Buy a second house or put money into existing mortgage?

SuperTina

Sorry, I know this is a monster post, but I really need some advice on this....

This is something I am contemplating, and I would appreciate all comments to help me decide what is best.


I currently own a house with my partner that is in negative equity - I'd say by about 200K. We have a tracker mortgage and a good 28 years left on it :eek:. We have no problems repaying the mortgage at the moment

House prices have come down massively in the area I live and I could buy the same type of house I own for about 100K - this would be a house that would require some work (generally rewiring and central heating).

I have around 40K saved and my Dad, who lives in another EU country would be willing to lend me the rest (around 80K).

So in theory I would hope to buy a house for around 100K and then let it.

The whole rationale behind all of this is twofold and not straight forward:

Firstly: I am hoping that eventually house prices might come up again (in the long term) and that I might make a gain on the second house that would even out against the negative equity on the house I currently own.

Secondly: My relationship is unstable, and without wanting to go into too much detail, I want to protect myself from/prepare for the worst case scenario, which is that I am left with full liability for the mortgage on the PPR, which is in NE by about at least 200K. Chances are I can't get my partner off the mortgage/deeds (which is why I'm even considering scenario 1)

The two reasons require different types of scrutiny, but I went for the more difficult one, i.e. I am the only one paying the mortgage on the principal private residence (PPR) and I’ve attempted to do a bit of a stress test.

I have sat down and worked out how much mortgage I can realistically afford on my own. This is net income after all outgoings, such as gas, electricity, refuse collection, UPC, TV licence, life insurance, house insurance, property tax – I have determined this by looking at outgoings over the last 3 years. This leaves me with 1350 Euro a month affordable repayment. I'm a PAYE employee.


I have then looked at my outstanding mortgage on my PPR, currently at ~347K. I have then tried to come up with two different scenarios in terms of affordability. I have a tracker mortgage with PTSB.

# Scenario 1: the loan amount does not change, but interest rates might change

# Scenario 2: I would inject my savings plus loan from father into mortgage of PPR (~100K)
So repayments for the two scenarios would be as follows (taking TRS into account in column 2, valid till 2017):


Interest |Scenario 1 |Scenario1 |Scenario 2 |Scenario 2
Rates|repayment no TRS|repayment-TRS |repayment no TRS |repayment-TRS
1.85% |€1,344.07 |€1,194.07 |€930.56 |€780.56
2.10% |€1,386.74 |€1,236.74 |€958.93|€808.93
2.35% |€1,430.08 |€1,280.08 |€987.73|€837.73
2.60% |€1,474.08 |€1,324.08 |€1,016.94|€866.94
2.85% |€1,518.74 |€1,368.74 |€1,046.57|€896.57
3.10% |€1,564.05 |€1,414.05 |€1,076.61|€926.61
3.35%|€1,609.98|€1,459.98|€1,107.05|€957.05
3.60%|€1,656.53|€1,506.53|€1,137.88|€987.88
3.85%|€1,703.69|€1,553.69|€1,169.09|€1,019.09
4.10%|€1,751.44|€1,601.44|€1,200.68|€1,050.68
4.35%|€1,799.78|€1,649.78|€1,232.63|€1,082.63
4.60%|€1,848.67|€1,698.67|€1,264.95|€1,114.95
4.85%|€1,898.13|€1,748.13|€1,297.62|€1,147.62
5.10%|€1,948.12|€1,798.12|€1,330.63|€1,180.63
5.35%|€1,998.65|€1,848.65|€1,363.98|€1,213.98
5.60%|€2,049.69|€1,899.69|€1,397.65|€1,247.65
5.85%|€2,101.23|€1,951.23|€1,431.65|€1,281.65
6.10%|€2,153.26|€2,003.26|€1,465.96|€1,315.96
6.35%|€2,205.77|€2,055.77|€1,500.57|€1,350.57
6.60%|€2,258.74|€2,108.74|€1,535.48|€1,385.48
6.85%|€2,312.16|€2,162.16|€1,570.68|€1,420.68


# Scenario1: until 2017 I’d be ok up to 2.85% interest rise. Which isn’t great really. After 2017 I could only afford up to 2.1-2.35% interest.

