Moneymakeover Should I borrow the maximum I can to buy a bigger house than I need at the moment?

[tim67at]

Personal details

Your age: 31
Your spouse's age: N/A
Partner's age if not married: N/A

Number and age of children: N/A


Income and expenditure
Annual gross income from employment or profession: 100k
Annual gross income of spouse/partner: N/A

Monthly take-home pay: Roughly 5k

Type of employment: Employee
Employer type: private company

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

Summary of Assets and Liabilities
Family home value: N/A
Mortgage on family home: N/A
Net equity: N/A
(I’m renting, 2k per month)

Cash: 70k on deposit
Defined Contribution pension fund: 50k ish
Company shares : 400k after tax in shares (have been heavily investing for a decade)
Buy to Let Property value: N/A
Buy to let Mortgage: N/A

Total net assets: 470k


Family home mortgage information
N/A

Other borrowings – car loans/personal loans etc
N/A

Pension information

Value of pension fund: 50k

Buy to let properties
N/A

Other savings and investments:
Note: the company shares section is a mix between shares and cryptocurrency

Other information which might be relevant

Life insurance: N/A


What specific question do you have or what issues are of concern to you?
Ever since I left college, I’ve been heavily investing with the aim of buying a home and hopefully having money left over. I expected house prices to crash at some stage, and wanted to wait for that moment. That moment has never happened and I’ve decided to buy instead at inflated prices obviously.

I never wanted a mortgage to be a significant percentage of my income. And right now I’m in two minds about something.

I’ve found a property that would suit me medium term for 600k. What I’m now wondering is :

1. Am I being stupid not maxing out my budget and spending more on a house? I technically could get a total amount of around 900k to spend on property (470k cash, 400k mortgage) but the idea of having that much money in property kind of worries me. Am I being TOO cautious here just getting a 600k house?

2. Even though I have 400k+ available if I sell every share and every cryptocurrency that I own, I’m tempted to purchase the 600k house with say 300k cash and 300k mortgage. This way I’d have some skin in the game with stocks etc, what’s your opinion on this, is there any downsides that I’m missing? The main thing I can think of is that gains on your own residence aren’t taxed when you make a profit - so since I’m buying a “cheaper” house the gains won’t be as much if the market continues to increase.

3. Should I be talking to a financial advisor about all of this? My head is exploding here thinking it through.

4. Anything that I’m missing here? What would you do? Would you keep some shares etc or is there another investment vehicle for example

 

[Protocol]

Even though I have 400k+ available if I sell every share and every cryptocurrency that I own, I’m tempted to purchase the 600k house with say 300k cash and 300k mortgage. This way I’d have some skin in the game with stocks etc, what’s your opinion on this, is there any downsides that I’m missing?

This is really a question about the cost of the mortgage debt versus the possible % returns on the other assets.

 

[thecoffeepod]

first-time buyer's mortgage at 4 times their gross annual income

For your €100,000 annual income, this means a maximum mortgage of €400,000

To purchase a €600,000 property, you'd generally need a minimum 10% deposit (€60,000), leaving a €540,000 mortgage,

which exceeds your LTI limit by 140k


Re your idea of selling €200,000 of shares and cryptocurrency for a down payment, this has several benefits, including a lower Loan-to-Value and Loan-to-Income ratio, and potentially lower monthly repayments

Start reinvestment then

However, the primary downside is Capital Gains Tax (CGT)

Any chargeable gain from selling your shares of cryptocurrency will be subject to a 33% tax rate, after accounting for an annual exemption of €1,270

This means the net amount available for your deposit will be reduced by this tax liability

Id sell now. Take smaller mortgage if successful , enact a life cover policy mortgage protection term reduction with accelerated illness cover

Also take out income protection cover

 

[Clamball]

I assume your €470K is the value of your assets net of tax. You clearly enjoy investing so why not keep a nest egg of €100K to grow your future wealth and then purchase a house for €770K (400K mortgage and €370K cash).

