Early 30's - Next POA

[Paulie_08]

Personal details
Age: 31
Spouse’s/Partner's age: 30
Number and age of children: N/A

Income and expenditure
Annual gross income from employment or profession: €75k + c.10% bonus (private)
Annual gross income of spouse: €30k (public)
Generally save €1-1.5k p/m

Summary of Assets and Liabilities
Family home worth €350k with a €200k mortgage
Cash of €65k
Shares : €2k

Family home mortgage information
Lender: EBS
Interest rate: 2.1%
If fixed, what is the term remaining of the fixed rate? 3.5 years

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

Buy to let properties
N/A

Other savings and investments:
Do you have a pension scheme? DC scheme (5% contribution from employer & recently upped my contribution to 20%)

Other information which might be relevant
Life insurance: Basic mortgage protection insurance.

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

Our plan is to build up our cash savings to be in a position to buy a new home (c. €450-€500k) in 5-10 years without having to sell our existing home (to avoid being in a chain). We would then evaluate whether we would sell the original house or try let it out (aware of the difficulties facing landlords). With our current rate of saving’s we should be in a position to have the 20% deposit in the next few years even allowing for savings to take a hit if/when we have kids.

Earlier this year I started drip feeding money (c. €200/m) into an all-world ETF via online broker. The plan is to continue investing each month and leave the money for 5 – 10 - 15 – 20 years depending on our needs. While I’m tracking each purchase, I may decide to sell on the 8th anniversary, pay tax on any profits and reinvest soon after to avoid the complications of deemed disposal – while it may not be optimal, I think it is still a reasonable approach to diversify without too much hassle.

I thought about using existing cash savings to purchase an investment property, which we could then sell to get the deposit of our next house, but given we want to avoid being in a chain, the difficulties that landlords face & the potential short time frame (5 years), I believe keeping most of our savings as cash is our best option (even if it is frustrating to see its purchasing power diminish due to inflation).

Specific questions:

1) Does the above plan seem sensible?

2) Are we missing anything or is there anything else we could be doing better to maximise our position?

 

[interested21]

I'm in a fairly similar position myself with the same goal as yourself - trade up in the next few years without entering a chain.

Our plan is to build up our cash savings to be in a position to buy a new home (c. €450-€500k) in 5-10 years

With the way property prices have been rising, are you worried that you won't get much more house for 450-500k than you already have? Do you risk wanting to trade up again a few years later just for the sake of avoiding a chain?

Earlier this year I started drip feeding money (c. €200/m) into an all-world ETF via online broker. The plan is to continue investing each month and leave the money for 5 – 10 - 15 – 20 years depending on our needs.

By doing this you're delaying your ability to trade up by diverting funds elsewhere. You're also giving yourself an admin headache with limited upside considering the relatively small amounts you're investing. You're already putting a big chunk into your pension every month which gives you plenty of stock market exposure. I presume this is invested 100% in Global Equities.

Some here may argue that you should temporarily reduce your pension contributions while you're saving for your new home. I'm not in that camp myself but I can see the logic of argument. It gets you where you want to be quicker and you have plenty of time to catch back up.

I thought about using existing cash savings to purchase an investment property

IMO your timelines are way too short for this. The admin, risks and upfront costs wouldn't be worth it.

We would then evaluate whether we would sell the original house or try let it out

This is something we considered as well. Like yourselves, we'll make the final decision when the time comes, but my feeling right now is that the yield just isn't great on 350k family homes. If at some stage we want to become landlords (a big if) we'll just buy somewhere more suitable.

 

[_OkGo_]

1) Does the above plan seem sensible?

Not really, today you have equity of €150k and cash of €65k with a base income of €105k so the potential to borrow 3.5x of €367k .

You can buy the house you want today comfortably by using using €200k of your cash/equity and a comfortable mortgage of €300k (<2.9 LTI). Being in a chain is not really a problem for you while you don't have kids. Its a small inconvenience to get what you really want.

Our plan is to build up our cash savings to be in a position to buy a new home (c. €450-€500k) in 5-10 years without having to sell our existing home (to avoid being in a chain). We would then evaluate whether we would sell the original house or try let it out (aware of the difficulties facing landlords). With our current rate of saving’s we should be in a position to have the 20% deposit in the next few years even allowing for savings to take a hit if/when we have kids.

This won't really work. In 5 years, you will still have a mortgage on your PPR of €175k. I'm assuming no overpayments and that you have a 30 year term so correct me if I'm wrong.

You are saving €1.5k a month so that's an additional €90k. If you plan of having kids and taking the full unpaid maternity leave (which I highly recommend), you won't save €90k, especially if the high earner will be on maternity leave. You could easily have 2 kids in 5 years so between unpaid leave and a new expense of childcare, lets say you actually have €50k saved in 5 years for the house or cash of €115k

You will be just about scrapping the 20% deposit needed of €100k plus the extras for associated costs (legal, EA's, engineers, stamp duty etc). But you will have existing borrowings of €175k and will be looking at borrowing €400k. Will your combined income be €165k by then to stay within the LTI rules? You could also have childcare fees x2 reducing your affordability i.e. they may not want to lend the full 3.5LTI to you

You could very easily end up in a chain anyway but with a young family to move instead of just a couple. It will make for a very stressful few years in your late 30's

2) Are we missing anything or is there anything else we could be doing better to maximise our position?

