36 with €310,000 in savings - how much to mortgage and for what term?

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pillbottle88

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Personal details

Age: 36
Wife's age: 40
Number and age of children: One child, one year old (planning for a second.)

Income and expenditure
Annual gross income from employment or profession: €156,800
Annual gross income of spouse: €0
Monthly take-home pay: €5,960
( after €1,340 per month in AVCs)
Type of employment: Private Sector (Tech)

In general are you:
(a) spending more than you earn, or
(b) saving? €1,000 per month

Summary of Assets and Liabilities
Cash of €294,000
Private pension: €40k
Company shares : €91k Unvested and Untaxed. Vesting quarterly from January 24. Should be refreshed €50k annually. Likely €4.5k per quarter vested after taxed from next year.

Other borrowings – car loans/personal loans etc.
Zero


Do you have a pension scheme?
Current pension contribution is 6% from employer and 14% of €115,000 AVC.
Employers contribution requires no match.
I can contribute an additional 6% of €115,000 by next October - which I plan to do using my quarterly bonuses next year.
I will increase my pension contributions to the maximum 20% of €115,000 - I expect my annual salary increase to cover this and monthly net income to remain the same next year.
Note: my savings are high and pension low at the moment as I only recently returned to Ireland after a decade working abroad.

Other information which might be relevant

Life insurance: 2x annual salary for me, nothing for wife

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

I will have €310,000 cash savings after selling some company stock in January.
I am the highest bidder on a house for €525,000.
I would like to spend €50,000-80,000 on furnishings and renovations.
Keep €40,000 emergency fund.
Keep €20,000 for investments. I used to keep my cash 90% in investments before I started saving for a house. Mostly index funds.
My current rent is €1,500 per month.
Current savings rate is €1,000 per month.
Next year I expect my mortgage to reduce my monthly savings, but to save an additional €5,000 per quarter from various bonus and stock vesting schemes.
For stamp duty and closing costs on the house - I will have some cashback and mortgage saver account bonus that will cover this.
My broker has offered a range of mortgages from BOI - I want to fix for only 2 years in this environment.
Lender: BOI
Interest rate: 4.65%
Type of interest rate: Fixed 2 years
Term: 20 or 25 years


ScenarioOneTwoThreeFour
House Cost€525,000€525,000€525,000€525,000
Renovation & Furnishing€50,000€80,000€50,000€80,000
Emergency Fund€40,000€40,000€40,000€40,000
Investments€20,000€20,000€20,000€20,000
Term Years20202525
Fixed Interest Rate4.65%4.65%4.65%4.65%
Savings€310,000€310,000€310,000€310,000
Principal€325,020€355,020€325,025€355,025
Monthly Repayments€2,083€2,275€1,834€2,004
LTV61.9%67.6%61.9%67.6%


I would like to keep a good sized emergency fund as we are a single income household. After the two year mortgage fix, I will either switch to a lower rate if interest rates are down or pay down some of the principal using investments and 2 years savings.

My question is related to whether I am approaching the balance right in terms of getting a larger mortgage than would be possible in order to retain some emergency cash, pay for more renovations and still retain some investments in addition to maximizing my pension contributions?

Also, should I take a longer term mortgage which would allow more monthly savings that I could use to pay off some of the principal as a lump sum when I come off the fixed term?
 
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The general guideline is to take out a big mortgage and for a long-term when you buy a house.

When you are settled in and you know how much the furnishing and everything else costs, review your finances.

If you have money left over, then pay down the mortgage with it.

Brendan
 
To apply this to your case, go for scenario 4.

When you are settled in, then pay off any surplus cash against the mortgage.

The small problem with this is the fixed rate issue. If you pay a lump sum off a mortgage, you may face an early repayment fee.

The shorter the fixed rate period the lower the break fee.

I wonder would it be worthwhile taking out a variable mortgage to avoid this?

And with your high income and potential bonuses and shares, a variable mortgage might be the better way to go.

But if the fixed rates are a lot lower, then fix for a short period so that any overpayments do not cost you high early repayment fees.

Why is the broker recommending Bank of Ireland?

In your situation, the size of the break fees is an important consideration. I think that AIB or Avant might be more appropriate.

