Buy first house with cash, then take out mortgage to finance second ‘forever’ home?

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PasryQueen

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Hello. We have a 400k savings from the sale of a property, we’re renting at the moment. We are thinking of buying a family home for €375k, live in it for a 3/4 years, save again for a deposit and then build/buy/renovate a second ‘forever’ home. We would rent out the first home and use the income to contribute to the mortgage repayments alongside two salaries (probably about €500k).

Obviously we’re very lucky to have our savings to be able to do this, but is there a better way to invest it? Any obvious pitfalls or downsides? We have a young family so want to buy a family home soon for stability, and our income is unstable for the next few years as we’re both switching careers.
 
Downsides? Do you really want to be in the property letting business? Read all the threads here about people getting out of it and the reasons why.

With €400k and (I think?) good salaries why not skip the first step and go directly to the "forever" home? How unstable will your salaries actually be in coming years?
 
ClubMan said:
With €400k and (I think?) good salaries why not skip the first step and go directly to the "forever" home? How unstable will your salaries actually be in coming years?
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Absolutely the correct strategy.

Buy your forever home now, before you change jobs as you will find it difficult to get a mortgage if you are on probation.

You save the hassle and costs involved in moving houses in 3/4 years.

When you have paid down the mortgage on your family home, you can then think about investing in property or equities or whatever. Come back here and do a moneymakeover and I would imagine that it will still be right to prioritise stuffing your pension.

Another big advantage of buying a home now with the €400k is that your LTV will be low and so the interest rate will be lower than it would be for a 90% mortgage.

It's not clear from your post whether you qualify as a FTB. If you do, there are some advantages in being a First Time Buyer , although I think that the only one applying to you now is that you will be able to borrow 4 times your income vs. 3 1/2 times your income as a second time buyer.

Brendan
 
Assuming you accept the downsides of becoming a landlord, and that regulatory changes in the mean time don't change your mind...

You'll be able to borrow a max of 80% for the forever home, taking the €500k example, that means you will need to save more than €100k in that time. Is that feasible and will salaries support borrowing €400k within loan to income limits? Don't underestimate the amount of money that you will spend furnishing, decorating, and maintaining the interim house.

Banks vary and their approach but it's likely that a percentage of future rental income would be factored into your affordability calculations. Again, there's a risk that might change in your timeframe.
 
ClubMan said:
Downsides? Do you really want to be in the property letting business? Read all the threads here about people getting out of it and the reasons why.

With €400k and (I think?) good salaries why not skip the first step and go directly to the "forever" home? How unstable will your salaries actually be in coming years?
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Brendan Burgess said:
Absolutely the correct strategy.

Buy your forever home now, before you change jobs as you will find it difficult to get a mortgage if you are on probation.

You save the hassle and costs involved in moving houses in 3/4 years.

When you have paid down the mortgage on your family home, you can then think about investing in property or equities or whatever. Come back here and do a moneymakeover and I would imagine that it will still be right to prioritise stuffing your pension.

Another big advantage of buying a home now with the €400k is that your LTV will be low and so the interest rate will be lower than it would be for a 90% mortgage.

It's not clear from your post whether you qualify as a FTB. If you do, there are some advantages in being a First Time Buyer , although I think that the only one applying to you now is that you will be able to borrow 4 times your income vs. 3 1/2 times your income as a second time buyer.

Brendan
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Thanks Brendan and Clubman,

We were living overseas until recently and our savings are from selling our apartment before we moved back. Both of us are actually unemployed at the moment - I’m retraining for a new career, other half just lost his job (tech crunch ) - so not in a position to get any mortgage so the ‘forever home’ is not an option right now. Our current lease is up later next year so we know we have to make a move and I don’t want to go back into the instability of another rental.

I think using the first home for rental income down the line certainly needs more consideration, will go back to those threads and get a better grasp on the pro’s and cons.

Appreciate your comments
 
Ok, then buy the c. €375k house now, get settled into jobs, save and then in a few years sell the first house and use the proceeds and savings and a mortgage if necessary to buy the "forever" home. Keeping the first house to rent doesn't make sense to me from many angles - all the reasons that many landlords are getting out of the business (and it is a business and not a passive investment) plus if you keep it you would be far too invested in Irish domestic property instead of having a more diversified portfolio (including decent pension cover as alluded to by Brendan). Others may disagree but I think that this would be a more prudent and balanced approach.
 
Leo said:
Assuming you accept the downsides of becoming a landlord, and that regulatory changes in the mean time don't change your mind...

You'll be able to borrow a max of 80% for the forever home, taking the €500k example, that means you will need to save more than €100k in that time. Is that feasible and will salaries support borrowing €400k within loan to income limits? Don't underestimate the amount of money that you will spend furnishing, decorating, and maintaining the interim house.

Banks vary and their approach but it's likely that a percentage of future rental income would be factored into your affordability calculations. Again, there's a risk that might change in your timeframe.
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Thanks Leo - the 100k deposit should be achievable (eapecially as we won’t have any rental mortgage over those years) and the salaries would support the loan (based on our previous earnings).

Some really good points to consider there - more food for thought, appreciate your comment.
 
I think your idea is mad tbh. It's a lot cheaper to rent for a few years than go to the hassle of buying now, buying again shortly and being stuck in a landlord situation that's getting more negative by the day for landlords.

Stall the ball. Hold onto your €400k. Rent. Research your ideal forever home as you get your employment situation sorted.

Then... go for it... spend, spend, spend ... on a property suited just for you.
 
PasryQueen said:
Our current lease is up later next year so we know we have to make a move and I don’t want to go back into the instability of another rental.
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That's not how tenancies work. If you have been there for more than 6 months you will have part IV tenancy rights.

How much do you expect to earn if you were both working and how much does your 'forever' home cost? It probably makes more sense to sit tight where you are and get back into employment and then buy the property that you actually want

PasryQueen said:
We would rent out the first home and use the income to contribute to the mortgage repayments
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This is generally a terrible way to do it, having a mortgage free rental and then a lot of debt on your PPR mortgage. On paper it looks profitable but in reality you are carrying unnecessary debt that eats up the profit.

For example, if your unmortgaged €375k property had €25k rental income, it will have some costs so let's say it has €22k gross profit. Assuming you are back earning in the high tax bracket, you will basically pay half of this in tax so you will have €11k net rental profit...all sounds great

However, you will unnecessarily be borrowing €375k on your PPR at rates which in all likelihood will be above 3% over the next few years. So that is just over €11k in interest that cancels out any rental profit. You can tweak the numbers and make it look like it is slightly more profitable but then you are only fooling yourself. It would be all risk and almost no reward

As it stands, you really shouldn't be looking at a rental at all until you are in a better overall financial position. Keep it simple, get back in employment and buy the home you actually want and reassess everything in 4/5 years.
 
PasryQueen said:
Thanks Brendan and Clubman,

We were living overseas until recently and our savings are from selling our apartment before we moved back. Both of us are actually unemployed at the moment - I’m retraining for a new career, other half just lost his job (tech crunch ) - so not in a position to get any mortgage so the ‘forever home’ is not an option right now. Our current lease is up later next year so we know we have to make a move and I don’t want to go back into the instability of another rental.

I think using the first home for rental income down the line certainly needs more consideration, will go back to those threads and get a better grasp on the pro’s and cons.

Appreciate your comments
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400k would means test you against getting *anything* in terms of social welfare in the event of one or both of you not getting a job, so I would be inclined to buy something with it.
 
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