Planning to Trade Up, Should we Overpay now

[JimmyCorkhill]

In the last 6 months we have taken out a 360,000 mortgage for 25 years. Currently with Avant on a fixed rate of 3.35% for 3 years.

In around 5/6 years we would like to build on some family land, it will mean selling the current house we are in (cost 500k) to fund this house & presumably it will cost more to build the house.

We will have a bit of excess cash each year that we could use to overpay the mortgage over the next few years before we build.

If we effectively plan to trade up, does it make sense to overpay the mortgage where possible before we look to build or should we keep excess cash to help with the purchase, or is there no difference at all?

We will most likely move in with family for a year during any building work to save on rent.

Thank you

 

[Brendan Burgess]

With an interest rate of 3.35% keeping cash on deposit at 2% before Dirt for example, will cost you about 2% a year. So you will pay 12% of any cash on deposit for 6 years. So if you have €10,000 today, it will cost you €600 to keep it in reserve.

Another way of looking at it is that you will save €600 interest by paying it off your mortgage now.

When you are closer to your building plans e.g. a year away, the cost of 2% would be only €200 and would probably be worth it to keep cash available.

For example, when you start applying for planning permission, you will need a few grand to pay for that. So you don't want to have to sell the house at that stage to fund the planning application. You will also need to pay the architect.

So pay down the mortgage now and when your plans become more concrete, revisit it.

Brendan

 

[DublinHead54]

I think 5/6 years is short term enough to seriously consider not overpaying the mortgage. Based on your figures you are going to need a mortgage to build the new house. In 6 years using a 'bit of excess cash' each year is unlikely to materially reduce the current mortgage.

Self-build mortgages require a deposit, you may be able to use the site as a deposit if you own the land, but you may still require 10% contingency funds. Best to talk to a bank. If the bank is going to require 10% of a 500k build you would be stuck until you sell your current house and free up the funds.

It would be better to have built up savings to provide more liquidity and it will also reduce the mortgage needed. Self-build mortgages are drawn down in stages, and invariably having more cash on hand will give you more flexibility.

Mathematically it may cost you more money to hold cash on deposit but the opportunity cost suffers.

In my experience banks don't look at overpaying a mortgage the same as savings.

You should speak with a bank/mortgage broker to understand what deposit you will require and work from that.

 

[Brendan Burgess]

Self-build mortgages require a deposit, you may be able to use the site as a deposit if you own the land

But they have the site.
And they accept that they will have to sell their home to fund the building.

I think it's just the planning and the architect that they will need to pay before selling their home?

If they could build the new home without selling their existing home, I would be inclined to agree with you.

Brendan

 

[DublinHead54]

But they have the site.
And they accept that they will have to sell their home to fund the building.

I think it's just the planning and the architect that they will need to pay before selling their home?

If they could build the new home without selling their existing home, I would be inclined to agree with you.

Brendan

They have to own the site, OP said family land. if it is family land the bank may not allow it as a deposit, so there could be legal fees to change ownership to make it eligible for deposit. If the land is used as the deposit the bank will likely want to see 10% contingency funds available.

Architect and planning could cost 5-10k.

It really depends how much the 'excess cash' is each year, I've interpreted as not a huge amount thus I think it is better to keep on hand until they have a better idea of the upfront costs they will need to start the build.

Put it another way, if the OP needs 50k in 5 years time and has 10k excess cash each year, would you advise them to overpay the mortgage?

 

[Brendan Burgess]

if the OP needs 50k in 5 years time and has 10k excess cash each year, would you advise them to overpay the mortgage?

Probably not.

But if he might need €10k in about 5 years and has €10k excess cash each year, I would advise him to overpay the mortgage now.

Brendan

 

[FCBC12]

In the last 6 months we have taken out a 360,000 mortgage for 25 years. Currently with Avant on a fixed rate of 3.35% for 3 years.

In around 5/6 years we would like to build on some family land, it will mean selling the current house we are in (cost 500k) to fund this house & presumably it will cost more to build the house.

We will have a bit of excess cash each year that we could use to overpay the mortgage over the next few years before we build.

If we effectively plan to trade up, does it make sense to overpay the mortgage where possible before we look to build or should we keep excess cash to help with the purchase, or is there no difference at all?

We will most likely move in with family for a year during any building work to save on rent.

Thank you

I asked myself the same question about 18 months ago (and still do) as we hope to trade up in 4/5 years.

We settled on not overpaying the mortgage (2.15% fixed for 5 years) on the basis that it is better to have the cash 'liquid' in 5 years as opposed to being tied up in the original house. We accepted the opportunity cost of that decision (ie extra interest paid) but felt having the cash to hand may help the trade up move quicker.

What price do you put on having that cash flexibility in 5 years time to help get your solicitor, planning application, contractors and initial plant works lined up and started quickly? They are more likely to prioritise your build if you have their early payments to hand and ready to go.

 

[JimmyCorkhill]

Thanks all, some good points made by all posters.
Excess cash for the current year (2023) would be between €6k-€8k, so not massive amounts but it could be €10-€12k next year fir example.

Regarding the land, we are in the process of trying to get that sorted and put into the name of the OH while trying to limit how much additional taxes or duties we need to pay. Hopefully the land will be sorted soon enough, so the only costs down the line may be the likes of an architect, PP etc.

The question is, if in 5 years the bank decides no matter what, we need a €50k deposit, do we not have that €50k because we have overpaid our mortgage with our excess cash.