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Index of Questions
I don't think that I will ever be able to afford a house. Is there anything I can do?
If your financial position doesn't allow you to buy a house in the near future, you should consider getting on to the housing ladder by buying a house jointly with one or two of your friends. This is not an ideal situation, but it's better than renting in a market where there is a long upward trend in house prices. If you do go down this route, make sure you have a good legal agreement in place to cover such issues as what happens when one of you wants to sell your interest.
Are house prices not heading for a crash?
No one knows
if house prices will go up or down in the short term. But it is very likely
that they will rise over the medium to long term.
If you buy now and house prices do go down, it's a pity but hardly a calamity.
OK, if you had waited you might have been able to get a bigger and better
house. You will be in much more trouble if you don't buy now and house
prices continue to rise. It's quite possible that you will never be able
to afford a house.
I have just received a lump sum of €40,000. Should I invest it or pay off my mortgage?
The current
mortgage rate is about 4.7%. The tax-relief is very small, so let's ignore
it for simplicity. Assume also that you have a variable rate mortgage
with no redemption fee. If you pay off your mortgage, you will save yourself
4.7% a year or €1,900. That is real cash into your hands, tax-free.
If you leave your monthly repayments as they are, your mortgage will be
repaid quicker.
If you put your money in a deposit account, you will probably get about
3% interest from which DIRT of 20% will be deducted. So your €40,000
will earn you €960 after tax. So you can earn €960 deposit interest
or save €1,900 mortgage interest. The only reason you would do this
is if you needed the money for something else in the immediate future.
For example, it wouldn't be clever to pay off your mortgage at 6% and
then borrow to buy a car in a few months time at 10% !
I am a self-employed doctor. I don't have a pension. I am thinking
of buying a house as an investment. What do you think?
No it is
not sensible. I know a few people who buy property as their pension. The
big attraction of a pension is that you get tax relief at your top rate
on contributions to your pension. The fund accumulates tax free. And you
get 25% of your fund tax-free when you retire.
What you are doing is buying a house out of after tax income. You pay
income tax on your rent and CGT on any profit you make on the property.
The only attraction of what you are doing is that you can borrow to invest
in a property, whereas it is not usually possible to borrow to invest
in a pension fund. However, borrowing to invest in anything increases
the risk and is probably not a good idea.
The stockmarket is going through a bad patch at the moment. Should I wait until things improve?
The stockmarket is very volatile. It is rarely valued correctly. Sometimes it is overvalued and sometimes it is undervalued. With foresight, you would have sold out at the peaks and bought in at the troughs. But, it is very difficult, if not impossible, to identify an overvalued market. If you do correctly identify an overvalued market and sell your shares in time, you will have to buy back in again at the right time. But the stockmarket has a habit of suddenly jumping in value when you expect it least.
I don't know if the stockmarket is overvalued at the moment. And I don't know of anyone who has a good long term record of predicting the turns in the market. The best investment strategy is just to buy a diversified portfolio of shares and hold them for the long term.
I am planning to invest 50% of my money in the stockmarket and keeping the other half in a deposit account?
If you had invested £100 in cash and £100 in the Irish stockmarket back in 1990, your investment would have been worth £570 ten years later. If you had invested the full £200 in the stockmarket, it would have done worse than the 50/50 investment initially, but ten years later, it would have been worth £870
You are better off investing 100% in the stockmarket. But this assumes that you will not panic when the stockmarket crashes. If keeping a part of your savings in cash, minimizes the chances of you panicking , then it is probably an acceptable strategy. It will cost you money in the long term, but you might sleep more easily at night.
I would like to invest in the stockmarket but I have no money ? Should I borrow to invest?
Borrowing can dramatically increase your profits. If you borrow at 6% and make a return of 10%, you will become rich over time. But borrowing dramatically increases your risk. If the stockmarket plunges, you will get nervous and be tempted to sell to cut your losses. Even if you keep your nerve, your bank manager might get nervous.
Remember that if you have a significant amount outstanding on your mortgage while you are investing in the stockmarket, you are effectively borrowing to invest in the stockmarket. If your mortgage is at a comfortable level (i.e. less than one year's salary), then this is a reasonable approach. However, if you have a high mortgage, you would be better off making additional payments against your mortgage to pay it off earlier.
A friend of mine works for Intel and says it's a great company. Should I invest in it?
Don't be tempted by stockmarket tips. Stockmarket tips are not worth anything. And it doesn't matter how reliable your source is. It might surprise you to learn that company directors often buy or sell their shares at the worst time.
I am self employed and have no pension. What should I do?
If you don't own your own home, you should save up to buy a home as a first priority. Don't start a pension until you own your own home and you have your mortgage under control.
Where is the best place to save for my children's education?
Depending on the age of your children, this is usually a medium to long term investment and there are a variety of approaches you can take.
You can increase your monthly mortgage repayments. This will enable you to pay off your mortgage quicker, so that you will have lower outgoings when you need extra money for your children's education. If you have a small mortgage, you will be able to extend your mortgage when you need more money.
You can increase your contributions to your pension scheme. When you need more money for education, you will be able to reduce your normal pension contributions as your pension will be better funded.
Or simply
build up a portfolio of shares and sell them as you need the money.
Don't contribute to any fixed term savings scheme. You might need the
money earlier or later.
Where should a child invest their savings?
Children should invest directly in the stockmarket for two reasons. Firstly, the investment is presumably long term and the stockmarket is the best place to invest for the long term. Secondly, a child who invests in the stockmarket learns a lot about it at an early age - crashes, dividends, and of course the extraordinary growth of the stockmarket.
I have 10 years left of a 20 year endowment policy , should I cash it?
If you try to cash the policy early, you will get a ridiculously low quote from the insurance company. This is because such a high proportion of the return comes in the form of a terminal bonus. To get the maximum value of these products, you must try to maintain the agreed level of contributions right up to the very end.
However, if your premium is increasing every year, stop the increase. This should not affect the value of the policy disproportionately.
If you cannot afford to continue contributing, then make the policy paid up. You will still get a terminal bonus when the policy matures, but unfortunately, it is not possible to estimate what it will be. This is because the calculation of terminal bonuses is so obscure.
If you absolutely
have to get your hands on the cash, go to one of the specialist companies
who will buy the policy from you. These offer much better value than the
insurance company's cash value. You will find such companies listed in
the 01 phone book under "endowment".