Investing in Property.

By: Joe Daly,
Daly Investment Planning Ltd,
Ballinrobe,
Co Mayo. (094 952-0921 or e-mail: info@dip.ie )

One of the areas of great discussion at present is the issue of whether you should buy or rent a property or indeed whether there is much more growth potential in the property market.

First we will discuss some of the types of mortgages available and then briefly look at issues you need to take into consideration when purchasing to buy or buy to let. Unfortunately no one can predict the direction of property but good background work reduces the risk.

Types of Mortgages and Flexible Options
You can choose from three different types of mortgage:

• Repayment Mortgage
• Endowment Mortgage
• Tracker Mortgage
• Pension Mortgage

Repayment Mortgage – suitable for purchasing your home
With a repayment mortgage or as it is sometimes called, an annuity mortgage, repayments are made to cover both the interest element of the mortgage and the mortgage itself. The amount of the mortgage outstanding progressively reduces, and by the end of the term both the mortgage and the interest are completely paid off.

Endowment Mortgage –
With an endowment mortgage, repayments are made to the lender to cover the interest element of the mortgage. At the same time separate payments are made into an endowment policy. At the end of the mortgage term, the proceeds of the endowment policy may be large enough not only to pay off the mortgage, but also to leave you with a surplus. Specialist advice is required as endowment mortgages are not suitable for all borrowers. There is a large element of risk, which needs to be explained and understood.

Tracker Mortgage -
This guarantees that the repayments will be pegged to the European Central Bank lending rate plus an extra .85% - 1.45% depending on the lender. This can in certain circumstances lead to lower monthly repayments than certain annuity mortgages.

Pension Mortgage
With a pension mortgage, repayments are made to cover the interest element of the mortgage (similar to Endowment Mortgage). At the same time separate payments are made into a retirement/pension plan. Finance act 2000 has made changes to retirement planning and gives options at retirement to certain individuals. At the end of the mortgage term part of the proceeds of the pension plan pay off the original amount of the mortgage. The surplus that remains provides you with an annual pension. It is possible to pay the loan back on sale of the property prior to retirement.

What Type of Rates?

Low interest rates reduce the interest burden but if we have low inflation we will also have a situation where it will take longer to pay off debt due to lower salary increases etc.

You can select from three different repayment rates:
• Variable
• Fixed
• Split
• Interest Only

Variable Rate
With a variable rate, your monthly repayments will rise or fall depending on prevailing interest rates. If the rates fall your monthly repayment reduces whereas if rates rise your repayment increases.

Fixed Rate
With a fixed rate, the interest you pay is fixed for a pre-determined term, such as 1, 2, 3, 5 and more years.
This means that you know exactly how much you will pay each month during the agreed period. The fixed rate will not be affected by interest rate fluctuations in the market. When the fixed period expires, you can either agree another fixed rate for a set term or revert to the prevailing variable rate. Beware if you opt out of a fixed rate before the term expires you may have to pay a fee on early redemption.

Split Rate
With a split rate, you have the best of both worlds, because you can split your mortgage between fixed and variable rates. If rates fall, you can benefit from a lower rate on the variable portion. If rates rise you have comfort and security of knowing that only the variable part of your payment is affected.

Interest Only
Used mainly for investment properties where by the interest is paid for the duration of the loan and the capital is paid on disposal or from other fund sources e.g. retirement.


Example of Mortgage.

In the case of a €150,000 interest only mortgage over 25 years an interest only mortgage reduces the repayments from about €898 (annuity Mortgage) to €656 (interest only) per month (APR 5.25%) and ensures that maximum tax relief will be available against rental income throughout the term of the mortgage.

The amount repaid to the lender on an interest only mortgage is €198,875 and that in a Repayment mortgage would be €119,661. Capital repayment is after tax repayment. These figures are in the current low rate environment. From this you can get a feeling as to how expenses allowed against rents reduces the over all cost BUT you need capital appreciation on your home to make money. If your property value does not increase by greater than your repayment you are not making money.

Capital appreciation plays a vital role in returns from property as does the rent and interest rates. Rates are low now and may increase in the future so look at your own situation carefully. Over the long term property, as an asset has yielded good capital appreciation to investors but there is no guarantee of this in the future and some economists together with Central bank said that there is a property bubble in the making in Ireland and that has now happened. Combined with effective tax planning the purchase of property can prove a fruitful investment as you can decide how and when to repay the loan.

Issues when Purchasing a property.

Some practical advice when purchasing to live in or rent would be to:

• Do the research. Local Market knowledge. Identify the opportunity
• Structure any deal to mitigate risk. Risk to each individual is different and ensure you are happy with that chosen
• Look at tenant risk, Gearing risk, Interest rate risk, liquidity, taxation on cross border transactions, death duties/probate issues.
Ask the following questions:
• Market outlook, set up costs, cost of bank debt, is the developer personally purchasing in the development and how much capital outlay have they in the project.
• Request projections on a basis of no rental growth, sale price being the same as the purchase price and the sale price with a 10-20% differential.
The yields or return on property is based on a number of issues the main ones being
• The initial bills like furnishings, washing machines and carpets
• The cost of voids or vacancy plus letting and management fees, a sinking fund for repairs and your insurance.
• Taxation and reliefs.

Buying abroad?

Many Irish People are looking abroad for investment opportunities and it is important that this is being done after your research and not because of price. We are hearing each day of someone who has paid a deposit on a property and it will not be ready until 2004 or later. They are marketed on current prices and expectations of future returns. No guarantees on either of these.

Apply the same research etc to these properties and take a long-term look at the possible growth of the economy you are investing in.

At the end of the day the method of finance, the property chosen and the expectations of returns /risk taken will be different for each property type. You decide on your risk profile and make a judgement on the information to hand.

The views and recommendations in this article are based on information from a variety of sources. Although they are believed to be reliable the author and Editor cannot guarantee their accuracy.