay ~ 8000 euro extra in capital off your mortgage in one year, does the amount of interest compounded over to 20 odd years not cost more?

For example using
http://www.jeacle.ie/mortgage/ie/

If you have a
30year mortgage
for €250k
@ 4%
with annual inflation at 2%

You make a once off payment of €8000
(slightly less than one years rental income)

in month 20
You save €16,096.66 in interest payments (or real savings (time value of money) €11189.70)

if were in month 120
You save €9,438.13 in interest payments (or real savings (time value of money) €6,140.70)

Now instead let's look at a car loan
of €13,000
@ 9%
over 5 years

in month 6 pay €8000 lump sum
interest savings €2,444.15 (real €2,292.15)

Therefore, like I said originally

You might assume the car loan as it has a higher interest rate, but you'd have to look more closely at the figures to check for sure.

How long left on mortgage, how much more to be paid?
What are the interest payments etc. etc.

In summary work it out yourself, and if you recently got a mortgage, pay off as much capital off it as possible as soon as possible as the interest payments are hugggge