Yes, you are missing the obvious. You are currently in a great financial position so don't ruin it just to avoid a chain sale

• You are maxing your own pension and your spouse is public sector
• You have the equity/cash to buy exactly what you want now so do it
• Prioritize your future family by saving for unpaid maternity leave
• Aggressively overpay your PPR mortgage with whatever else you have
• By the time kid #2 comes along, you can ease off pension contributions if necessary to manage childcare costs

After all of that, at 40, you could be over the worst of childcare costs, have a well funded pension and a very manageable mortgage. If you still fancy being a landlord at that point, then go for it.

 

[Paulie_08]

@interested21 Thanks for the comments. Is your approach to maximise cash savings until you can afford to purchase?

With the way property prices have been rising, are you worried that you won't get much more house for 450-500k than you already have? Do you risk wanting to trade up again a few years later just for the sake of avoiding a chain?

Have factored in some house price growth but planning to buy in a slightly different area where prices are currently lower so while I can't say for certain, I hope we wont be going above the €500k mark!

By doing this you're delaying your ability to trade up by diverting funds elsewhere.

Reasoning behind this is to have some money invested in equities over the medium/long term which can beat inflation. If we need the funds to purchase the "forever home" we'll cash it in but ideally we would not use it for the house purchase and continue to let it grow. We're happy with our current location and are in no rush to move which is why I noted we'd hope to purchase in 5-10 years (i.e. we may not move straight away once we can afford to).

I presume this is invested 100% in Global Equities

Correct!

 

[interested21]

Is your approach to maximise cash savings until you can afford to purchase?

Yep, more or less. I have some equities but I'm not going to add to them again until we have traded up. Investments returns can be great when you leave them to compound over years and decades. In our case we will need the money in the next 2-3 years so the risks far outweight the potential upside.

The goal of this cash is for a deposit, not to beat inflation. We have plenty of money in equities through our pension. The goal of that money is to beat inflation over the next 25 years.

The hardest thing is tuning out some of the media coverage of inflation and the idea of "beating it". If money is earmarked for a deposit then housing inflation has been around for years. The increase of the price of milk doesn't change that. And being deeper in equities certainly wouldn't have made inflation any easier this year - the opposite in fact!

Beating inflation in the short term is hard. Inflation = increased interest rates = lower asset prices. I think we can only expect equities to beat inflation when we average them out over decades.

Anyway that's probably off topic.

I think you're doing great and have yourself in a great position. You could probably just benefit from narrowing your focus a bit and keeping things simple:

• Save for your distant-future through your pension
• Save for your near-future in cash
• Buy what you want whenever you can afford it (even if that means entering a chain...)

 

[Paulie_08]

@_OkGo_ Very interesting insights, appreciate the advice.

Something I should have emphasised in my original post is we’re in no rush to move now, we’re happy with our current location. We’re looking to maximise our future purchasing power but don’t necessarily want to move as soon as we can afford to. We just want to be in a sound financial position when that time comes.

But you will have existing borrowings of €175k and will be looking at borrowing €400k. Will your combined income be €165k by then to stay within the LTI rules?

While we hopefully see some increases in our salaries, we're not banking (excuse the pun) on having a combined salary of €165k in order to purchase. There’s a lot of mixed commentary on the process of buying a forever home while keeping a starter home. From talking to banks and mortgage brokers, some banks won’t count your existing borrowings if the expected rent of the original house covers twice the mortgage repayments for it (which would be the case here).

• Prioritize your future family by saving for unpaid maternity leave
• Aggressively overpay your PPR mortgage with whatever else you have
• By the time kid #2 comes along, you can ease off pension contributions if necessary to manage childcare costs

After all of that, at 40, you could be over the worst of childcare costs, have a well funded pension and a very manageable mortgage. If you still fancy being a landlord at that point, then go for it.

Alot to be said for that approach. While we're in no rush to move, the above is definitely a viable/attractive option. Will give it some thought. Thanks for the reply.

 

[Gordon Gekko]

People worry too much about being in a chain. Saving up to buy a house is crazy, you borrow, albeit prudently. With the demise of bridging, you just close both deals on the same day. Waiting 5-10 years to buy a house or to do a renovation (as seen in another thread) makes very little sense.

 

[Paulie_08]

You could probably just benefit from narrowing your focus a bit and keeping things simple:

• Save for your distant-future through your pension
• Save for your near-future in cash
• Buy what you want whenever you can afford it (even if that means entering a chain...)

Valid point - cheers for the advice.