Should we move or not?

Discussion in 'Money makeover' started by trevize, Jan 8, 2017.

  1. trevize

    trevize New Member

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    5
    Age: 45
    Spouse’s/Partner's age: 42

    Annual gross income from employment or profession: 100K (potential bonus up to 15%)
    Annual gross income of spouse: 40K

    Monthly take-home pay : Around 6500 per month combined

    Type of employment: Myself private, wife is part time public sector

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

    Rough estimate of value of home: 515K (based on most recent sales in the area)
    Amount outstanding on your mortgage: 75K
    What interest rate are you paying? tracker, ECB+ 0.9% (5 years left on term)

    Other borrowings – car loans/personal loans etc: 320
    Childcare: around 1K a month

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

    Savings and investments: 20K cash

    Do you have a pension scheme? Yes - my current fund is around 100K. Contributing 12% per month (7% from employer) , wife has 20 years service (split evenly between part time and full time) but I've no idea what that would be worth (probably should check!)

    Do you own any investment or other property? No

    Ages of children: 3, 8, 12

    Life insurance: Yes

    We have 3 kids and our current house is going to be a squeeze as the kids get older due to bedroom sizes. The 2 eldest are currently sharing but I can see a situation where they will be looking for separate bedrooms in the next year or so which will mean the youngest will be left with the box room which is tiny. So we've been contemplating moving to a larger house within the area and given that there are practically zero new houses being built means buying an older house and having to spend money on renovations. I think that we'd be looking at a spend of 700-750K on a house ( incl renovations) to make a meaningful move.

    The question is, are we mad to consider taking on 300K+ of debt at our ages ( given we are about 5 years from being mortgage free) ?

    My head says we should stay where we are but the heart says move! I'd be interested in some unbiased opinions.
     
  2. DCD

    DCD Frequent Poster

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    Trevize,
    First thing to consider do you like where you live? Are you and the family happy with the area?
    Five years time you have your loan payed. Your will then be starting the most expensive stage regarding the children?
    Can you extend your current property attic room etc?

    On your income sure you could jump again. That said I am sure you and your wife have worked hard to chip away and almost wipe out your borrowings.
    Stay where you are if the area suits. Enjoy the kids they will be gone before you know it.
     
  3. trevize

    trevize New Member

    Posts:
    5
    Thanks for the quick reply DCD

    We love the area and we'd only be contemplating moving a couple of kilometres from where we are now, so within the same town and school catchment area.

    Attic conversion is something we will look into , but I'm not sure we'd end up with a room that could be used as a bedroom given the type of roof we have.
     
  4. Gordon Gekko

    Gordon Gekko Frequent Poster

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    1,773
    The attic conversion or an extension might make sense. Your mortgage rate is also very low because of your tracker.

    However, you have the means to move and you shouldn't be concerned about a €300k mortgage on a €750k house.

    Debt is not a bad thing when it's for the right purpose. For example, I would see no issue with the debt you're proposing but if you were taking out a car loan, I would see an issue.

    One issue which I do think needs addressing is your pension. You should be making AVCs. That 5% just isn't enough, and €100k is behind where someone of your means should be.
     
  5. gnf_ireland

    gnf_ireland Frequent Poster

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    A 200-250k upgrade on the house is probably fine, and I am sure it does make a lot of sense. However a 300k mortgage at 3.25% (roughly) is 1700 over 20 years and 2100 over 15 years in repayments.

    Can I ask if your children were to go to college/university is it possible that they would stay with you and commute, or likely they would have to live away from home?

    The reason I am asking is - pushing it, the 3 year old would be roughly 9 by the time the eldest went to college, so could conceivable have the box room until then. If they eldest was to leave home then, they could be given the box room and the youngest upgraded ! It is something worth considering.

    If it is likely that they will stay living with you during the 3rd level years, then I think you will need more space. I don't think it will be feasible as they are all in their teens/early 20's otherwise. A rotation system on rooms is unlikely to work (giving the bigger rooms to the exam class students).

    If the roof is not suitable for an extension is it possible to change the type of roof you have (square it off etc), as this would be cheaper than upgrading the house.

    The other issue of concern is bathrooms - teenages spend lots of time in their and you all will want to get out at the same time in the morning !

    I think you need to consider all of these and then determine if you need to upgrade the house or not. You should also discuss the possibility of an attic renovation with an architect who may be able to determine what is possible or not.


    I also suggest you consider if/how you are planning to fund the children's third level education. It is only 6 years away, especially if you plan to upgrade the house. If you don't upgrade it, you will be mortgage free so should be possible. If you do upgrade, will that put a financial strain on you ? Think of the registration fees alone !


