Save for home or invest?

Discussion in 'Money makeover' started by Emily R, 17 Jan 2019.

  1. Emily R

    Emily R Registered User

    Posts:
    11
    Age: 40
    Spouse’s/Partner's age: 34

    Annual gross income from employment or profession: 67,000
    Annual gross income of spouse: N/A

    Monthly take-home pay 3,100 euro

    Type of employment: e.g. Civil Servant, self-employed –yes in private sector

    In general are you:
    (a) spending more than you earn, or
    (b) saving?


    I am saving €1k a month

    Rough estimate of value of home- €295k
    Amount outstanding on your mortgage: €150k
    What interest rate are you paying? 3.1% variable

    Other borrowings – car loans/personal loans etc –no borrowings

    Do you pay off your full credit card balance each month? Yes paid in full each month
    If not, what is the balance on your credit card?

    Savings and investments: Circa €23k in savings; €30k in shares

    Do you have a pension scheme? Yes-with my job in the private sector

    Do you own any investment or other property? No

    Ages of children: No

    Life insurance: Need to sort this out as have none currently


    What specific question do you have or what issues are of concern to you?

    Should I save for a house or invest in equities?

    Personal situation as follows:

    Outgoings:

    I am currently letting out my only property to relatives at a discount-personal circumstances have lead to this. There is no quick way this would change over the next few years. My relatives pay me an amount that covers bulk of my mortgage payments. My net outflow on a monthly basis for the mortgage is €150. I also need to pay the yearly mgt fees for this property.

    I pay rent of €600 monthly and live with my spouse. My spouse is not in a position to earn an income currently.


    Savings:

    I am saving €1,000 each month and have savings of €23,000. I would like to buy a small property for circa €300k, perhaps in 12-18 months. Scenario in 12 months could be: €35k in savings, €30k from sale of shares and €15k from my parents for a deposit of €80k. This would leave me with very little buffer. I could also wait 18 months to build up a larger deposit.


    The downside is that the small property would not be my preferred home, merely somewhere to live till my spouse is able to earn an income. This is likely to be in the next 3 years.

    My question is should I continue to save as I have done and look to buy a small property to get us out of the rental rut… Or should we hold out for three years when we have better purchasing power with two incomes and in a stronger position to buy our long term home. The savings could be invested into equities for the next few years if this option is pursued.



    Any thoughts appreciated.
     
  2. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    Summary
    Equity in investment property: €150k
    Savings and investments: €53k
    Total assets: €200k

    Salary €67k
    Potential mortgage - 3.5 times income: €230k

    Potential price of house: €430k

    It seems to me that you have to resolve this issue first.

    As you have a mortgage of €150k, I don't think any lender will give you a mortgage of €230k or probably any worthwhile mortgage.

    It is shockingly inefficient for tax purposes to rent a property to occupy while letting a property that you own.
    • You are paying tax on the rental income you receive while getting no tax deduction for the rent you are paying.
    • Any increase in the value of the property will be subject to Capital Gains Tax for the period while it is let out.
    So to answer the question you asked - you will not be able to buy a property, so continue to invest.

    But to answer the question you should have asked - sell your current property as quickly as possible so that you can buy a family home.

    Brendan
     
  3. Laughahalla

    Laughahalla Frequent Poster

    Posts:
    45
    Last edited: 18 Jan 2019
    Hi Emily,
    Well done with saving €1k per month, having no consumer debt and a really healthy emergency fund/savings. Keep this up.

    Unfortunetly, the main thing holding you back by the sounds of it is the rental property. This is costing you money each month when it could be generating income.

    When you rent a property to family/ relatives or on the flip side if you borrow/loan from/to family/ relatives that changes the relationship with your family/relatives and usually not for the better.
    You are sacrificing your wealth and by the sounds of it your wellbeing in order to subsidise your relatives.
    Your relatives are not your responsibility. Your immediate family i.e yourself, spouse and children ( if you had any children ) is your repsonsibility. That's it.

    You need to be getting a market rent from your property or if you really want to buy a house then maybe it's time to sell the property you rent out and use that towards your "small" 300k property.
    Your rental property could be a tax liability for you that you may not have considered.

    Emily, it's time to put your life first. If you tell them that you are selling it will take a few months for it to sell so they will be getting plenty of notice to find somewhere else. (Just make sure you give enough notice and are compliant with the residential tenacies board)

    On the insurance side of things. A term life policy is approx. €10 per month per €100k of cover so is relatively inexpensive for peace of mind. You might have a work life policy that will pay out in case of death in service so may not need to buy additional.
     
    Last edited: 18 Jan 2019
    DeeKie likes this.
  4. Protocol

    Protocol Frequent Poster

    Posts:
    2,826
    Your net seems low given the 67k gross / 5583pm.

    Maybe you are making large pension deductions?
     
  5. newirishman

    newirishman Frequent Poster

    Posts:
    754
    Indeed. A quick look using a tax calculator shows somewhere around 3700-4000 Euro take home monthly, with the upper figure if you are taxed as a couple and get all of your spouses tax credits (do this immediately if you haven't already!)
     
  6. Emily R

    Emily R Registered User

    Posts:
    11
    Thanks for the honest advice everyone.