# Scenario 2: I could afford up to 6.35% until 2017 and 5.35% thereafter. This obviously looks a lot better.

If I injected this 100K for example in Jan 2014 (at which stage I estimated the outstanding mortgage to be 337660) and would keep the loan at the same length I would make the following savings in interest (assuming the interest rate stays the same over the duration of the loan, which is of course unrealistic, but this is just to give me some idea):


Interest Rate|Total interest (337660)|Total interest (-100K injection = 237660) |Difference
1.85|89,397|62,922|26,476
3.85|200,677|141,245|59,432
5.85|326,009|229,459|96,549
So this would save me a good bit of money – assuming the mortgage runs over its entire life span, which is not likely as I will have an inheritance at some stage.


I have then looked at what yield I would get from buying an investment property (IP) costing 100K


|Once-Off|Yearly Outgoings|Yearly income|Deductibles|Tax deductable
House Purchase Price|100,000| | | |No
Solicitor|1,500| | | |No
Stamp Duty (2%)|2,000| | | |No
PRTB|90| | | |No
NPPR registration (ends 2014)|200| | | |No
Property Tax| |200| | |Maybe?
Refuse Collection| |200| |200|Yes
Insurance| |300| |300|Yes
BER Survey (?)|300| | | |No
Building Survey|500| | | |No
Property Maintainance/Repair| |500| |500|Yes
Furnishings Wear/Tear|10,000| | |1,250|Yes 12.5% for 8 years
Gross Rental Income (2 bed)| | |10,800| |
Gross Rental Income (3 bed)| | |14,400| |
| | | | |
Total|114,590|1,200|10,800-14,400|2,250|

TAX DUE

#(Gross Income - Refuse ,Insurance, Repair and Wear/Tear) * 52% (41% tax plus 4% PRSI and 7% USC):

|Tax Due|Net income from IP|monthly|Time in years to offset purchase price
2 Bed|4,446*|5,154**|430|22
3 Bed|6,318|6,882|574|17

*[(10,800-2,250)x0.52] ** [(10,800-1,200-4,446)]

#(Gross Income - with Refuse and Insurance only deductibles of 500, total outgoings 700) * 52% (41% tax plus 4% PRSI and 7% USC):

|Tax Due|Net income from IP|monthly|Time in years to offset purchase price
2 Bed|5,356|4,744|395|24
3 Bed|7,228|6,472|539|18



Having done this, obviously it would be better to try and get a 3 bed, but depending on location and rentability this might not be possible. I have looked at current rentals of houses in the area I’m looking at, so the rental income is based on this.

I have researched the revenue webpage, boards and askaboutmoney to figure out all the costs and tax etc, so I hope I have worked this out the correct way.

In any case, if I did calculate correctly I could expect a rental yield of somewhere between 400-570 Euro per month.


So now back to my two scenarios, if I had an extra let’s say 450 Euro per month to add to my max mortgage repayment of 1,350, this would bring me up to 1,800 Euro a month, which means I could afford an interest rate of 5.1 and 4.35% on the PPR before and after 2017 respectively. Which is not quite as good as scenario 2.


So to compare these options now:

I stick with scenario 1 and buy a IP (house to let), I will be able to afford the PPR up to an interest rate of 5.1%/4.35%(post 2017). Assuming I have constant tenancy (I know this is not realistic either) the cost of this would be 115K. Prob another 20K depending on how much repair the house needs. For this I’d need 80K from my dad.

Advantages: House prices are such that I can afford to buy a house without needing a mortgage. I have two houses, rental house helps paying for PPR. Value of both houses might increase. I could sell IP if necessary. My eggs are in two different baskets.