    Finally, I agree with Gordon - the pension appears to be low. Using the Pension Authority calculator, it puts you in line for a total pension pot of 400,000 euro, worth around 15,800 a year (in today's money). I am guessing your wife's pension would be worth more than that using the 'years service/80 rule'.

    I was once told that to achieve roughly 50% of your salary as a pension, you would need to pay roughly 25% of your salary into it from the outset (as a reasonable guide) - although others are open to correct me on this.
     
  6. trevize

    trevize New Member

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    5
    Fair comment , I'm planning to start taking my bonus as an AVC rather than as cash which should help.
     
  7. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Fair enough, but I'm a great believer in paying the AVCs on a monthly basis. You adjust to the lower net pay amount and then cease to notice the AVC.

    There's also the "cost averaging" aspect which divides opinion, but which I like.
     
  8. trevize

    trevize New Member

    Posts:
    5
    Thanks for the thoughtful response, some comments below:

    I think its highly likely they'll be at home (we aren't far from the city) and assuming rent remains as high as it is now in Dublin, I wouldn't be surprised if they were still around in their mid 20's ! This is really what sparked our thinking of the move, that we'd end up with an adult living in the box room...

    Unfortunately a couple of people have tried this approach and have been refused planning permission.

    Fortunately we have an ensuite and a main bathroom , so not a huge issue there.

    I'd imagine it won't be any worse than child care which runs us around 12-13K a year but definitely something we need to include in our thinking.

    Yes, thats a fair point - I'm hoping my wives pension will shore us up a bit and the use of my bonus and/or additional monthly payments. My wife is likely to return full time once the kids are in secondary school which will help as well.
     
  9. gnf_ireland

    gnf_ireland Frequent Poster

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    634
    I think this is a real concern for a lot of people these days. We are in the same boat - I don't believe our kids will leave until their mid-late 20's. They will not get it as good anywhere else

    True, but you still will have some childcare costs for a few years and you are entering an expensive phase of a child's life - the teenage years. If you are carrying a reasonable sized mortgage into this you do need to do it with your eyes open.

    Your wife is now 42. Your youngest will start secondary in say 9 years time. She has been doing part time for roughly 10 years. How realistic is it for her to go back to full time after 20 odd years part time? I would have my doubts. I know a lot of people who talk about going back once the kids are older, but never do !


    I do think you should do a review of the family finances to see where the money is being spent currently. 6500 euro where you are roughly breaking even each month seems high, relative to salary. Assuming 1500 mortgage and 1000 childcare, its still 4000 a month on 'living'. Personally I would review this to see where the funds are going, and at least be happy on what you are spending your salary on even if you decide not to change it.
     
  10. PaddyBloggit

    PaddyBloggit Frequent Poster

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    2,808
  11. Brendan Burgess

    Brendan Burgess Founder

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    30,973
    I presume you mean that you are paying €320 per month on some loan? If so, you should use your cash to clear it. You are presumably paying around 10% on the car loan? If you have a 0% loan, then don't.



    This is a clear case where you should not be making AVCs at the moment. Yes, your pension fund is too low. But you have almost cleared your mortgage, so you have plenty of assets. You may well be trading up in the next year or two. You will also need money for your children's education. You need to build us accessible assets to fund these. Do not put money away in your pension.

    When the kids are sorted and your mortgage is back under control, you will then have plenty of spare cash to max your pension contributions.

    Brendan
     
  12. Brendan Burgess

    Brendan Burgess Founder

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    The trading up issue is interesting and I like Paddy's idea of thinking outside the box.

    I doubt if it's a runner, buy you could consider renting a bigger house when you need it. And then moving back to your existing home when the older kids have left.

    Investing in the family home is one of the most tax-efficient forms of investment. No tax on the imputed income i.e. rent saved. No CGT.
    So you could trade up for ten years. When the kids have moved, you could trade down again and you would release a lot of capital tax-free. So it's not as if you have a €300k mortgage for the next 30 years.

    A lot of people do have difficulty trading down, so it's something you need to think about. In the past with stamp duty rates of 6% and 9%, this was not a viable option. But with stamp duty reduced to 1%, it's doable.

    Is there any remote chance you could sell your current home to a friendly investor who might sell it back to you after 10 years? A long shot, but if a friend or relative is thinking of investing in property, that could work very well.

    Alternatively, could you do a house swap with someone with a larger house?

