Saturday 24 February 2018

Home economics: Sinead Ryan answers your property questions


New kitchen: home-improvement loan or mortgage top-up?
New kitchen: home-improvement loan or mortgage top-up?
Sinead Ryan

Sinead Ryan

Q. When my parents died last year, they left the family home equally to their children. My portion from the sale amounts to around €76,000. I plan to pay off some debts and change my car, but I will still be left with around €38,000. Rather than put this on deposit, with rates so poor, can I put it into a pension plan and, if so, what one is the best value? I work in the leisure industry, but my employer doesn't have a pension plan.

A. While putting money into your pension is a great idea, especially as you don't already have one, part of the attraction is the excellent tax relief a contribution receives, which is at the marginal rate.

However, one caveat Revenue insists upon is that such contributions are made from 'earned income', i.e. not from rental income, say, or winnings - or, in your case, a legacy. But there are ways and means to address this.

You haven't told me your age, but let's assume 30-50. If so, you can technically put 20-25pc of your annual income into a pension and qualify for maximum tax relief at whatever rate you pay. As you get older, this percentage increases to a maximum of 40pc by age 60, although few people can afford to do so. You would need to do it as a contribution from your salary, but you can always replace this by drawing off the legacy if you wish.

You say your employer doesn't have a scheme. By law, they must make one available to you, even if they don't contribute towards it. It's called a Personal Retirement Savings Account (PRSA) and you can look after it yourself with or without your employer's input; the company must simply facilitate the deductions.

These are normally sold by insurance companies, but I would strongly recommend you find yourself a fee-based broker (pension commissions can be very high) and get his or her advice on the best plan. It may be possible to eke out your contribution over several years from your legacy if your salary isn't high enough, thus availing of all the relief based on income.

Finally, you have no inheritance tax implication on the money: it falls well within the allowance for parent to child.

Q. I am building a kitchen extension which I expect to cost around €30,000. My question is about how best to finance it. My mortgage is currently €170,000 at about 3.7pc interest and I've around 16 years left on it. Should I tack the loan onto the end of that, bringing it up to €200,000 or take out a separate loan to pay for it?

A. You don't say whether you have a tracker or variable mortgage so I'll assume the latter, since you wouldn't be allowed to extend a tracker mortgage in any event. You're currently making repayments in the region of €1,174 per month, and adding the new loan to this would increase them to €1,381.81 - a total increase of €39,744 over the term.

Taking out a personal loan separately will, of course, incur higher interest rates, but over a shorter period. KBC is offering 6.3pc on a five-year loan, which would mean repayments of €581.73 p.m. or €34,903.80 over the term.

Bank of Ireland, at 7.5pc, would bring this to €35,858.40. If that's too high, Permanent TSB has a 10-year personal loan rate of 8.2pc for home improvements, making repayments lower, at €362.51 p.m. - but an expensive €43,501 over the decade.

All in all, it's much of a muchness which you choose, but the personal loan, in as short a period as you can afford, shades it for me.

Incidentally, you might want to take the opportunity to switch your entire mortgage and incorporate the new loan into it. You can do better than 3.5pc at the moment, with both Ulster Bank and KBC offering 3.1pc, which might just make the loan pay for itself.

The Ryan Review

If you listen to the austerity doomsayers, no one in the country has any money. We can't afford anything and we're struggling to get by, claim their political representatives on the hard left.

The truth inevitably paints a different picture.

Central Bank figures, not hampered by sentiment, show that there is over €95 billion in household deposits - spread between banks, NTMA offers (like post offices) and other State instruments.

This figure has remained virtually constant in the eight years of austerity and shows little sign of changing.

A recent Standard Life survey showed average deposit levels at €46,000 for two thirds of people. The 55-64 age group have the most, averaging €91,000. Obviously it goes without saying that lots of people have none at all.

Nevertheless, we're a curious people. We'll keep money earning nothing in a bank, while juggling debts at home - 72pc plan to hang on to their deposits in the year to come, despite the same percentage acknowledging they represent terrible value.

It's fear. People hoard when they are fearful of tomorrow.

AIB or BOI or Prize Bonds may be the mattress, but paying down debt or spending, even when it is the logical action is a terminal step; hanging onto it is security, even when inflation is eating into the real value.

With DIRT punishing savers at 39pc, the stick isn't working.

What will it take to get that cash swilling around the economy?

Indo Property

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