Largest Mortgage possible vs small Mortgage and owning a home outright sooner?

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markodaly

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Given that there are strict rules around getting a mortgage, where usually the 3.5 times the combined income is what is given, is getting and spending the amount better than actually just getting a smaller mortgage and having a house paid off in full in just a few years?

I guess this is more of a long term investment question.

I have a fairly sizeable deposit. Approx 275k, should be near 300k when I am going to actually drawn a mortgage
Now I could buy a nice 3-bed semi in Cork for about 300-350k and have a tiny mortgage and own my house in say, 3-5 years easily.

Or I could apply to the bank and spend all the amount they are willing to lend.
Say I get 400k off the bank, then in theory I could spend 600k (if not more) on a house if I put all my savings into it.

My thinking is this...
If house prices rise by say 10% over the next 3 years (which is conservative imo) then a 10% rise of a house of 300k is a capital gain of 30k, but a 10% rise of a house worth 600k is a capital gain of 60k which being its ones primary residence is a tax-free capital gain. If this house is your forever home then the return will be greater again in 10-20-30 years...

I know that interest payments would be larger on the larger home, but would it be THAT much more?
Also, I know the market is not uniform, house prices in different categories will rise at different levels.

However, I think one gets what I am saying here. My parents would have said, get the small house and have it paid off faster, then upgrade, but I think a little bit the opposite way, generally, because Central Banks over the past 10-15 has folded the world with money and asset prices have followed and I genuinely believe this will continue in the short to medium term anyway as the world is hooked on debt and cheap money. (My own personal view, I may of course be very wrong)

I am a 41-year-old First Time Home Buyer with two young children.

Apologies if this question has been asked before.
 
There's a lot of ifs and buts mentioned above
Have you spoken to lender/broker to determine how much you can borrow?
Have you factored in costs relating to buying/selling again in few years, which could eat into any profit.
When calculating repayments you will need to have an idea how much you can borrow, term and interest rate. With a lower LTV, the interest rate would usually be lower. This might impact your decision.
Karl Jeacle calculator is a great resource but you will need some idea of the above to effectively use it.
If you are buying in urban location, try to link up with a broker that deals with Avant as their rates are really good but loan must meet specific criteria.
 
Looking at the financials of your options is only one lens to view this in. What type of house do you need to suit yours and your families wants and needs? Size, rural, in an estate, close to schools, close to water, amenities etc. Then align that against your financials and what you can afford.

It does seem like you are in a position to buy your long term house, trader up strategies are more for people that can't afford to buy their long term house now.

Interest rates at historic low rates, but likely won't be this low forever, but carrying debt at these levels shouldn't be as much of a concern compared to rates of 7% plus.

My advice work out the house you want (not just the most expensive) and then align with the financials.
 
markodaly said:
If this house is your forever home then the return will be greater again in 10-20-30 years...
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If it's your forever home then you won't be selling it. There will be no return.

Stop thinking if it as an investment. Get the smallest house that meets your needs and that you'll be happy with. Less cost. Less cleaning. Less maintenance. Live with little to no debt and focus on the priorities in life.
 
markodaly said:
If house prices rise by say 10% over the next 3 years (which is conservative imo) then a 10% rise of a house of 300k is a capital gain of 30k, but a 10% rise of a house worth 600k is a capital gain of 60k which being its ones primary residence is a tax-free capital gain
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The only way to realise that tax free gain is to trade down. In those 3 years, you will have paid ~17k in interest (300k x 3yr x 2%, on reducing balance). You will also pay associated costs to sell and buy (~10k). And finally, the property you trade down to has also increased by 10% so really you are selling at €660k, buying at €330k and you have costs of at least €27k. Optional extras of moving costs, furniture, decor etc will push that up even higher. So yes, you will have benefitted from living in a nicer house for 3 years but the tax free growth is a bit of distraction because ultimately you are not gaining from it.

There is also no guarantee that your house or house prices will continue to rise and they may be up, flat or down in 5/10 years, who knows? Those that benefitted in the past were generally just lucky in their timing.

With that said, I agree with @Dublinbay12 that you should assess your needs and buy the house the meets your requirements for the most reasonable price that you can afford. You don't need to stretch yourself financially and you will benefit for a more comfortable standard of living.

You should not borrow as much as possible just because they are willing to give it to you. Housing is only one part of your financial needs. At 41, you have ~25 years left to work. You will probably face education costs with your children and you need to fund a pension. If you have not made any plans for these costs already, then it would be madness to put all of your savings and take out a big mortgage to put it all into your house.

And equally, if you already have a very healthy pension and have funds in place for education, then it may not be such a big problem to take out a larger mortgage to improve your standard of house
 
Just apply for a mortgage and when just look for a house you like - the mortgage gives you more options and allows you to go through bidding wars. Also take into account that you might have some spending with renovations.
I would agree to stop thinking that as an investment alone. But also not necessarily going with the smallest house as space requirements can grow sometimes. Be reasonable and don't overstretch yourself without limit yourself either.
I did find looking for a house quite stressful and I am not sure I want to go through that soon again.
 
_OkGo_ said:
You don't need to stretch yourself financially and you will benefit for a more comfortable standard of living.

You should not borrow as much as possible just because they are willing to give it to you. Housing is only one part of your financial needs.
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Very sound advice.

Personally I would work out what I am comfortable repaying based on some conservative options about your future.

