Too much in cash?

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MurphB

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Age: 45
Spouse’s/Partner's age: single, no spouse

Annual gross income from employment or profession: 45K basic + 25K commission (consistent over last 10yrs)

Monthly take-home pay 3.5K

Type of employment: e.g. Civil Servant, self-employed Private blue chip

In general are you:
(a) spending more than you earn, or
(b) saving? saving 5k year possibly less

Rough estimate of value of home 520K and non essential but nice to have retrofit would cost 26k after grants at current levels.
Amount outstanding on your mortgage: 90K and 9 years, 900/month
What interest rate are you paying? 2.75% (same lender offering 2.3% fixed for a couple of years)

Other borrowings – car loans/personal loans etc none

Do you pay off your full credit card balance each month? don't have one
If not, what is the balance on your credit card?

Savings and investments:
25K shares in employer, tax already paid, nothing owed at current stock value
135K cash at 0% (cu & current a/c)


Do you have a pension scheme?
DC 300K, contributions- basic 5%, employer 7%, AVC 15% (this totals circa 22% gross) and invested as follows
IL passive equity fund 60%, (charge 0.12%)
IL moderate growth fund 40% (charge 0.18%)


Do you own any investment or other property? no

Ages of children: 10,10,15

Life insurance: Well covered with employee policy, also separate policy to clear mortgage in event of my death


What specific question do you have or what issues are of concern to you?
Concerns over % of wealth in cash, and current headlines re inflation. I'd like an opinion on the following loose plan.
Eldest kid attending college in 4 years time. I'd hope to grow cash further and take a small mortgage to purchase their accommodation. The rental income from other room or two would be used to service this. If it doesn't work out that I'm in a position to purchase before eldest kid hits college I'd hope to purchase before the twins hit college (8 years time). Kids living/educational costs are also met by their mother, but if I do purchase a property for their use in college I'll meet this cost alone.
I'd like an opinion on this plan, or is this property purchase more hassle than its worth and should I put my cash elsewhere, clear mortgage/invest/home improvements?

I'd also like an opinion on the pension fund split, unsure which is the most aggressive, both sound pretty sleepy tbh. Current pension predictions are 850K if I stop AVCs, or 1.2M if I continue with the 15% AVC. My inclination is to continue with the AVC with the current tax reliefs.
 
MurphB said:
Amount outstanding on your mortgage: 90K and 9 years, 900/month
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So you are paying this off over the next 9 years anyway.
After 4 years when you want to buy a house, it will be down to €53k and you will be knocking €10 capital a year off it.

So, the first thing to do is to clear the mortgage now.

You will be €8,000 richer in 4 years when your kid starts college.

Brendan
 
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After 4 years, you will be mortgage free and you will have €70k left of your existing cash plus the €40k or so of saved mortgage payments.

You are making about €10k of AVCs, so if you stopped these you would have another €24k cash.

So you would have €134k when your oldest starts college.

You won't have a mortgage so you should be easily able to get a mortgage then if that is the right thing to do.

If you had a child starting College today, it would be hard to know if buying property would be the right idea.
It's even harder to know when it's 4 years away.
You don't say where you live and where your kids might go to College.
If all three of them want to go to the same College, then it might make sense to buy a place.
But you won't know that until the twins start college.

You should plan your finances to enable this. But be flexible.
1) Clear the mortgage
2) Pause the AVCs until you know what you are doing
3) Decide where to invest the cash in the meantime.

It's very hard to know where to put the cash. We are in weird economic times with cheap money probably inflating shares. But inflation may wreak havoc with your cash as well.
 
One option worth considering in normal times would be to buy an investment property now if you know where your children will be going to college.

Unfortunately, that is not advisable now because of the anti-landlord sentiment which is the consensus of all the political parties. You may well own an investment property and not be able to get the tenants out for your child to live in the property. So you would have the worst of both worlds.

