Trading up - Use savings or keep mortgage low.

[Daniel Kelly]

Looking at 2 options for buying in Lucan.
I have 130k savings. Wife has 70k. Mortgage of house we're selling is 5k. (virtually gone)
The general options are
A. Buy a 4 bed with all the bells and whistles for e.g. 425k. (this will require 80k from our savings + 60k mortgage (over 20 years - €300 per month repayments)
B. Buy a 4 bed (which is still quite impressive but as it's our 3rd time moving, my gut is telling me go for option 1 as we don't want to move again) for e.g. 370k (this will require 80k from our savings and no mortgage).

We are also have another child in October and wife will be giving up work for a while.
However, allowing for no more childminder fees and reduced mortgage payments (from 1k currently to 300 per month). I think Option A is best.

I guess the real question is ....
Is it reasonable that we're transferring our savings (80k) into equity and so we're not spending it per se?
I guess if we get the 425k house and have a mortgage of 60k, the LTV is low and the equity is very positive.

Part of me thinks Option B is more prudent, but is it necessarily the best option just because it's the cheaper option?

Decisions, Decisions.

 

[Brendan Burgess]

Am I right in saying that you are selling your existing house for €290k? If so...

While you haven't given us any details of your income, it seems as if you can comfortably afford the €425k house and for your wife to take time off work.

It makes no sense with the amount of cash you have to buy a house which does not meet all your requirements and then trade up after a few years.

Trading up is quite risky. Do you sell your own first or buy first? If you sell your own and prices rise before you buy another one, you can get caught. If you buy another one first and prices fall, you can lose out also.

It's also very stressful.

It's also very costly. Auctioneer's fees and two sets of solicitors' fees. Moving costs. Decoration costs.


So it's very clear that you should buy the house you want now as you can well afford it.

 

[Brendan Burgess]

Having made that decision, the question is whether you should use your savings or take out a mortgage?

You are going to have €65k savings left if you buy it for cash.

If you take out a mortgage you will have €125k savings and €60k cash!!!!

Unless you are about to invest €125k in a business in the next year or two, then there is no reason for you to borrow €60k on which you will pay 3.5% interest to place it on deposit on which you will get 0% interest. That would cost you about €2k a year.

€65k savings should be plenty. You will be saving the €3,600 a year in mortgage repayments.

Most people carry the idea of having a rainy day fund to a ridiculous extent. I fear that you are doing that.

Brendan

 

[Daniel Kelly]

Having made that decision, the question is whether you should use your savings or take out a mortgage?

You are going to have €65k savings left if you buy it for cash.

If you take out a mortgage you will have €125k savings and €60k cash!!!!

Unless you are about to invest €125k in a business in the next year or two, then there is no reason for you to borrow €60k on which you will pay 3.5% interest to place it on deposit on which you will get 0% interest. That would cost you about €2k a year.

€65k savings should be plenty. You will be saving the €3,600 a year in mortgage repayments.

Most people carry the idea of having a rainy day fund to a ridiculous extent. I fear that you are doing that.

Brendan

Thanks for 2 previous replies. I know it's a good dilemma to have, but no less stressful.
My salary is 75k and my wife's net monthly was 2,200.
We are currently 'over-paying' our mortgage at 1k per month.
So wife being out of work will be cushioned by
-- Childminder fees not required : €600
-- Reduced Mortgage repayment : €1,000 if we buy house for cash.
= €1,600

 

[Brendan Burgess]

On a salary of €75,000 with no mortgage, you have no need for a rainy day fund of €125k.

Buy the house you want and pay cash for it.

Brendan

 

[Daniel Kelly]

On a salary of €75,000 with no mortgage, you have no need for a rainy day fund of €125k.

Buy the house you want and pay cash for it.

Brendan

Thanks. I know I'm always planning for the future rather the presents. Kids education, kids this, kids that, I support 1847 is still engrained in the psyche

 

[Brendan Burgess]

Thanks. I know I'm always planning for the future rather the presents. Kids education, kids this, kids that, I support 1847 is still engrained in the psyche

What ages are the kids?