Going back to your original question, If you find your house is within your budget, you will need to way up your options. A low LTV brings with it a lower interest rate. But no point being on a cheaper rate of you don't have money to replace the boiler when it brakes. Remember it's easier to pay back the money than it is to go looking for another loan.

Personally I'd borrow as much as I was comfortable with and keep my money as insurance. Houses have a lot of hidden history so I would treat the first 6-12 months as getting to know what the house is really like. When you're in and are happy with everything then turn your focus to paying off your mortgage as quickly as you can.
 
PGF2016 said:
If it's your forever home then you won't be selling it. There will be no return.
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There will be for whoever inherits it. And its value could be helpful for later life care (Fair Deal etc.).
PGF2016 said:
Stop thinking if it as an investment.
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I totally disagree. One should always consider the investment aspect of one's house. But not exclusively.
PGF2016 said:
Get the smallest house that meets your needs and that you'll be happy with. Less cost. Less cleaning. Less maintenance. Live with little to no debt and focus on the priorities in life.
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I wouldn't disagree with this though.
 
PGF2016 said:
If it's your forever home then you won't be selling it. There will be no return.

Stop thinking if it as an investment. Get the smallest house that meets your needs and that you'll be happy with. Less cost. Less cleaning. Less maintenance. Live with little to no debt and focus on the priorities in life.
Click to expand...
id argue get the best house in the best location you can afford, you will spend more time there than anywhere else, and as long as its financially comfortable for you you are unlikely to regret it.
 
markodaly said:
I have a fairly sizeable deposit. Approx 275k, should be near 300k when I am going to actually drawn a mortgage
Now I could buy a nice 3-bed semi in Cork for about 300-350k and have a tiny mortgage and own my house in say, 3-5 years easily.

Or I could apply to the bank and spend all the amount they are willing to lend.
Say I get 400k off the bank, then in theory I could spend 600k (if not more) on a house if I put all my savings into it.
Click to expand...
So you are not sure if you a €300k house, a €600k house, or anything in between.

This is first and foremost not a financial question!
 
The first questions are what you need, what you want, what you can afford, and whether that makes you a slave to fund the whole thing.

The CGT exemption makes buying the nicest place you can afford attractive, but the flipside is that it may force you to keep working and you can only access the value if you move or die.

Having said that, in my view homes are like mattresses…don’t scrimp on one and get the best one you can afford.
 
markodaly said:
....My thinking is this...
If house prices rise by say 10% over the next 3 years (which is conservative imo) then a 10% rise of a house of 300k is a capital gain of 30k, but a 10% rise of a house worth 600k is a capital gain of 60k...
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You're assuming both houses rise by the same amount in % terms.

Think about it this way, if viewing your house as an investment, it's not like you're buying an S&P 500 ETF, you're betting on an individual stock, and putting all your eggs in one basket. It may rise by the market average, but it might not.
 
Gordon Gekko said:
......
Having said that, in my view homes are like mattresses…don’t scrimp on one and get the best one you can afford.
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Thoroughly agree. At the very least, future proof your purchase by making sure you have space to extend. Especially with kids, and grandkids in good time, you can't have too much space.
 
ClubMan said:
I totally disagree. One should always consider the investment aspect of one's house. But not exclusively.
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Agreed. It's the biggest investment most will ever make and it should be considered. But it's rarely an investment to make more money. It's an investment in a home.
 
Blackrock1 said:
id argue get the best house in the best location you can afford, you will spend more time there than anywhere else, and as long as its financially comfortable for you you are unlikely to regret it.
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There comes a point where you don't need the best house and location you can afford.

In my own case between savings and the amount we were mortgage approved for we could have gotten a seven figure house. We bought an excellent house in an excellent location that is more than big enough and spent a bit over half of what we could afford (if you consider the amount we were approved for the amount to be the amount we could afford).

We're not the only people in that (very fortunate) position. And I'd suggest the OP might be in that position also.
 
Dublinbay12 said:
Looking at the financials of your options is only one lens to view this in. What type of house do you need to suit yours and your families wants and needs? Size, rural, in an estate, close to schools, close to water, amenities etc. Then align that against your financials and what you can afford.

It does seem like you are in a position to buy your long term house, trader up strategies are more for people that can't afford to buy their long term house now.

Interest rates at historic low rates, but likely won't be this low forever, but carrying debt at these levels shouldn't be as much of a concern compared to rates of 7% plus.

My advice work out the house you want (not just the most expensive) and then align with the financials.
Click to expand...

Well I have 2 young children who are a few years from school age, and we may or may not got for a third.
I guess we want all that you said above, a good house in a decent-ish location close to transport options, schools, amenities etc..
So would be looking at 4 beds maybe 5 beds which are not all that plentiful or cheap.

That is why I am leaning on the 'Buy what suits but get your "forever" home now'
 
PGF2016 said:
If it's your forever home then you won't be selling it. There will be no return.

Stop thinking if it as an investment. Get the smallest house that meets your needs and that you'll be happy with. Less cost. Less cleaning. Less maintenance. Live with little to no debt and focus on the priorities in life.
Click to expand...

Sorry, I should clarify this. I used the term 'forever' home as a way to describe a family home that people are happy to stay in forever, if they so choose to, not a starter home where one will want to or need to trade up later. Especially if you add 2/3 kids to the mix.

I'm a dual citizen of another country and will all likelihood be heading back there in the future to live/retire etc... so that forever home will not really be a forever home if you get me.

That is why I mentioned the CGT exemption for one's primary residence which is one of the largest tax breaks any person has in Ireland.
 
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