Your mortgage repayments will be ~€1700 pm for a 30 year term, Throw in income and mortgage protection you will probably end up with a similar monthly outlay as your current rent. So your net income will stay the same, you will still have the capacity to save or invest. I would prioritise pension over investing but the split is up to you. You should be able to grow the €100K quicker than you did since you left college as you will be starting with a larger figure.

I would not consider any capital gains on your ppr as you will always need a place to live and you should think of it as your home not an asset that may go up and down in value. If you sell in 10 years you still need another place to live so you don’t make a profit you just swap to a new residence.

 

[ClubMan]

I’ve found a property that would suit me medium term for 600k. What I’m now wondering is :

1. Am I being stupid not maxing out my budget and spending more on a house? I technically could get a total amount of around 900k to spend on property (470k cash, 400k mortgage) but the idea of having that much money in property kind of worries me. Am I being TOO cautious here just getting a 600k house?

No, not if the €600K house suits you but I'd be concerned about the "medium term" qualifier and if this actually means that you'd end up trading in within a few years?

 

[Steven Barrett]

Am I being stupid not maxing out my budget and spending more on a house? I technically could get a total amount of around 900k to spend on property (470k cash, 400k mortgage) but the idea of having that much money in property kind of worries me. Am I being TOO cautious here just getting a 600k house?

No. Just because you can push yourself to the limit, it doesn't mean you have to.

2. Even though I have 400k+ available if I sell every share and every cryptocurrency that I own, I’m tempted to purchase the 600k house with say 300k cash and 300k mortgage. This way I’d have some skin in the game with stocks etc, what’s your opinion on this, is there any downsides that I’m missing? The main thing I can think of is that gains on your own residence aren’t taxed when you make a profit - so since I’m buying a “cheaper” house the gains won’t be as much if the market continues to increase.

This is where you need a crystal ball. If you sell now and crypto/ shares tank, you've come out a winner, selling at the height and with low debt. Or they could go on a massive rally and you lose out.

But don't lose sight of the use of money and that is to spend it at some point in the future. You have built up significant assets since leaving college and are now at a time when you are making a major purchase. Cashing in your investments and having a very low mortgage is what you have been saving the money for in the first place.

I have never met someone who complained about having too little debt.

 

[TRS30]

As a general note, holding significant amount of your wealth in the shares of the company you work for, it not seen as a prudent thing. Not sure what the split of company shares/crypto is however would certain look to sell all the company shares if possible (vested) and then take out the lowest mortgage you can.

When you say the €600K house will suit medium term, do you intent to move, start a family etc that would make this unsuitable? If you think a bigger house/better location is definitely on the cards, I would buy that now as you have longer to pay off mortgage and inflation will eat into repayments.

 

[misemoi]

I expected house prices to crash at some stage, and wanted to wait for that moment.

A crash might have meant that your income crashed or your investments crashed or both. Try to look at it this way and enjoy the wealth you have accumulated.

 

[tim67at]

OP here - Re the 600k house that’s medium term suits me - it’s enough for a couple and 1 kid but not 2 kids. So I’d consider that medium term at first glance.

 

[Brendan Burgess]

Your age: 31

Cash: 70k on deposit
Company shares : 400k after tax in shares (have been heavily investing for a decade)

So, first of all, you are doing very well.

You invested in shares and crypto at a good time, so I don't think you have lost out much if at all by not buying a house earlier. So don't beat yourself up over it.

You are treating "company shares" and crypto as the same thing. They are not.
Could you provide a breakdown.

If they are shares in your employer, you should sell them immediately irrespective of what you do on the housing front. Having your income and your wealth depending on the prospects of one company is just too risky.

 

[Brendan Burgess]

I’ve found a property that would suit me medium term for 600k.

I technically could get a total amount of around 900k to spend on property (470k cash, 400k mortgage) but the idea of having that much money in property kind of worries me.

This is a very difficult decision.