    In relation to my net pay-I contribute a significant percentage to my pension. I haven’t availed of my spouse’s tax credits to date-but will claim them now. I think I can go back for the last four years.. will check this out.

    Regarding my life assurance-work pay twice my annual salary in the event of death whilst in employment, so that should be okay. I would like to get cover in the event of illness. Work pay full pay for a certain period (6 months), then payment is limited to disability allowance.

    To my original question about saving or investing: I am disheartened to hear that no bank is likely to approve a mortgage/approve an unworthwhile mortgage. Is the fact that there are tenants covering the bulk of my mortgage payments taken into the account in the mortgage approval calculation by the banks?

    If I was to get market rates in terms of rental income for my property, would this help my future application for a second mortgage? Or am I better off just selling my property altogether? The property I own has good rental potential… so could be a long term investment if I could get market rates in terms of rental income.
     
  7. Cervelo

    Cervelo Frequent Poster

    Posts:
    426
    Are you paying tax on the rental income at the moment ??, If not then this needs to be factored into your future plans
     
  8. RedOnion

    RedOnion Frequent Poster

    Posts:
    2,372
    Not really. They take a percentage of the income, but the full outgoing, stressed at about 6% interest rate. So it counts massively against you as you've an ongoing commitment before your mortgage.
     
  9. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    You have to be realistic here. If you want to buy a family home to live in, you have to sell your investment property.



    This is madness. If you want to buy a home, then stop contributing to a pension until you have bought the home and sorted out the mortgage.

    Most lenders charge lower rates for lower Loan to Values. By having a bigger deposit, you will save interest on the whole mortgage.

    Brendan
     
  10. gravitygirl

    gravitygirl Frequent Poster

    Posts:
    416

    Agree with all this, though would suggest you still continue with the pension at a much lower level, especially if your contributions is matched by your employer, as you don't want to lose out on "free" contributions.
     
  11. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    If your employer's contribution is dependent on you making a contribution, you should contribute.

    Otherwise, don't make any contributions. You can resume contributions at a later stage.

    Brendan
     
  12. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,204
    With over €200k in available assets, I don't see any reason why the OP couldn't buy a house for €300 - €400k AND continue maximising her pension contributions.

    I think your advice to defer making pension contributions while carrying a mortgage is bonkers. It ignores:- (a) the "use it or lose it" nature of the tax relief on pension contributions; and (b) the "time diversification" benefits of investing in equities over an extended period of time.
     
    llgon and gravitygirl like this.
  13. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    Hi Sarenco

    He should not be buying a small house for the next three years.

    He should be trying to buy his final home or at least a home for a good few years.

    Therefore the priority for him is to maximise the cash available for him to do so as soon as possible subject to the matching the employers contribution caveat.

    Whether he should pay down the mortgage in full or not, is discussed in this thread:
    https://www.askaboutmoney.com/threa...-a-pension-but-dont-leave-it-too-late.189981/

    But the one thing is clear, he should not be making unnecessary payments to his pension fund now.

    They key thing about paying down a mortgage is that he is getting a tax-free return on his money equal to the mortgage rate.
    He has plenty of time for "time diversification".

    Brendan
     
  14. gravitygirl

    gravitygirl Frequent Poster

    Posts:
    416
    Sorry to be a pedant but I imagine the OP is a she??
     
  15. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,204
    I strongly disagree.

    The OP is 40. Accumulating retirement savings over the next 25 years and spending down the pension pot over the succeeding 25 years, represents an investment time horizon of 25 years. That's not a particularly long time period from an investing perspective.

    You are also ignoring the "use it or lose it" nature of the tax relief on pension contributions.

    The OP has €200k in available assets. She can buy a €400k property with a 50% LTV mortgage. That's a pretty decent budget, even in Dublin.

    She can always trade up to a more expensive property in the future if her household income increases.

    In any event, there is no good reason for the OP to defer maximising tax-relieved pension contributions.
     
  16. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    I am not. I have referred you to the extensive discussion of it on the other thread.

    Buying and selling a home have big transaction costs and financial risks. Moving home is very disruptive. The priority for the OP now is to buy a house which is well suited to her long term needs. Halting pension contributions now will make that easier for her.

    When she had bought a house, she can then read the other thread and make up her mind whether she should be paying down her mortgage or contributing to a pension scheme.

    Brendan
     
  17. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,204
    Where you conceded that pension contributions should be the priority from around 40.

    The OP has available assets of over €200k and is currently adding to her after-tax savings and home equity. Whether she buys now or defers the decision for a few years is beside the point - she has and will have ample resources to purchase a house with a sensible level of mortgage financing.

    In the meantime, there is no logical reason to forego the advantages of contributing the maximum tax-relieved amount to a pension.
     
  18. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,558
    Hi Sarenco

    We are obviously not going to agree on this, but I will try one more time.

    If she contributes to a pension now, she will lose access to that cash. If she keeps it, she will have access to 50% of it immediately.

    Her plans are unclear and uncertain. The lender may give her a loan of €234k and she may be happy to buy a house for €434k.

    But lots can change...
    • The lender may not give her €234k
    • She may not get what she wants for €434k.
    • She may want to spend money on doing up the house
    Flexibility and access clearly trump the other considerations in my opinion.

    Brendan