Use savings or borrow to build house

H

highbury

Guest
Hi,

I’m currently in the process of buying a site down the country at a cost of 45K. I have saved the money to pay for this. I intend to save around 20-30K over the 18 months to start the house. My brother is a builder. The site/house should be built for €160K. I should be able to rent out the house for around €500/600 a month. When built it should be worth about 280K . I also have SSIA €254 put in since I started in April 2002. I currently have a house in Dublin which I rent out a room and mortgage is not to high. I also pay 400 a month into a Directors pension. I’m a IT contractor and have been lucky so far in having continuous work but as a contractor I know there will be times I will be out of work!. I will be keeping the house as its in my home town. Hopefully move back some day. So my question is should I borrow for the site/house or use my savings. If I use my savings I can build it over a few years and have a small mortgage (50K). If I borrow I can keep my savings and do something else with it. Don’t know which is best…Great website by the way.

Thanks,
Highbury
 
Re: Use savings or borrow to built house

It boils down to numbers. What is the cost of using your savings? (not only the current rate you are earning on them but the potential rate you could earn on them) Then ask, what will be the cost of any borrowings? (maybe use fixed rates for certainty)

Better off borrowing if the cost of using your savings is higher than the cost of money.
 
Re: Use savings or borrow to built house

Thanks for the reply Theo
My 45K is with NR I think it’s at 3.25%. To get a mortgage at the current rate would be around 3.5%. Obviously if mortgage rates go up so does the deposit rate with northern rock. I suppose there is not much in the difference. I think this is what you mean?
 
Re: Use savings or borrow to built house

Given those numbers, it will cost you less to use your savings than to borrow. [Unless you think you can generate a higher return on the savings - but if the house is going to be worth 280 after being built, that's not a bad return]
Use the savings.
 
Re: Use savings or borrow to built house

Maybe use some of your savings.... given the nature of your job, you should be hanging on to some rainy-day money, despite the cost of doing so in the form of a slightly larger mortgage.

Actually, just re-reading the thread, if you have the €45k for the site, and are guaranteed a contract for the next few months to allow you to build up a rainy-day fund again quickly enough, go ahead and buy the site without taking out a mortgage. Out of the €20-30k you estimate you can save over the next 18 months, I'd keep some of that aside as a safety net.
 
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