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

[Brendan Burgess]

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.

1) There is absolutely a risk that the OP will lose his job and be earning half of what he is on at present.

But a more likely outcome at his age is that he will retain his job and be earning more in 5 years' or 10 years' time. He should plan on this basis but bearing in mind that he might lose his job.

That is why I suggested that €300k would be an appropriate level of borrowing and €400k was too risky.
That is why I suggested that he should pay down his mortgage to €200k.
That is why I suggested that he should sell all his investments and not be in a position where is actually borrowing to invest.

2) There is a risk that house prices may fall dramatically from their current level.

But there is also a scenario where they rise dramatically from their current level.

But buying more house for the sake of having more house is just silly.

Not if you can comfortably afford it. "More house" might well be a house which reduces the commute to work. "More house" might well be an additional bedroom which he could let out when he is replaced by AI and his salary is halved. "More house" might just be a nicer house in a nicer location.

But financially it makes sense as well. It saves him the cost and risk of trading up in 5 years.

 

[BIG-notorious]

"More house" might well be a house which reduces the commute to work. "More house" might well be an additional bedroom which he could let out when he is replaced by AI and his salary is halved. "More house" might just be a nicer house in a nicer location.

These are all excellent reasons to buy more house. None of them amount to buying more house for the sake of it.

Not if you can comfortably afford it.

This on its own is a silly reason to buy anything. I mean lots of people everywhere go for the expensive option every time simply because it is the expensive option and they can. But you need to be a lot richer than the OP before that stops being a dumb approach to spending money.

But financially it makes sense as well. It saves him the cost and risk of trading up in 5 years.

Again with the assumption that the right home for the OP now isn't going to be the right home in 5 years because of a conflation between possibilities and nailed on certainties.

If the OP really wants the €900k home now but the €600k is an "it'll do" option for time being they should go with the €900k option now. Why wait 5 years for something they really want if they don't have to.

But spending an extra 50% and tripling their mortgage for something they neither want nor need? That's just dumb.

 

[Brendan Burgess]

Buying more home than you need now but will probably need in a few years is a good investment.
Especially, if you get benefit from it in the meantime in terms of a better location, or closer to work, or better insulation or an extra room you could rent out.

The reason for not borrowing €400k has been explained a few times, but I will explain it again.
Borrowing 4 times your income is risky and if you don't need to take that risk, you should not do so.
So, I don't think he should borrow that much to buy a house.
Buying 3 times his income is a more manageable risk. But again, I would prefer to get it down to €200k.

 

[_OkGo_]

I technically could get a total amount of around 900k to spend on property (470k cash, 400k mortgage)

I think you need to sit down and look at what you can actually afford, it's not a €900k property.

You have €870k available to you. As a single buyer, I would be keeping a slightly larger emergency fund of ~€30k until everything settles after a purchase.

You will need to budget for the costs of buying. Solicitors, stamp duty, engineers etc could total €15k.

You will need to furnish it from scratch. Depending on what is needed and your preferences, this could easily be another €15-20k.

And then depending on what you buy, a new build or older property, you may have costs you weren't expecting. For example, a new build may require flooring, blinds, curtains, painting, white goods etc. Or an older property might be in need of some immediate upgrades (e.g. a boiler). All depends on what is essential but you could be looking at another €10-20k just to make it livable.

That is about €70-80k that you need to hold back in reserve. Properties can easily bid up 5-10% over asking so you should be targeting properties in the €700-750k (asking) range

 

[Duke of Marmalade]

Rental yields in Ireland are c. 8% p.a. This then is the market price of the utility value of a home. Of course the utility of a particular property is hugely personal. But presuming you have a house that you would like to live in then 8% of its market value is the market price of that utility, or maybe you actually know its rental value. Now you don't need a spreadsheet to tell you that buying a house on a 4% p.a. mortgage and building in likely future price increases of say 3% p.a. and throwing in that utility value of 8% p.a., maxing your "affordable" home is a no brainer.

 

[Brendan Burgess]

Hi Duke

I don't agree with this approach.

He is buying a home. He gets most of the utility from the first €600k worth of home.

Does he get €24k additional utility from spending another €300k? I very much doubt it.

We don't speculate on house prices on askaboutmoney. House prices might rise or fall.

Brendan

 

[Duke of Marmalade]

Does he get €24k additional utility from spending another €300k? I very much doubt it.

The market prices that utility at €24k. Maybe indeed OP does not but I don't think we should speculate on the OP's utility calculus.
I suppose my point is that there is too much focus on the investment aspect.
If OP was contemplating upgrading from a Ford to a Merc, they probably wouldn't come to AAM anyway, but the advice would mostly ask do they think that the extra enjoyment of the Merc would justify the expenditure in their opinion.
Replies to OP seem to see the issue as purely one of the financials. They need to build in their utility calculus. If they see it purely in investment terms ignoring its utility then it becomes a more marginal decision. I am not speculating on property prices but something has to be built in for an estimate of future price increases.

 

[Alkers86]

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.

If things go pear shaped, you can always rent a room to avail of 14k (Ithink now) per annum tax free.

That is a good security net to have as a 31 year old.

 

[ClubMan]

you can always rent a room to avail of 14k (Ithink now) per annum tax free.

Yes, €14K.

Rent-a-Room Relief

This page overviews rent a room relief.

www.revenue.ie

 

[tom1220]

My reading is that the OP is not in a long term relationship and has no kids. Buying a longer term home on the basis that it would suit a family is heavily relying on the assumption that the potential future partner wants to live in this specific location and house, and is happy to raise kids there. It is more likely than not that a new place needs to be bought at that point.

 

[Brendan Burgess]

Yes, but if he meets a long-term partner, it's quite possible that she will move in with him or he with her. Either way, their costs will be reduced.

 

[shipship]

On the other hand, it's usually better to start fresh in a new place with a partner.

 

[Bronte]

OP should not purchase a property that sounds like one double bedroom and a small room. Should buy a decent two bed with one ensuite and one main bathroom. That means a comfortable rent a room tax free income of 14k. That’s a pretty good insurance on mortgage payments against potential job loss. Once property is purchased he can overpay mortgage to further insure against such issues. His 2k monthly rent is now going on buying himself an asset.