# Standing at the crossroads



## Maybrick (2 Dec 2008)

Thanks in advance for any help - I realise my situation might look reasonably ok, but I'm very worried about my income declining in the near future so any advice would be greatly appreciated.

Savings: 110,000
Mortgage: 185,000 on an apartment worth approx 250,000 (but who knows in the current climate - I bought it for 250,000 in January 2006 anyway). Mortgage 950 per month. Would love to trade up if possible.
Income: Approx 4,500 per month - but may decline sharply in the coming year.
Expenses: Roughly 1,000 per month. Have wife but no car or children.
Pension: No

Thanks,
Alex


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## Jonathan.OB (2 Dec 2008)

> reasonably ok





> Would love to trade up if possible.



I think you're worrying far too much to be fair. 

Why are you predicting your income to drop? Are you S/E?

Is your wife working?


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## Maybrick (2 Dec 2008)

Thanks for the reply - yes, I am self-employed. It's hard to be exact, but if the recession starts to bite I could lose as much as half my income. My wife does work but only part-time (she has a disability), so only makes about 20,000 a year.

I should have mentioned that we're both 33.


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## CGorman (2 Dec 2008)

Hi Maybrick, could you fill out this? :

Age:
Me: 
Spouse:

Employment
Me: 
Spouse: 

Gross Income
Me: 
Spouse:

Property
(incl. rate of interest)

Other Borrowings:

Savings
(incl. rate of interest)

Pension: 
Me:
Spouse:

Kids:

Life Insurance:

Spender or Saver: 

My Question/s:


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## Maybrick (2 Dec 2008)

Here you go...

Age:
Me: 33
Spouse: 33

Employment
Me: Self-employed
Spouse: Self-employed

Gross Income
Me: circa 55,000
Spouse: circa 20,000

Property
(incl. rate of interest)
Apartment worth roughly 250,000, mortgage 190,000, Interest 5.94 %

Other Borrowings: None

Savings
(incl. rate of interest)
110,000, Interest 3%

Pension: 
Me: No
Spouse: Yes, but very small

Kids: No

Life Insurance: Yes, for 200,000, costs 16 a month.

Spender or Saver: Savers.

My Question/s: How can I best protect myself against a sudden drop in income?


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## legallady (2 Dec 2008)

I think you should use your savings to pay off most of your mortgage. the repayments then should be greatly reduced. If your income does drop dramatically, your wifes wages (plus your new lower wage or social welfare payments) should be ok to cover you.


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## CGorman (2 Dec 2008)

You stated that you would like to trade up in the near future. It would thus be a *possibility* for you to sell the apartment now for say 210k (or whatever) add the equity difference to your cash pile (maybe an extra 20k) and rent for the next few months or even a year or two. When a better property at a reasonably affordable price comes on the market down the line you will be in a strong cash position to buy it and hopefully have much added clarity about your income security.

Only an idea


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## Maybrick (2 Dec 2008)

Thanks - but that means taking a hit of 40,000 on the apartment, which I'd be very reluctant to do. Surely it's better to hold tight until the market bottoms out?


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## Dreamerb (2 Dec 2008)

Maybrick said:


> Thanks - but that means taking a hit of 40,000 on the apartment, which I'd be very reluctant to do. Surely it's better to hold tight until the market bottoms out?


Not really. Or at least, not necessarily. Say the apartment would currently realise 210k [just as an example] and your "trade up" house / apartment is currently on the market for 350k. You can take it pretty much for granted that you'll be able to negotiate on that unless the price is really reflecting current conditions, so let's say you could get it for 310k. 100 k cost. Add in your various transaction costs, and it will cost you stamp duty of 12,950, solicitor's fees, agent's fees - maybe 20k in all. Total cost of trade-up, 120k, of which 40k is the "hit" on the apartment.

Now, contrast that with "wait it out" until you can be guaranteed your money back on the apartment:
If your apartment would currently sell at 210 (and I know we're taking figures out of the air here, but it's only by way of illustration - principle will still hold), then you'll need the market to rise by 19% to "recoup" that 40k. But wait! - the price of your "trade up" also goes up. Your 310k house is now 369k. 119k cost. Add in your various transaction costs: your stamp duty goes up to about 17k, solicitor's fees, agent's fees - maybe 24k in all. Total cost of trade-up, 143k - 23k more than if you took the "loss".

Fair enough, markets don't behave uniformly and FTB markets tend to go up first in a rising market. There's every possibility that waiting won't cost you all of that extra 23k. 

You know, I've just re-read your post again - "wait until the market bottoms out" *and* not take a hit on the apartment? 

Waiting until the market bottoms out is a good strategy, if you can guarantee you can detect when that is - often not easy. But you will take a hit on the apartment if you do. 

Which means, in my opinion, that the best strategy is probably to decide what you can afford by way of trade up costs, see what budget that gives you, look at what's on the market in that general range, and then make a decision based on your and your spouse's needs and wishes for a home that you expect to live in for not less than ten years.


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## Maybrick (2 Dec 2008)

Thanks - a lot of food for thought there. I'll do some sums and get back.


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## Bluebells (2 Dec 2008)

This is just my tuppence worth.
There is lady on TV here in US called Susie Ormond, and I realise that most of her advice is useless to someone in Ireland.
 However, one thing she always advises, regardless of whether you are trading up or trading down, rich or poor, wanting to get rich or wanting to know what to do with your money - _secure your home_.

Once the roof over your head is secure, you can live on oatmeal and potatoes if you lose your job. You cannot live on the street, dragging debt to the bank around with you. When you get old, (assuming you live that long on oatmeal etc!), you can release equity in your home to fund your needs.