Disadvantages: All the hassles that come with being a landlord, house might not rent out, value of houses might decrease. House might not sell. Potentially 50-100K more interest than option 2 if kept over entire lifetime.

Scenario 2:

I put the 100K into PPR mortgage, which makes repayments affordable up to up to 6.35% until 2017 and 5.35% thereafter. For this I’d use 20K of my savings and 80K from my dad.

Advantages: I have one PPR, cost of mortgage less, no extra burden/stress with rental property, value of house might increase. Potential savings in interest would cancel out some/all of financial injection if mortgage kept over lifetime

Disadvantage: Bank has to agree to take partner off mortgage and deeds (otherwise he can potentially benefit from my cash injection). House value might decrease. House prices might go up and I would not be able to afford a second house.


Conclusion

Scenario 1 would cost me up to about 140K (including repair) to buy the house with no savings in mortgage interest (compared to scenario 2), but I’d end up with two houses, one of which would soley be mine. House 2 would help to pay for house 1. Houseprices might go up again and I’d make up for the NE on PPR with increased value of Investment property.

Scenario 2 would cost me 100K but that would even itself out through savings in interest payments. I have one house (half of which possibly would still belong to my partner). House prices might increase and I would not be able to afford an investment property.

So in the end it’s a bit of a gamble...

I could of course add a 3rd scenario:rolleyes:, in which my Dad buys the IP, which would considerably decrease the tax due (20% for non residential landloards), but I need to look into the whole side of things with doing that, and he’d need to check tax laws to see how that would affect him (he is retired).

So as you can see definitely not straight forward and I'd appreciate all comments!:)

djimi

Im sure someone else will read through all that and perhaps give you better advice, but in general if you want to make your money work for yot then the absolute last place you should be putting it at the moment is into property. If you have €40k saved up then put it into somewhere that will earn it some interest; if you need to buy a house at a later date then you can use it for that. Its pretty unlikely that you are going to rent the second house without making some kind of a monthly loss on it.

collie0708

Im thinking of doing something similar but purely as an investment im lucky enough not to be in negative equity thinking of buying a 1 bed apartment as I reckon this is the best chance of making a good return.

nxbyveromdwjpg

djimi wrote: »

Its pretty unlikely that you are going to rent the second house without making some kind of a monthly loss on it.

This isn't true at all in Dublin, rents are high and if you bought now you'd definitely be up every month.

djimi

nm wrote: »

This isn't true at all in Dublin, rents are high and if you bought now you'd definitely be up every month.

And can you say with 100% confidence this will definately be the case in 3/5/10 years time? An awful lot of people bought property in the mid 2000s with the same attitude; look at where that got them.

SuperTina

Thanks guys for the feedback. As I tried to explain in my original post, I have two reasons why I'm contemplating this

djimi wrote: »

Im sure someone else will read through all that and perhaps give you better advice

,

Yes, please, "read through all that", as it explains why I'm looking for advice, and I don't want this post being hijacked to discuss something other than what I'm asking about.

djimi wrote: »

Its pretty unlikely that you are going to rent the second house without making some kind of a monthly loss on it.

For that reason I would be most grateful if people could look through my calculations - at least the one where I'm trying to project outgoings and income from a rental property as I'm not entirely sure that I have grasped everything.

I am fairly certain that I could rent out the house, most of the houses in the area are renting without any problem - my neighbour has been renting his for the last 6 years without any empty period and there's been 5 different tennants. There are also only a limited amount of properties in this area for rent on the likes of daft.ie etc, so I've done my research with regard to that.

So I don't think I'd make a loss on it, maybe not as much income as I've projected, although I thought I was conservative enough in my calculations.

Zamboni

Are you married or not?

SuperTina

No, not married, no children either

riclad

Prices are still going down,in most areas, put money in high interest account,You can buy a house in the future if you want.
Are you saying, i want a house ,eg i might have to move out if my relationship fails, even though i,m still liable for the mortgage.
Check price changes on daft ie every 3 months.
I would not borrow 80k, to buy a house, unless interest was very low,on a tracker,and rent return was very high.
ie if interest rates went up your profit is zero.