Brendan
 
While paying off the mortgage seems logical, perhaps not if he is intent in purchasing a second property. A mortgage on an investment property, the interest rates are significant higher. If the LTV is less than 50% then ICS do 3.75% on BTL. The interest rates go up as the LTV rises above 60%.

If you want to buy a property then you need to do the maths on the interest you are paying on the house versus the after taxable income/saving on the BTL.
 
I think that the maths is easy enough

Should he pay €10k off his mortgage today which he could delay until year 9?

He will save €10k @ 2.75% for 4 years = €1,100
But will pay an additional 1% on €9,000 for 4 years = €360
So for this lump which he could delay to year 9, he will save about €700

And the saving will be much more for the €10k he has to repay in year 5.

So it's clear. Pay off the mortgage in full now.

Brendan
 
Brendan you are assuming a lower LTV. It depends how much a property would cost him in whatever area he wants to buy.

Can we get that information to give answer accurately?
 
MurphB said:
Eldest kid attending college in 4 years time. ... If it doesn't work out that I'm in a position to purchase before eldest kid hits college I'd hope to purchase before the twins hit college (8 years time).
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Do you think all 3 will end up going to college in the same city (or area if Dublin) so a single property will benefit them all?
What will you do when they're finished? Keep or sell?

MurphB said:
should I put my cash elsewhere, clear mortgage/invest/home improvements?
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Think of the following scenario:
You pay off your mortgage tomorrow. You've still got 45k in cash, so now you're saving an extra 900 per month along with the 5k per year you're currently saving.
Then the bank calls you next week and offers to loan you 90k at 2.75% interest - they heard you might be possibly thinking of buying a property in a few years. Would you take the bank up on that offer now?
You don't need to do the maths on interest rates. Unless you've a clear plan for the money, just pay off the mortgage.
 
But there are providers who’ll do equity release on the home at home mortgage rates, so I wouldn’t worry too much about that.

It’s pretty clearcut…pay off the mortgage.

I’d increase the total pension contributions to the 25% maximum, do the usual in terms of keeping an emergency fund in cash, and then I’d shy away from an investment property and instead start building a portfolio of equities.

I’d sell the shares in the employer company; that’s almost always the right move.

Without knowing where the kids might go to college, it’s impossible to say whether or where an investment property might be required. Plus there’s all that anti-landlord sentiment.

After clearing the mortgage, doing the retrofit, and setting aside, say, €20k for emergencies, you’d have around €25k plus the ability to add €15k a year to your equity portfolio. Assuming your retirement age is 65, 20 years of that should look pretty nice. i.e. €25k to kick things off and €300k filtered-in over a 20 year period. All in addition to your decent pension fund.

You’re in a good position…now it’s time to make that a great position.
 
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Do they do it at home loan rates?

I would have assumed that they are effectively taking security on your home, but charging you a higher rate as it's for an investment property.

If they do them at these rates, that would be perfect for the OP

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They are less attractive for buy to let
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Brendan Burgess said:
Do they do it at home loan rates?

I would have assumed that they are effectively taking security on your home, but charging you a higher rate as it's for an investment property
Click to expand...
There aren't a huge amount of these yet so I'd imagine they're all on an individual case basis.

My crude understanding is say for example you want to buy a BTL but don't have sufficient deposit in cash. They'd do an equity release on your home to get the deposit, but the balance as a BTL mortgage at BTL rates.

Even if it was BTL rates, if it was secured only on your own home there's nothing to stop you then switching to another lender at PDH rates.

But who knows what might be available in 4 years time.
 
Buying a place isn't a guaranted as there are quite a lot of external variables in addition to securing a mortgage. Some of these are costs (solicitors, furnishing) and timing between drawing down on a mortgage and kids starting college. Other items like available properties in the location, property prices etc.

With that it's probably worth considering the cost of just paying rent for your kids to attend college. This could be as much as 15k a year but obviously varies.

I think it's worth factoring that in when looking at your plan for the next 10 years.
 
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