It is very risky borrowing €400k. For a FTB who has scraped together the 10% that they need to get on the housing ladder, they have no choice but to take the risk. The risk of staying out of the property market is higher.

But you do not need to take that risk.

You have €470k
I think that a mortgage of €300k would be comfortable enough for you.
And this would allow you to buy a €770k house.

Buying a €600k house with €130k of borrowing is just too conservative.

If a €600k house is good enough for the medium term, you will get another few years out of a €770k house.

Trading up is very stressful and very risky. You have to coordinate the selling and the buying. The seller or the buyer drops out and you are stuck. Estate agents won't take bids from you if you have not sold your own house.

So you try to minimise trading up within reason. And it seems to me that €770k is a good balance.

Get mortgage approval for the higher amount, but only borrow what you need.

 

[Brendan Burgess]

I’m tempted to purchase the 600k house with say 300k cash and 300k mortgage. This way I’d have some skin in the game with stocks etc, what’s your opinion on this, is there any downsides that I’m missing? The main thing I can think of is that gains on your own residence aren’t taxed when you make a profit - so since I’m buying a “cheaper” house the gains won’t be as much if the market continues to increase.

Let me turn that on its head.

Imagine you live in a €600k house with a mortgage of €130k.

Would you borrow €170k to invest in shares or crypto? You wouldn't, or at least, you shouldn't. You will pay the full interest on the mortgage without any tax relief, yet any gains on the investments will be subject to Income Tax and Capital Gains Tax. And if you make a loss, you can't set it against anything - except future gains.

 

[Brendan Burgess]

Summary
1) Sell all your investments
2) Get loan approval for €400k
3) Depending on the CGT bill, buy a house with a mortgage of around €300k.
4) Max your pension contributions
5) With any cash left over, get your mortgage down to about €200k or twice your income.

After that, I would still advocate paying down the mortgage until it is cleared. But you have a very comfortable mortgage and if you want to invest any surplus in shares or gamble it on crypto, fine. You are playing with money you can afford to lose and any crash won't affect your lifestyle.

 

[Brendan Burgess]

Defined Contribution pension fund: 50k ish
Company shares : 400k after tax in shares (have been heavily investing for a decade)

You really should be maxing your pension contributions as it's by far the most tax efficient, long-term form of investment. I usually advocate buying a house before maxing pension contributions, but as you can comfortably afford to buy a house and max your contributions, you should max your contributions.

 

[Brendan Burgess]

The main thing I can think of is that gains on your own residence aren’t taxed when you make a profit - so since I’m buying a “cheaper” house the gains won’t be as much if the market continues to increase.

I would not consider any capital gains on your ppr as you will always need a place to live and you should think of it as your home not an asset that may go up and down in value. If you sell in 10 years you still need another place to live so you don’t make a profit you just swap to a new residence.

Let me just clarify how this question should be approached because most people get it wrong because of the mistaken ideology "your home is not an asset".

tim's situation and comments show clearly that it is an asset and that the CGT exemption of the home is a very important consideration.

To simplify matters, we will eliminate the mortgage issue.
Johnny has €600k.
He can buy a house which meets his needs for 5 years for €400k or he can buy a house for €600k which meets his needs for 8 years.
After 8 years, he will be married with a clatter of children and will need to spend €1m on a house.
It would make no sense to buy a house for €400k and invest €200k in shares. Not only will he have to sell in 5 years, but he will pay CGT on any gains on the €200k. If he "invests" the extra €200k in more house, that investment will grow tax-free and the return on the investment i.e. the greater utility of a better house will also be tax-free.

So it make sense for Johnny ( and the OP) to buy more house and less investments.

Especially in the early days of buying a house where you are very likely to trade up a few times, you must include your home as an asset and the CGT exemption is a very important consideration.

 

[Premos]

I’m buying a “cheaper” house the gains won’t be as much if the market continues to increase.

Not necessarily as much as you think. I own 2 properties. One has its value increased by 240k and the other about 280k in the past 15 years. The first one was nearly 3 times cheaper 15 years ago.