D1stant

If I were you I'd get some legal advice on the potential outcomes

If you and the OH split would the new house potentially be used to pay the first house loan?

Would putting the new house in you and your fathers name be an idea?

100k sounds good, but is this in an area that has long-term viability in terms of infrastructure and jobs, close to city etc. If all this is covered and the new house will rent and be firewalled fromn the NE.... it seems like a good option.

Zamboni

SuperTina wrote: »

No, not married, no children either

Then I would say scenario two is ruled out by default.
The partner will directly benefit from any cash injection in to mortgage.
You do not want the bank to remove his name from the mortgage in order to ensure that he remains liable for his portion of the NE.

Option 3 would be buy a house and live in it.
Let him go do his thing and rent out the current property using rental income to pay off the mortgage?

SuperTina

riclad wrote: »

Prices are still going down,in most areas, put money in high interest account,You can buy a house in the future if you want.

That's a bit of a gamble though, isn't it, noone knows where the house market is going... all I know is, now I could get my hands on one.

riclad wrote: »

Are you saying, i want a house ,eg i might have to move out if my relationship fails, even though i,m still liable for the mortgage.

If push came to shove, yes - I know this sounds crazy, but I have my reasons (which would be something for the personal issues forum!)
.

riclad wrote: »

I would not borrow 80k, to buy a house, unless interest was very low,on a tracker,and rent return was very high.
ie if interest rates went up your profit is zero.

WEll, my dad would hardly charge me lots of interest, in fact, he wouldn't charge me any.

D1stant wrote: »

If I were you I'd get some legal advice on the potential outcomes

I will, once I've made my mind up on what to do...

D1stant wrote: »

If you and the OH split would the new house potentially be used to pay the first house loan?

Well, if he goes and I stay in the house I would use rental income from the new house to help with the mortgage repayments of house1. Which according to my calculations should work to a certain degree.

D1stant wrote: »

Would putting the new house in you and your fathers name be an idea?

I have thought about that, need to look into this. In theory he could buy the house and then be a foreign landlord, however, he needs to look into tax implications having foreign income while being retired. Also, if I did that I'd be liable to inheritance tax at some stage, but if I jointly bought with him, must look into that.... It's an interesting idea - if we bought it as think it's "joint tennancy" would I automatically get the house when he passes without having to pay inheritance tax? Probably definitely a question for an expert...

D1stant wrote: »

100k sounds good, but is this in an area that has long-term viability in terms of infrastructure and jobs, close to city etc. If all this is covered and the new house will rent and be firewalled fromn the NE.... it seems like a good option.

Houses I'm looking at are in Dublin 12, close to Luas and close to Our Lady's Hospital and James hospital

Zamboni wrote: »

Then I would say scenario two is ruled out by default.
The partner will directly benefit from any cash injection in to mortgage.
You do not want the bank to remove his name from the mortgage in order to ensure that he remains liable for his portion of the NE.

Exactly. This would only work if the bank agreed to take him off the mortgage and deeds - and that would only be a good idea if there really was no hope in ever getting any money ouf of the my partner (which is hypothetical at the moment).

Zamboni wrote: »

Option 3 would be buy a house and live in it.
Let him go do his thing and rent out the current property using rental income to pay off the mortgage?

Well, at the moment we're still entitled to TRS until 2017 - worth 150 Euro a month and we have a tracker mortgage which I would not want to lose, plus we'd be liable to 42% income tax plus PRSI and USC on the rental income and we would still have to supplement the payments, so not sure this would be a good option...

riclad

I,M not a legal expert, if you put 40k into existing mortgage ,its possible
in some ,way ,the other person gets 20k off the loan,you get 20k off the loan,if the mortgage is a 50/50 loan.
You can get advice from flac,free legal advice centre.
EG i,m not sure if theres any point in putting the 40k, into the loan at this point.

the_syco

SuperTina wrote: »

I have around 40K saved and my Dad, who lives in another EU country would be willing to lend me the rest (around 80K).

