Hi folks, we are lucky enough to have enough savings to buy a new house without needing a mortgage. Our financial adviser thinks it might be smart to mortgage anyway, so as to keep the capital intact. The savings are currently invested and returning around 4-5%. The mortgage would cost around the same. We should be able to pay down the mortgage in full if interest rates get silly. I get the argument for keeping the capital, but would it be wiser to be debt free? Many thanks
Would you take a mortgage if you could buy from savings?
- Thread starter helvetica
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thedaddyman
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A nice problem to have
First thing you should consider is the level of risk in your investments. It may be a conservatively managed portfolio but even the most conservative of stocks carry a level of risk. 10 years ago bank shares and shares like Tesco's were considered low risk by many investors but look where they are now. 4-5% return suggests it is not gathering interest in a savings account.
Second thing to consider is the tax implications of whatever decision you make, for example, what is the CGT impact of cashing in your investment.
Thirdly you mention "we" in your post, I presume that means 2 of you. You need to think the implications of death, illness or separation became a factor in your lives. Could something happen that would result in your lump sum being used for other events?
Is a half and half approach a consideration, use half of your savings to reduce the mortgage but still retain a significant capital lump sum for a rainy day
First thing you should consider is the level of risk in your investments. It may be a conservatively managed portfolio but even the most conservative of stocks carry a level of risk. 10 years ago bank shares and shares like Tesco's were considered low risk by many investors but look where they are now. 4-5% return suggests it is not gathering interest in a savings account.
Second thing to consider is the tax implications of whatever decision you make, for example, what is the CGT impact of cashing in your investment.
Thirdly you mention "we" in your post, I presume that means 2 of you. You need to think the implications of death, illness or separation became a factor in your lives. Could something happen that would result in your lump sum being used for other events?
Is a half and half approach a consideration, use half of your savings to reduce the mortgage but still retain a significant capital lump sum for a rainy day
Steven Barrett
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Why would you want to have debt if you don't have to?
What are you going to spend your money on?
Could you not spend it on buying the house and then start again?
As daddyman says, what level of risk are you taking? That 4% - 5% could fall quite quickly. As we've seen with the QE announced by the ECB, bonds can also fall in value quite quickly.
Have you ever met someone who's complained of being debt free?
Steven
www.bluewaterfp.ie
What are you going to spend your money on?
Could you not spend it on buying the house and then start again?
As daddyman says, what level of risk are you taking? That 4% - 5% could fall quite quickly. As we've seen with the QE announced by the ECB, bonds can also fall in value quite quickly.
Have you ever met someone who's complained of being debt free?
Steven
www.bluewaterfp.ie
+1. Can you achieve a higher return than 4/5% with your savings without taking unnecessary risk with your funds? By buying a property with your savings you can then put aside the notional rent/mortgage payment each month into a pension scheme/AVC (if appropriate) which will in time replenish your funds at a good return and also be tax effective.
Brendan Burgess
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Hi helvetica
Your financial advisor probably gets a fee from selling you a mortgage and from selling you investment products.
We are in a very uncertain world. Nowhere is risk free. The euro could collapse. De risk. Buy your house for cash.
Brendan
Your financial advisor probably gets a fee from selling you a mortgage and from selling you investment products.
We are in a very uncertain world. Nowhere is risk free. The euro could collapse. De risk. Buy your house for cash.
Brendan
I'd love to know how you are reliably generating 4-5% annual return after fees and taxes. On the surface it makes sense to buy the house with cash, rather than take on a mortgage.
However
However
- Would the mortgage really cost you 4-5%? What if you used some of your capital to get a low LTV ratio, then your mortgage rate should be lower again. For example, KBC are currently offering 3.62% APR for LTV < 60% if you open a current account with them. As you say, if interest rates rise significantly, you always have the option of paying it down with capital.
- A monthly mortgage repayment imposes some financial discipline; it may be easier to pay off the mortgage than to reaccumulate your capital amount through discretionary monthly savings.
- Might you have any large capital needs in next five years. For example, elderly parents that require care, or funds to start a business? It's probably easier to keep the capital on your own terms now, rather than have to look for it again on a bank's terms later.
To be fair, Eurozone sovereign bond prices rose pretty dramatically both in anticipation and on the announcement of the commencement of a QE programme by the ECB.
As others have noted, buying the house with cash is the equivalent of receiving a guaranteed, tax free, net return of 4-5% per annum for the life of the mortgage that you would otherwise require. Subject to any liquidity needs, that's pretty much a no brainer in my opinion. You might possibly do better by investing your savings in equities - but you might do an awful lot worse. Why take the risk?
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Just playing devils advocate for a minute, and leaving out the whole 'peace-of-mind' side of the argument...that financial advisor may just have been giving objective financial advice.
The OP doesn't give specifics on where the savings are invested but if it's say a genuinely diversified multi-currency share portfolio, history tells us that they may be financially better off over the long term if they stay invested. (Note: no need to retort with the 'history is no indicator of future performance' line - I'm well aware of it, I'm just making a quick point).
thedaddyman's half-and-half suggestion would seem to be a reasonable compromise and would mean presumably a lower bottom-line mortgage rate based on LTV. As regards the point SBarrett makes about why would you want to have debt if you don't have to - well that's easy, if the money bought produces a higher return.
The OP doesn't give specifics on where the savings are invested but if it's say a genuinely diversified multi-currency share portfolio, history tells us that they may be financially better off over the long term if they stay invested. (Note: no need to retort with the 'history is no indicator of future performance' line - I'm well aware of it, I'm just making a quick point).
thedaddyman's half-and-half suggestion would seem to be a reasonable compromise and would mean presumably a lower bottom-line mortgage rate based on LTV. As regards the point SBarrett makes about why would you want to have debt if you don't have to - well that's easy, if the money bought produces a higher return.
Brendan Burgess
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Of course, they MAY be better off. But they may be a lot worse off as well.
Certainly the financial advisor will be better off, because he earns commission.
Brendan
My opinion is that you should get a mortgage that meets the following criteria:
- The loan-to-value is <= 60% meaning you have plenty of equity and a good interest rate;
- Mortgage repayments at an interest rate of 2% higher than todays rates represent no more than 25% of take home pay when taken over 30 years or until state pension age, whichever is less
Steven Barrett
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You'll only know that after the fact though. You can also quite easily lose it or some nutter flies a jumbo jet into a building again.
My mortgage is the biggest outgoing I have each month (creche isn't a millions miles behind it). We would have a lot more financial freedom if we didn't have that obligation each month for the next 22 years.
Steven
www.bluewaterfp.ie
Wouldn't argue with that at all. It's all 'what ifs'
If the OP wants to go down the conservative route that's up to them.
Just highlighting the other side of the coin.