    Brendan
     
  13. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Hi Brendan,

    I'm apologising again for disagreeing with you!

    I fundamentally disagree with the idea of deferring meaningful contributions to one's pension.

    The OP earns €115k per annum. Based on other contributors' calculations, they're looking at pension income of circa €25k per annum including the State Pension.

    It's the power of compounding over time that builds a meaningful pension fund. My sense is that the OP won't get to the circa €60k of annual pension income that's recommended for someone on €115k without accelerating the contributions now.

    GG
     
  14. Fella

    Fella Frequent Poster

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    60k annual pension seems excessive no matter what your earnings are now. I'm not sure why someone would need that much money in retirement.
     
    roncondon likes this.
  15. Brendan Burgess

    Brendan Burgess Founder

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    Hi Gordon

    This is a mistake which many people make.

    I am not suggesting that he squanders his money instead of starting a pension. I am suggesting that he invests in bigger house and pays off his mortgage quicker instead of investing in a pension. Paying off a mortgage compounds the money at 3% or 3.5%, tax-free, risk-free and charges free. If the value of his bigger house increases, it will compound tax-free as well.

    Fella makes a good point as well. People on €115k are told that then need a retirement income of €60k. People on €200k are told that they need a retirement income of €100k. Trevize will have paid off his mortgage. He may well have traded down so will have a lump-sum of cash. And his expenses will be greatly reduced.

    Of course, if he trades down, he probably should use the proceeds to maximise his pension contributions at that time if it's still the right thing to do from a tax point of view.

    Brendan
     
  16. michaelm

    michaelm Frequent Poster

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    Last edited: Jan 9, 2017
    Mad. I wouldn't dream of moving just because the box room might be a bit of a squash and a squeeze for the youngest. In a year or two, when it makes sense, you can just separate the older two and stick the youngest in the box room. By the time the youngest is a teenager the eldest may well have moved out or be away at college in which case the youngest will get an upgrade.

    Also, pretty much any attic can be converted, just depends on the height. I recently had my attic converted (planning exempt) and it's a decent space given how small my house is, that I have a hip roof, and the stairs runs up the middle of the room. Great storage too.
     
    Last edited: Jan 9, 2017
  17. Gordon Gekko

    Gordon Gekko Frequent Poster

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    But the 3.1% return does nothing to fund the individual's retirement.

    Mortgage repayments tend to be circa 30% of one's income. There should be room elsewhere to makr AVCs.

    If my monthly mortgage is €3k and I'm making a €2k AVC, I disagree that I'd be better off putting the net €1,200 against my mortgage for the next 15 years and then starting to contribute to my pension.
     
  18. Brendan Burgess

    Brendan Burgess Founder

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    €300k debt will cost you around €9k in interest a year. A bigger house will have higher running costs and higher property tax.

    Only you can decide if the extra room is worth the additional €1k a month for probably 10 years.

    Brendan
     
  19. Brendan Burgess

    Brendan Burgess Founder

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    The best way to build his wealth is to cut his expenditure. So by not trading up, he will be richer in 10 years time. (Unless house prices increase by more than 3% a year over that period.)

    If he decides to trade up...

    Then paying off the mortgage quicker will result in a tax free, risk free, charges free return of 3.1% per annum.

    Let's say he has €10,000 cash today. If he pays it down against his mortgage, this will be worth €13,439 after 10 years.

    Let's say that instead of paying off his mortgage, he invests €17,000 in his pension fund which will cost him a net €10,000 after tax-relief. If he gets a 3% return after charges, after 10 years, he will have €22,800 but it will be in his pension fund.

    He could put the €13,400 cash into the pension fund at that stage, and it would be worth €22,400 (after tax relief) .

    So there is very little financial difference. But that is assuming that the pension fund will generate a return of 3% a year after charges. It might get more, or it might get less. It also assumes that the tax-regime stays the same. It might become more favourable or it might become less favourable.

    Personally, I would prefer to owe €13,400 less on my mortgage than have an additional €22,400 in my pension fund.

    But making the decision now to pay off a €300k mortgage quicker, does not preclude him from contributing to the pension fund later when the mortgage is under more control.

    Brendan
     
  20. Fella

    Fella Frequent Poster

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    Stupid question time , I don't get when the advice is max out AVC for tax purposes for people that are going to be getting 60k pension a year surely your going to be paying tax then at the high rate ? So your just deferring tax till later . Obviously fund gets to grow tax free but should you not aim to max AVC to keep you in low tax bracket at retirement ? Going over this into high tax rate for me seems to defeat the purpose of it.