 

[Brendan Burgess]

Not necessarily as much as you think.

It is a reasonable assumption to make that whether he buys a house for €600k or €900k that they will increase or decrease by the same percentage.

The fact that one of your houses increased by 300% and another by 100% is completely irrelevant.

Brendan

 

[Premos]

It is a reasonable assumption to make that whether he buys a house for €600k or €900k that they will increase or decrease by the same percentage.

It's a reasonable expectation but not necessarily the reality. That's the reason why I gave the examples. The 2 properties are barely a hundred meters of each other but are in a different segment of the market, one at the lower end the other more at the middle.

 

[BIG-notorious]

I’ve found a property that would suit me medium term for 600k.

I would say buy the property that you're happy with now. You don't know what will happen or when it will happen, in terms of the property market, your own employment, the wider economy or your own personal circumstances— each of those will very likely change over the course of your life, but how & when is a mystery to you like it is to all of us.

For the most part though I think buying a "starter home" is a terrible idea unless the alternative is renting (you're dropping €2k a month in rent down the toilet...). You might end up in 5 years with loads of equity and earning twice your current salary and be able to get somewhere twice the size at the same affordability, or you might end up unemployed and deep in negative equity. Plenty of people have ended up in both situations over the last 25 years— often the same people have ended up in both situations consecutively.

Johnny has €600k.
He can buy a house which meets his needs for 5 years for €400k or he can buy a house for €600k which meets his needs for 8 years.
After 8 years, he will be married with a clatter of children and will need to spend €1m on a house.
It would make no sense to buy a house for €400k and invest €200k in shares. Not only will he have to sell in 5 years, but he will pay CGT on any gains on the €200k. If he "invests" the extra €200k in more house, that investment will grow tax-free and the return on the investment i.e. the greater utility of a better house will also be tax-free.

An equally valid guess about Johnny's future:

• Johnny has €600k. After 8 years he will be single with a cat and a dog, and his home is worth half of what he paid for it. His entire profession was displaced by AI and he's now earning half of what he did when he bought the house and is glad he bought a more modest home instead of buying the biggest trophy home like everyone said he should.

Sometime in the early 2000s I was sitting around a dinner table and the discussion was house prices. A diner expressed the view that interest rates would never rise, the boom would never end, and property prices would keep rising forever. The very idea of house prices falling was ridiculous.

Around 10 years later at another dinner I expressed the view that due to the large population increases recorded in the 2011 census is was basically inevitable that property prices would stabilise and then begin to rise again. Another diner laughed in my face. The very idea of house prices rising was ridiculous.

To simplify matters, we will eliminate the mortgage issue.

The mortgage issue is the biggest factor in identifying whether the home is a potential asset in terms of a future relocation or an outright liability. There's a vast and obvious difference between the homeowner with a €400k mortgage and the homeowner with no mortgage.

So it make sense for Johnny ( and the OP) to buy more house and less investments.

It certainly makes sense for Johnny (and the OP) to borrow the least amount of money they can to buy their home and insulate themselves from the threat of negative equity (which, sorry everyone, hasn't gone away you know). And they should buy the home they actually want to live in for the longish term- buying somewhere for a few years is a big risk; a risk that's paid off for many but was a disaster for many others. But buying more house for the sake of having more house is just silly. The biggest purchase of your life should not be based on the assumption that meeting a partner, having a family, and long-term-rising house prices are all nailed-on certainties.

Remember that after adjusting for inflation, house prices have only now gotten back to 2007 levels. That's 18 solid years of running just to stay still for a large number of people....

 

[conor_mc]

Remember that after adjusting for inflation, house prices have only now gotten back to 2007 levels. That's 18 solid years of running just to stay still for a large number of people....

I'm pretty sure the value of my house in a firmly middle-class suburb of Dublin City hasn't yet reached the nominal amount that was allegedly paid for my neighbour's house in 2006.