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## CGorman (2 Dec 2008)

Bluebells said:


> you can release equity in your home to fund your needs.



Unfortuately in the OP's case, it is highly unlikely their is *any* realiasable equity to speak of in his home.

My suggestion above could be illustrated as:

> Sell now for €200k
> Rent for 2yrs
> If job is secure, then continue the trade up move; possibily at a cost of 10%-15% less than now...

My point is sell your own property now and then buy when the market drifts furture downwards with more job security, more cash saved and a stronger commitment to the place you are going to buy. This is basically the same as trading up, just with a much bigger gap in between than people normally experience.


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## Padraigb (2 Dec 2008)

CGorman said:


> My suggestion above could be illustrated as:
> 
> > Sell now for €200k
> > Rent for 2yrs
> > If job is secure, then continue the trade up move; possibily at a cost of 10%-15% less than now...



That's a really high-risk strategy. What if the market is near its bottom now, and climbs a bit over the next two years? And have you ignored OP's point about his income not being secure?


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## Maybrick (2 Dec 2008)

Also, it just feels wrong to spend two years paying rent, ie dead money. Staying where I am and reducing the mortgage is surely the safer option?


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## Padraigb (2 Dec 2008)

Maybrick said:


> Also, it just feels wrong to spend two years paying rent, ie dead money. Staying where I am and reducing the mortgage is surely the safer option?



Let's be honest: nobody knows where things are going. Staying where you are is the cautious option. That's what I would do in a position like yours.

It's worth weighing the return you get on your savings against the interest you pay on your mortgage. Reducing your mortgage might be the best way to invest your savings. Given the concern you expressed about a possible reduction in your income, it might be prudent to hold some of your savings in a more accessible form.


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## Dreamerb (2 Dec 2008)

Maybrick said:


> Also, it just feels wrong to spend two years paying rent, ie dead money.


Not the "dead money" fallacy! Rent is payment for a service - i.e. the provision _and maintenance _of accommodation and certain related costs. Mortgage interest is payment to the bank for the loan of funds, and is neither more nor less dead money than rent. 



Maybrick said:


> Staying where I am and reducing the mortgage is surely the safer option?


Again, not necessarily, and for a number of reasons. 
(1) If you do wish - and have the opportunity - to trade up, it will probably be useful to have a substantial amount of accessible cash - money you can get before you complete the sale of your apartment. 
(2) If you use most of your savings to reduce the mortgage and your income does drop dramatically, you may not have a "cushion" of money readily available. Your mortgage is already at a very manageable level, so may not reduce by quite as much as you think. 
(3) There are some very good savings rates available at present - so good that even after DIRT, they may give a better return than the reduction of mortgage interest. Have a look at the financial best buys forum for those. 

Given your high savings, (currently) good income, and low mortgage payment, in your position I'd look at increasing the mortgage payment - but that leaves you the flexibility to reduce the payments again if your income takes a hit. 

I'd be very cautious of selling up in order to rent - while it could well work out very well for you, it is a risky strategy and requires timing the market.


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## MrMan (2 Dec 2008)

You could always test the market by putting it up for sale, you don't have to accept any offer. You  may find that your valuation is misplaced and this may make up your mind for you.


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## CGorman (2 Dec 2008)

Padraigb said:


> That's a really high-risk strategy. What if the market is near its bottom now, and climbs a bit over the next two years? And have you ignored OP's point about his income not being secure?



As I clearly said in my post: that suggestion is merely a possibility - I did NOT say it was the best course of action, I just said it was an option for the OP.

And I specifically mentioned job security in my post from the angle of putting himself in a non-mortgage position whilst he still can until such a time that he is more certain of job security, particularly as he has indicated he wished to trade up in the short-medium term.


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## SteveW9 (3 Dec 2008)

Maybrick said:


> Thanks - but that means taking a hit of 40,000 on the apartment, which I'd be very reluctant to do. Surely it's better to hold tight until the market bottoms out?


 Youre better off taking a 20k hit now by selling your appartment than a 150k hit in 2 years.


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## SteveW9 (3 Dec 2008)

Maybrick said:


> Also, it just feels wrong to spend two years paying rent, ie dead money. Staying where I am and reducing the mortgage is surely the safer option?


 
As its an appartment youre in a much worse situation, there is little or no demand for appartments nowadays and there are plenty of houses available. I think you will really struggle to sell it. So I would use all your savings to pay off your mortgage.


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## MrMan (3 Dec 2008)

SteveW9 said:


> Youre better off taking a 20k hit now by selling your appartment than a 150k hit in 2 years.



Regardless of the fact that you just pulled a ridiculous figure from the sky, if indeed his apt dropped by a further €130k in 2 years then the trade up would have dropped by a similiar amount and he might just sit tight.


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## Maybrick (3 Dec 2008)

Thanks for all this advice - looking at it again, I think the most sensible option might be to use half the savings to reduce the mortgage and keep half in a high interest deposit account. That way I'll reduce my payments but still have acess to a reasonable amount of ready cash. As for the suggestion to sell up and rent, I do see the logic. Sorry, though - call me a coward but it just feels too risky and I'm really not brave enough.


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## Padraigb (3 Dec 2008)

For a number of years recently, the odds have favoured the risk-takers. The game has changed recently, and I think caution is probably a better strategy for most people.

But do you need, at the moment, to reduce your mortgage repayments? If you maintain the same level of repayment, you will be increasing the equity in your home at a good rate. Depending on how flexible your lender is willing to be, you could keep up repayments at a high level in the short term, and adjust downwards if your income falls.


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## Bronte (4 Dec 2008)

Another way to look at it is a 40K hit might be cheap.  

Why are your savings only receiving 3% interest when you can get over 6% at present.


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