MMO - Release positive equity now to build new home in next 6-12 months?

thirtysomething

Registered User
Messages
6
Hi - 1st time poster here.

Age: 38
Spouse’s/Partner's age: 36

Annual gross income from employment or profession: 58,000
Annual gross income of spouse: 18,000
Spouse is self employed consultant (part time) with minimal business overheads - business is growing and projected to turnover 25,000 in 2015


Monthly take-home pay approx: 4500 combined

Type of employment: PAYE - IT

In general are you:
(a) spending more than you earn, or
(b) saving?
B

Rough estimate of value of home: 190k
Amount outstanding on your mortgage: 130k
What interest rate are you paying? std Var with AIB, about 4.5%

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month? NO
If not, what is the balance on your credit card? 1900
Paying back approx 150-200 per month


Savings and investments:
Started putting 1500 per month between us into savings recently.
Separately we have about 30k in savings for kids future.


Do you have a pension scheme? Yes
500 per month going in between employee/employer/avc


Do you own any investment or other property? NO

Ages of children: 3 & 8

Life insurance: Yes


What specific question do you have or what issues are of concern to you?
Our house is in positive equity (market value - mortgage left = ~50k) and we are thinking about selling it and then trading up to a new home. However we are not in a rush to move into a new home straight away as we would like to buy a site and build a new house.
The current plan is to release the equity on our existing home and use this as a deposit for mortgage to build a new house.
The thinking on this is that we will get more for our money by building and it will be exactly the house that we want. Without having got official quotes, I reckon we can buy a site and build a really nice 4/5 bed house (<2k sq ft) for ~280k - buying an equivalent existing house in same area would be 350k+.
In the interim we plan to stay with parents for a while and then rent until new house is ready.

We are very lucky to not be in negative equity and actually able to exit our house with some nice money in the bank.

I'm just wondering why this all seems so obvious - am I missing a catch somewhere?


 
Some simple things first

1) Pay off your credit card in full. You are putting €1,500 a month into savings while paying around 15% interest on your credit card balance. I know the figures aren't huge, but that is still madness.

2) You are paying 4.3% on your AIB mortgage if you are on the SVR. Pay the €30k off the mortgage and reduce the LTV to around 55%. You will be able to reduce the rate to 3.9% i.e. saving around another €400 a year.

2a) Rather than pay off the mortgage, keep your savings to buy a site and get planning permission. I think you should do this before you sell your house and move in with the parents.

But the key point is that you are borrowing very expensive money at 4.3% to enable you to save at probably less that 1%. This makes no sense. When you build your house, try to have as small a mortgage as possible as the banks are charging much lower rates now for lower LTV mortgages.

Brendan
 
Hi Brendan,
Thanks, this is the good common sense type of advice I was hoping to hear and will help me formulate the right questions to ask. I'm hoping to visit a financial advisor with the aim of getting advice and making a sound plan as opposed to being encouraged into buying financial products.
You are right about the CC - I'll pay that off so that it will be a non issue for new mortgage application.
The hope is not to use the 30k on the house - its for the kids future,rainy day etc. but at least it will show the bank that we have capital assets - Is that the way it works?
I would like to buy a site with cash from house sale but then that would be our 20% contribution to the new mortgage (albeit a lesser one) gone - no?
I've heard it mentioned a few times here and elsewhere that the new mortgage should be applied for before selling existing home, Can someone explain the rationale behind this?
Thanks, TS.
 
If not, what is the balance on your credit card? 1900
Paying back approx 150-200 per month
I'm going to pick on you about this too. They might have to tighten the belts a little, but VISA will survive without you. Pay it off tomorrow and save yourself €135-€220.

I'll leave the big-picture stuff to the guys who know this stuff better. Just one thought - 5 minutes with excel suggests that if you attacked this problem like lunatics, invested everything (except a 10k emergency fund) in paying less interest, you could own this house outright in just under 10 years, without ever getting a raise.

You could afford a whole lot of college on a month-to-month basis if you had no mortgage payments :)
 
The hope is not to use the 30k on the house - its for the kids future,rainy day etc.
To my mind if you've got enough insurance, 6 months of expenses is enough of an emergency fund.
Medium term, I'd leave 10-15 of that 30 alone, and invest the rest in paying less interest - about the best return you can get. The expensive part of your kids' future is 10 years away, so getting a good return is more important than having lots of cash-in-hand.

I've heard it mentioned a few times here and elsewhere that the new mortgage should be applied for before selling existing home, Can someone explain the rationale behind this?
I think the idea is to protect yourself from any unexpected problems getting new credit.
Imagine somebody has stolen your identity, they are in the process of trashing your credit record, and you haven't heard about it yet. Your name will be mud with the banks until the dust settles, and that could take a while.
 
So the site is about 55K?

Never met a person yet who did a new build on budget !

How long do you, your wife and kids plan to live with parents? What do you mean by rent?

How long have you been saving 1500 monthly?

Are there any issues with credit card usage, odd that you would not pay the full amount, the way you're paying it is not a good sign.

Your saving lump sum is good, equity good, and savings good.

Would it be better to concentrate on the growing business before tackling the 'horrendous' stress of a new build. A better business gives you more cash for building. Well done on the business.
 
Hi Bronte,
Fair comments/questions.
55k for site would be great but 70-80k is more realistic where I am. It sounds like you have an idea of what it should cost to build a house.
Plan to stay with parents for no more than 6 months - then rent if needs be after that for how ever long it takes to get our new house.
Saving just since xmas.
No issues with CC, just naive mentality, I have seen the error of my ways thanks to advice here and elsewhere and paid it off in full.
 
Excellent to get feedback on posters actually heeding advice !

No way am I getting into how much to build a house, that's a how long is a piece of string question. Are we talking granite or mdf, Villeroy & Bosch for sanitary ware etc etc.

You've been saving for 2 months, what were you doing before with the money - don't answer if you don't want to.

Sites are expensive down your way.

Sounds like you're being cagey about staying with the parents, if you are, might need to rethink that.

Where did you come up with the housebuilding cost? Have you asked a builder. Don't do what most Irish people do and build a massive empty mausleum that you cannot afford to heat ! (says she who won't admit to how much her heating bill is and hoping to get a nice little refund in July when they read the gas meter to help with the summer holiday bill !)
 
If it's builders finish how are you going to fund the painting, garden (not urgent) driveway, tiling, flooring etc? It costs a heck of a lot to finish a house. Decent kitchens are expensive !

Re the site cost, I think it's high because you can buy houses for that price. I was looking last week at a site for 150K and another for 80K in the same location and a 40 year old house, large, that needs refurb on a VERY large site was around 220K. Just thought it was madness to go building with what you could do on the existing house (it had income stream too) plus you could live in it from day one. But everybody wants there dream home and nothing wrong with that. Though they do say it takes the third build to get it right.
 
Back
Top