Clearing a mortgage - but unsure of which property

Anon4this1 · 04-08-2022 11:08am #1

Long story short....

c.€400k inheritance (after tax is paid)

Primary residence - c.€260k mortgage balance, with €1,200 p/m repayments

Rental property - c. €130k mortgage balance, with €650 p/m repayments and €1.1k monthly rent (way below market value, but not a lot I can do about that unfortunately 🙄 )

I love the idea of being mortgage free on my primary residence, but €260k out of €400k is a very significant chunk, so I am most drawn to clearing the rental property, leaving a larger chunk, securing a larger income, and creating an asset I can sell, if I ever met hard times.

However potentially I am missing something here... I am not looking for advice, but wondering if there are any obvious principles or implications I am missing with either scenario, which I should take into consideration???

TIA

Jim2007 · 04-08-2022 12:36pm

Another way to look at it is that you really don' have 400k, you have 10k when everything nets out.

Another way would be which is costing you the most

A third would if the recession got really bad which would you prefer to loose

And then there is just gut reaction, do what you feel comfortable doing, so don't want to have borrowings and some are comfortable.

As you say, you are not looking for advice.

L1011 · 04-08-2022 1:42pm

You are presumably offsetting the rental properties mortgage interest against tax on the rental income, so include that in any calculations of reduced expenditure / increased income - easy to overlook.

Anon4this1 · 04-08-2022 3:59pm

https://www.boards.ie/discussion/comment/119428068#Comment_119428068

Yes, we are. However at the time of the original purchase of the rental (our first home), we managed to secure an extremely low interest rate (about 1.25%), so the amount of interest we offset against tax, is small and not a major factor here.

The more I think about it, the more I think clearing the mortgage of the rental property would be best, for a few reasons.

I was originally thinking about locking in €120k for 10 years in the National Solidarity Bond (via An Post), as it is very secure and a 10% guaranteed rate of interest, which is one of the best around for a 'safe' investment from what I can see.
However in reality the return on this investment after 10 years is just €12k
If I use €130k to clear my rental mortgage I am securing the €130k in a property which is currently worth €215k, and I could sell if I ever needed access to the money
At present, I don't really 'make' much each month with the current level of rent, when things like mortgage repayments, insurance, maintenance etc is taken into account - the rental property essentially just pays for itself with only a small bit left over. If I cleared the mortgage, I would be doubling my monthly rental income from €650 to c.€1.1k per month (albeit before tax). So the extra €650 per month income over just 18 months (or c.3 years if tax is considered) would give me a bigger return, than a decade locked into the State Savings.
One of the things holding me back... is the very low rate of interest we are currently paying on the mortgage - I appreciate this about the cheapest access to money that will be found these days, so maybe we would be better to leave it as-is, and look to invest the cash elsewhere

standardg60 · 05-08-2022 5:14pm

If you paid all or even half off your primary mortgage you would have a net monthly gain of between 600 and 1200, tax free (I assume your mortgage payment comes from your net income). Whereas you'll pay tax on any gain from the rental property.

It would be a no brainer for me.

Henry Ford III · 09-08-2022 10:57am

Look at the real cost of credit on both properties. Pay off the pricier one.

Clearing a mortgage - but unsure of which property

Comments