If you are saving on child care, I presume that they are young?

So the savings you can make by paying €2,000 a year less interest will amount to a fair bit by then.

 

[Gordon Gekko]

Brendan is right. Buy the house with the bells and whistles and pay cash for it (i.e. no mortgage). You will be in a fantastic position...mortgage free and plenty of cash in the bank.

 

[Daniel Kelly]

Brendan is right. Buy the house with the bells and whistles and pay cash for it (i.e. no mortgage). You will be in a fantastic position...mortgage free and plenty of cash in the bank.

Thanks everyone and yes I trust you guys, especially Brendan. To a certain extent it's common sense, but I guess I just needed to hear it from the experts. Just need to convince the wife now too. But it's an easy sell really.

 

[Bronte]

I agree with option A but I think you should have a small mortgage as it's no harm to have 60K in savings and it's good discipline to be paying something every month to a mortgage if otherwise you'd have the money swallowed up in general spending. And of course some people are naturally savers and like a good cushion. There's a psycological side to that. You can also overpay the mortage when you're all settled and the final figures are 'real'.

Congrats on the new baby.

There's also another reason to borrow, banks don't like people who have no borrowings, so it's good to have a record of good repayments for the day you come knocking for a car loan or a college loan etc.

 

[Brendan Burgess]

Bronte

After all the good work the rest of us have done in explaining the right answer, you come along and ruin it all by sowing doubt where there should be no doubt

After they buy the bigger house for cash, they will still have €65k in savings.
He earns €75k a year.
They are obviously good savers, so the likelihood of them frittering away money is very low.

There is no basis to your assertion that "banks don't like people who have no borrowings". They have a very good borrowings record. They have borrowed money and paid it off. So they have a very good credit record and history.

And with €65k in the bank and saving over €3,000 a year, they won't need a loan for a car or for college.

By the time his kids reach college age, they will have built up their savings. It's probably that his wife will have returned to paid work by then anyway.

If someone has €10k cash and a €10k mortgage, it could be argued that they should not repay the mortgage as they need a cash buffer. But it's wrong to suggest to someone with €65k cash that they should take out an expensive mortgage to boost their cash even further.

Brendan

 

[Daniel Kelly]

What ages are the kids?

If you are saving on child care, I presume that they are young?

So the savings you can make by paying €2,000 a year less interest will amount to a fair bit by then.

Kids are 7 and one arriving in October (all going well). I suppose more of a reason to not be paying 300 euro per month mortgage if we can avoid it.
Better spent on Nappies and Milupa

 

[Bronte]

And with €65k in the bank and saving over €3,000 a year, they won't need a loan for a car or for college.

By the time his kids reach college age, they will have built up their savings. It's probably that his wife will have returned to paid work by then anyway.

You don't know what can happen in life. And the whole point of this forum is to give posters different options I thought. My DH lost his job and I'm ever so glad we were savers and now I don't have to rely on a bank for loan for education and I'm glad we have a mortgage loan at a very low interest rate as there's no way the bank would give it to us now in all probability.

Anyway Daniel already said he trusted you so he's obviously going to do the right thing.

He also said it would cost €300 a month which is nothing.

 

[Brendan Burgess]

Hi Bronte

The OP is a saver. Borrowing €60k at 3.5% to put it on deposit at 0% does not make him any more a saver. In fact, it is the opposite, as his outgoings will increase by over €2,000 a year in interest. When his eldest starts college, he will have very substantial savings which will be about €25,000 higher if he does not take out a mortgage now.

Of course, neither he nor I knows what might happen. But borrowing money at high mortgage rates is only a good idea if they know that they will have a definite need to borrow money in the immediate future. For example, if they needed to buy a car within a year or two. Likewise if someone had a child starting college in a year or two, they might be better off not paying off a mortgage if it meant that they would have to remortgage for the college costs.

Brendan

 

[Daniel Kelly]

Hi Bronte

The OP is a saver. Borrowing €60k at 3.5% to put it on deposit at 0% does not make him any more a saver. In fact, it is the opposite, as his outgoings will increase by over €2,000 a year in interest. When his eldest starts college, he will have very substantial savings which will be about €25,000 higher if he does not take out a mortgage now.

