Sunday 22 October 2017

'I've tracker mortgages on three Dublin properties but I'm retiring soon. Do I use my pension lump sum to clear some of the outstanding?'

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Gerry Stewart Partner, Fagan & Partners (www.f-p.ie)

Question:

I'm 57 and hope to retire at 60. I have three properties in Dublin - two are rented and one is my main residence. I have three tracker mortgages - the cheapest of which is on my main residence. One of the mortgages is an interest-only mortgage, with €230,000 to be repaid on it. I have these mortgages until I'm 70. I will also have a semi-state pension which is due when I retire. I will get a six-figure lump sum payment at retirement. Can you advise what the best course of action is to prepare for retirement? I don't particularly want the job of managing property for too long after retirement. Would it be a good idea to pay off some of the mortgages now, as I would have the money to clear at least one of them? All three mortgages (including the one for my main residence) are covered by the rental income earned on the two rented properties. Marie, Dublin 3

 

Answer:

Should you hope to retire at the age of 60 and will do so on a semi-state pension, you should ensure you get the biggest six-figure lump sum possible. You can do this by making an additional voluntary contribution (AVC) to your pension in a way which would increase your tax-free lump sum to one-and-a-half times your dynamised pensionable salary. A dynamised pensionable salary is where you add inflation to your best three or more consecutive years' salary from the past 10 years.

It is really a personal choice whether or not you pay off your tracker mortgage early.

You need to compare the return you are getting on the money you would use to pay it off versus the interest cost of the tracker mortgage. On the rental properties, your rental income exceeds the mortgages on the two rental properties - so you are being taxed on any rental profit. Assuming you have registered the properties with the Residential Tenancies Board, you can claim mortgage interest relief (which is currently granted at a rate of 80pc) to reduce the taxable profit. If you clear either mortgage, your taxable income will increase, as you will no longer be able to claim this mortgage interest relief. If you clear either of the mortgages, check that the mortgages are not cross-charged - that is, where one property acts as security for another.

If you did decide to sell the rental properties, you may have to pay capital gains tax if the properties have increased in value since you bought them.

You explained that you will have to repay the full €230,000 interest-only mortgage at the age of 70. So at that stage, you may have to consider selling an asset to repay the mortgage, if you have not already sold the properties by then.

You say you may not want to be managing property for too long after retirement, so you could consider using a professional estate agent to do this for you. The estate agent's fee would be deemed a rental expense, which you can write off your rental income tax bill, and the agent should be able to take over a lot of the hard work, such as letting the property, vetting tenants, organising repairs and collecting rent.

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