Advice needed on saving for extension or borrowing to do it now

[tom1ie]

Hi all,
Sorry if this is the wrong thread mods feel free to move.
We have been quoted almost 40k to get work done on the house (extend into garage).
We were expecting to be able to release some equity with our mortgage provider to cover this but avant don’t offer this which is fair enough- would’ve been nice to know when we switched but ah well.
We try and throw 10% of the loan off the mortgage principle every year but now we are thinking we will save this years 20k and next years 20k and pay cash for the extension (price might even go down with commodity prices dropping?- actually who am I kidding ).
Or we look to get a credit union loan now to cover the 40k but it would be at 8% interest rate.
Are we better just not overpaying the mortgage and saving for the extension would ya think- does this make the most financial sense?

 

[_OkGo_]

Are we better just not overpaying the mortgage and saving for the extension would ya think- does this make the most financial sense?

I think you are asking the wrong question or looking at it the wrong way. It's not just a financial decision.

Taking the credit union loan vs saving up has a premium of 6%. You can save the €40k in 2 years so you can also pay off the loan in 2 years. Very roughly, you'll have an average balance of €20k for 2 years at 6%. Or in other words, the loan will cost you ~€2400 more than saving up.

So the real question is whether getting the work done now and having 2 years of use and enjoyment of the extension is worth €2400 to you?

I would say it probably is.

 

[ClubMan]

We try and throw 10% of the loan off the mortgage principle every year but now we are thinking we will save this years 20k and next years 20k and pay cash for the extension (price might even go down with commodity prices dropping?- actually who am I kidding ).
Or we look to get a credit union loan now to cover the 40k but it would be at 8% interest rate.
Are we better just not overpaying the mortgage and saving for the extension would ya think- does this make the most financial sense?

You don't say what your mortgage rate is but assuming that it's less than 8% it doesn't really make sense to be paying off a lower cost loan only to borrow at a higher rate imminently.

 

[Brendan Burgess]

Agree with OK Go


It will cost you about €3,500 in interest to build now with a CU loan.

So build when it suits you and when you can get a builder.

Brendan

 

[tom1ie]

You don't say what your mortgage rate is but assuming that it's less than 8% it doesn't really make sense to be paying off a lower cost loan only to borrow at a higher rate imminently.

Yeah I’m two years into an avant 7 year fixed at 1.95%.
So I’m leaning towards just hanging on for two years- saving the 40k and getting it done then.

 

[Brendan Burgess]

avant don’t offer this which is fair enough- would’ve been nice to know when we switched but ah well.

It probably still made sense to switch.

It would be costing you about 3.5% to borrow from Avant, so the Credit Union will cost you "only" about €2,000 extra.

 

[Brendan Burgess]

Have you other savings which you have ring-fenced for education or as an emergency fund?
You could use these for the extension and then build back up the fund.

Brendan

 

[NoRegretsCoyote]

Yeah I’m two years into an avant 7 year fixed at 1.95%.
So I’m leaning towards just hanging on for two years- saving the 40k and getting it done then.

I don’t have a crystal ball but we are back in an inflationary world again.

It’s likely that €40k today will buy more extension than €40k in two years.

 

[MrEarl]

I don’t have a crystal ball but we are back in an inflationary world again.

It’s likely that €40k today will buy more extension than €40k in two years.

Unless there's a recession in two years time, in which case construction costs incl labour and materials, will start coming down in price

The key questions on this thread seems to be about when the additional space is needed - and is it worth paying a likely premium for (ie loan intetest), to get it now.

 

[tom1ie]

I don’t have a crystal ball but we are back in an inflationary world again.

It’s likely that €40k today will buy more extension than €40k in two years.

Yeah I get ya- but at the same time with commodity prices coming down and interest rates going up should this not lead to lower prices because of lower demand (because of higher interest rates) and lower materials costs (because of lower commodity prices).

 

[NoRegretsCoyote]

with commodity prices coming down

I don’t have a crystal ball.

I do know that in 2008-2010 construction prices didn’t fall by much despite mass unemployment in the construction sector.

It did get a lot easier to get a builder to answer the phone though.

 

[tom1ie]

Have you other savings which you have ring-fenced for education or as an emergency fund?
You could use these for the extension and then build back up the fund.

Brendan

I don’t have a crystal ball.

I do know that in 2008-2010 construction prices didn’t fall by much despite mass unemployment in the construction sector.

It did get a lot easier to get a builder to answer the phone though.

Yeah valid points.

 

[Horatio]

Additional benefit of saving for 2 years is that you get an extended cooling off period to continually assess & refine your actual needs & final design.