Of course, neither he nor I knows what might happen. But borrowing money at high mortgage rates is only a good idea if they know that they will have a definite need to borrow money in the immediate future. For example, if they needed to buy a car within a year or two. Likewise if someone had a child starting college in a year or two, they might be better off not paying off a mortgage if it meant that they would have to remortgage for the college costs.

Brendan

Just to put a different slant on this.
Originally I said I had 130k saving and wife had 70k savings.
In summary we need to make up shortfall of 140k to buy the 425k house.
What I didn't say (didn't think I needed to get into the details)
was that my 130k is 70k saving and 60k in various investments (Life Assurance, REIT Fund, ISEQ Wisdom Tree).
Would prefer to leave 60k investments in place and monitor them (they have recovered well from the 2009 bashing they took).

The advice has been great and appreciate but I'm thinking
70k (my savings) + 50k (wife's savings) + 20k mortgage = 140k

Also, we'll spread the 20k mortgage over the longest possible period to keep the monthly repayment down.
Also, keep it variable so we can pay off in chunks when we can.

 

[Fella]

Just to put a different slant on this.
Originally I said I had 130k saving and wife had 70k savings.
In summary we need to make up shortfall of 140k to buy the 425k house.
What I didn't say (didn't think I needed to get into the details)
was that my 130k is 70k saving and 60k in various investments (Life Assurance, REIT Fund, ISEQ Wisdom Tree).
Would prefer to leave 60k investments in place and monitor them (they have recovered well from the 2009 bashing they took).

The advice has been great and appreciate but I'm thinking
70k (my savings) + 50k (wife's savings) + 20k mortgage = 140k

Also, we'll spread the 20k mortgage over the longest possible period to keep the monthly repayment down.
Also, keep it variable so we can pay off in chunks when we can.

I can see you how its hard to use up so much savings, but the fact you saved up that much in the first place means your likely to do it again. Then you'll have savings and wonder what you should do with it. I would love to have a mortgage of 3.5% just so I could pay it off and feel like i've made a 3.5% return on my money. No point in paying interest at 3.5% if you can avoid it , its very hard to get that return investing or any other way , trust me I'm trying with my own money.

 

[Brendan Burgess]

Hi Daniel

It makes no sense at all to borrow money to invest.

You can keep your €60k investments largely intact and use your cash to buy the house.

Borrowing money to invest is a terrible idea. Spreading it over a longer period makes a terrible idea worse,not better.

If you do decide to cash some of your investments you should not cash any which are currently worth less than you paid for them, as any gain from the current value up to the price you paid will be, effectively, exempt from tax.

Brendan

 

[Daniel Kelly]

Hi Daniel

It makes no sense at all to borrow money to invest.

You can keep your €60k investments largely intact and use your cash to buy the house.

Borrowing money to invest is a terrible idea. Spreading it over a longer period makes a terrible idea worse,not better.

If you do decide to cash some of your investments you should not cash any which are currently worth less than you paid for them, as any gain from the current value up to the price you paid will be, effectively, exempt from tax.

Brendan

Thanks Brendan,

Just a bit puzzled though.

Is it not the investments that are worth less than I paid for them, that are exempt from Tax
e.g. One investment bought for 10k is now 8k approx.
e.g. Antoher investment bought for 10k is now 9k approx.
e.g. Another Life Assurance product taken out in 2007 which I pay into monthly is performing at about 110% (note I've already paid exit tax eventhough I haven't exited, 7 year rule brought in by government).
I know this 110% has to take into account inflation etc.

 

[44brendan]

banks don't like people who have no borrowings,

Now there's a new one on me after 20+ years in the business

 

[Bronte]

Now there's a new one on me after 20+ years in the business

Because a history of repayment is a sign of a good borrower. And people who don't borrow don't make any money for banks. Of course they don't like overborrowing (except for the 10 year celtic tiger period when it was all the rage), they also don't like people who fail to make repayments on time. Anyway you tell me what banks like 44B?