<snip>

My relationship is unstable

The 40k; put it into a bank account under your maiden name?

SuperTina

riclad wrote: »

I,m not sure if theres any point in putting the 40k, into the loan at this point.

I wouldn't put the 40K into the mortgage just like that. I would borrow 80K from my dad, add 20 of my own, so to put 100K into the mortgage (provided I can get partner off deeds/mortgage) which would reduce mortgage repayments to a degree I could manage by myself.

At the current state of play I would not put any money into the house as long as only 50% of it belong to me and the OH would benefit from everything I do. That is a sure road to losing out. Again, all hypothetical and assuming the worst.

SuperTina

the_syco wrote: »

The 40k; put it into a bank account under your maiden name?

Why would I do that? I'm not married, the money is in my savings account and my partner has no access or entitlement to this money.

maddragon

This is a tricky one and we are in a similar situation albeit without the unstable relationship factor. My advice would be a.) do not pay down the mortgage as you will have lost your rainy day fund and you may never build up that kind of a sum again. Also the tracker mortgage is cheap money.

b.) do not buy a property yet. Prices are unlikely to rise for a decade and you don't know what bombshells the government has in store for second property owners.

c.) I'ld put 1/2 to 3/4 of the money into the highest paying deposit account I could find and split the rest between google, McDonald's, Kerry group and Ryanair shares.

miss no stars

maddragon wrote: »

This is a tricky one and we are in a similar situation albeit without the unstable relationship factor. My advice would be a.) do not pay down the mortgage as you will have lost your rainy day fund and you may never build up that kind of a sum again. Also the tracker mortgage is cheap money.

b.) do not buy a property yet. Prices are unlikely to rise for a decade and you don't know what bombshells the government has in store for second property owners.

c.) I'ld put 1/2 to 3/4 of the money into the highest paying deposit account I could find and split the rest between google, McDonald's, Kerry group and Ryanair shares.

Don't.


Aviation is a fickle industry to put your money into regardless of the company. If you have lots of money to spare it can be a good way to make a big return, but if it's your rainy day nest egg I wouldn't.

There's a well known saying in the aviation world... "The quickest way to make a small fortune from aviation is to start with a large fortune".

ETA: People always need food, which is why the likes of Kerrygroup are a good bet. People don't always need air travel for leisure and their use of it is extremely sensitive to external factors (Volcanic ash cloud, terrorism scares etc), hence if the money is your nest egg it's good to go with something that's not so fickle as aviation, but more stable and consistently required.

the_syco

SuperTina wrote: »

Why would I do that? I'm not married, the money is in my savings account and my partner has no access or entitlement to this money.

Sorry. Missed the "not married" part. Don't put it into the mortgage, as you won't see it again; put it into a high interest bank account. As said, the Kerry Group seems to be doing well.

You mention that you're 200k in NE; am I to assume that you got this number by looking at how much houses were sold nearby you, and took that figure off how much you owe the bank?

Zamboni

SuperTina wrote: »

Exactly. This would only work if the bank agreed to take him off the mortgage and deeds - and that would only be a good idea if there really was no hope in ever getting any money ouf of the my partner (which is hypothetical at the moment).

Well, at the moment we're still entitled to TRS until 2017 - worth 150 Euro a month and we have a tracker mortgage which I would not want to lose, plus we'd be liable to 42% income tax plus PRSI and USC on the rental income and we would still have to supplement the payments, so not sure this would be a good option...

Sometimes these decisions are not purely financial.
It could be a premium you pay for your independence and retention of control in a negative situation.
You would rightly lose TRS but you could get to keep the tracker if you deal with your bank correctly.
You may have to supplement the payment but you will have no rent to pay in your new house.

SuperTina

the_syco wrote: »

You mention that you're 200k in NE; am I to assume that you got this number by looking at how much houses were sold nearby you, and took that figure off how much you owe the bank?

Yep. Outstanding about 340 - houses selling for around 90-150 depending on various factors.

Zamboni wrote: »

Sometimes these decisions are not purely financial.It could be a premium you pay for your independence and retention of control in a negative situation.

Indeed, that's the whole dilemma

Zamboni wrote: »

You would rightly lose TRS but you could get to keep the tracker if you deal with your bank correctly.
You may have to supplement the payment but you will have no rent to pay in your new house.

Would it not be six of one and half a dozen of the other which house I end up living in? If I live in house 1 I get to keep TRS and no discussion with bank about tracker, but tax liability would be the same than house 2 (ok I can get tax relief on 75% of mortgage interest on house 1 - but lose TRS). Although I need to do some calculations on that I think...

riclad

You can only claim trs for 7 years.So you might have say 3 years left on it.

Cuddlesworth

SuperTina wrote: »

my partner has no access or entitlement to this money.

I wouldn't be so sure.

Since you have no children, have you been cohabiting for five years and is he financially dependent on you?

SuperTina

riclad wrote: »

You can only claim trs for 7 years.So you might have say 3 years left on it.

Bought in 2006 so falling into the category that can claim TRS till 2017

Cuddlesworth wrote: »

I wouldn't be so sure. Since you have no children, have you been cohabiting for five years and is he financially dependent on you?

Been cohabiting since 2006, he has a job, so no, not financially dependent on me.

SuperTina

Cuddlesworth wrote: »

I wouldn't be so sure. Since you have no children, have you been cohabiting for five years and is he financially dependent on you?

Would he have any entitlements due to us living together?

D3PO

SuperTina wrote: »

Would he have any entitlements due to us living together?

if living together over 5 years then yes.

SuperTina

I alway thought you had to be married? So by just living together he has entitlements to my posessions? As in half to it as if we were married?

halkar

I think you should sort your life and relationship out first. And sort out the house you have now with your partner. You are borrowing 80k which will have to be paid one way or other regardless where it comes from. I don't think it is worth the risk. Put your 20k somewhere and save more if you can. Be careful on money affairs with relatives, it can go very sour too.

SuperTina

halkar wrote: »

I think you should sort your life and relationship out first. And sort out the house you have now with your partner.

I appreciate all comments, but this is not helpful. I am looking for comments on the particular options I am deliberating about, if I wanted relationship advice I would post in personal issues.

halkar wrote: »

You are borrowing 80k which will have to be paid one way or other regardless where it comes from. I don't think it is worth the risk. Put your 20k somewhere and save more if you can. Be careful on money affairs with relatives, it can go very sour too.

This is the least of my worries, and again this is not about relationship issues, whether it is my partner or my father.

It would be great to get some feedback from people who are renting out houses and have experience in that area and who can tell me if the projections on rental income are realistic and doable.

D3PO

SuperTina wrote: »

I alway thought you had to be married? So by just living together he has entitlements to my posessions? As in half to it as if we were married?

Its not as straightforward as saying hes entitled to half (nor is it like this if your married either) you need to read up on the civil partnerships bill.

He would be entitled as would you for that matter to continue to have the same level of comfort as you had together (or as clsoe as possible given ther extra expense of a split). So if you for example were the high earner on 60k a year and he was earning 20k for example if he so wished to do so he could go to court and they would award some level of maintenance to him and vica versa.

thats assuming hes vindictive enough if you split to go down this route. (i wouldnt think many would) Anybody of high moral fibre would just walk away and start a new life unless of course the relationship impacted their earning power in which case then fair enough that should be addressed.

SuperTina

Thanks very much for this info. We have very similar income, I am good at saving, he is not! He's also not vindictive, so I can safely assume that this is not an issue that would arise.