Brendan
 
pillbottle88 said:
Annual gross income from employment or profession: €156,800
Click to expand...

pillbottle88 said:
Keep €40,000 emergency fund.
Keep €20,000 for investments. I used to keep my cash 90% in investments before I started saving for a house. Mostly index funds.
Click to expand...

This makes little sense to me.
You should not be borrowing money at 4.65% to invest in shares.

So, you should liquidate your employer's shares and any other shares as soon as you are able to do so and pay down your mortgage.

A €40,000 emergency fund seems very high. How secure is your job? If you lose your job, will you get a large redundancy payment?
If there is a big downturn in the economy, how likely are you to find another job quickly?

Open an account with a credit union. Get a credit card with a big limit on it. Ask your bank for an overdraft facility.

Then if there is an "emergency" you will be able to fund it.

Brendan
 
Thanks for the quick reply, Brendan. Merry Christmas!

I take your point on not mortgaging for investments, I can start to build this back up later. I also have company stock vesting quarterly and plan to sell as it vests.

The emergency fund is mainly for risk of redundancy. I don't think is a great risk at the moment, but finding another similar role in my industry, based in Ireland, could be tough.

I should have at least a three month redundancy payment - so potentially could reduce down to €25,000 emergency fund. I hadn't considered credit cards as a form of short term emergency credit. I have two €10,000 limit credit cards that I pay off fully on time and am only using at the moment to line the month I pay for bigger purchases up with my quarterly bonus. (I spend nowhere near the credit limits on these.)

Regarding the mortgage - I think it's BOI as I had been in Ireland less than six months when I first approached the broker and they said some of the others wouldn't consider me until I was back over a year. Interest rates were low then, so I was only considering fixed mortgages. I will enquire about variable and the other lenders. What is the advantage of AIB or Avant? Do they allow more flexibility for overpayment?
 
Life cover is far too low. 1 (and possibly 2) children and a spouse with no income will not be looked after by 2 year's salary.

An emergency fund should be kept, as redundancy will not be that much based on your short service. This can be gradually reduced based on increased service. Tech and IT seem to be among the first to be hit in a downturn and we've gone a while without one.
 
Boi variable is 4.75 i think

That's not far away from the 4.65% two year fixed.

I can't see the variable increasing
 
I am not sure why you feel 40k is a large rainy day fund Brendan? Sure it's larger than many people but it's an above average income household with a single income and a child and potential new large-ish mortgage? That said, I do recognise logic in your alternate approach of setting up credit facilities now when things are good though. I personally hate the high interest and charges that typically come with being over drawn or actually having a balance to pay on a credit card....if I'm in a "rescue" situation those charges are going to be even more penal.

Also not sure about the old wisdom of get a big mortgage when you can - fine if interest is 2% but at 4-5% no thank you.

I would got for the longest term though, it's relatively easy (if not locked in extraordinary long time) to pay down. And yes- don't borrow to invest at those rates - the tax on any gain won't cover the interest/cost.

Your approach to money looks good OP. Planning on loading up pension once mortgage is in play is correct.

Edit to add - I agree 40k is a big rainy day fund in the context of about to source a mortgage - I'd be very happy to run that down to almost nothing in order to reduce amount you need to borrow at 5%, with a view to increasing rainy day fund back up over a few months.
 
Thanks @Fortune - I will look in to adding cover along with taking out the mortgage.

Thanks @presidenttttt - I agree that single income with kids means a larger rainy day fund. But, reducing by the amount of a redundancy payment probably makes sense.
On the wisdom of getting a higher mortgage - when I lived abroad, the financial advice I followed advocated for largest mortgage with longest term possible. But, this was in a super low interest rate environment in a country with zero CGT. Borrowing at 2.5% to invest in accumulating ETFs with zero tax does make sense. So, very different to borrowing at double the cost and facing a 33% or 41% tax on the gains today in Ireland. I am interested to know, in Ireland, when the interest rates tips the balance back towards mortgaging to invest being the right move?

Thanks @moneymakeover & @Brendan Burgess - I have asked my broker to look in to variable rate options. I'm thinking with a longer term and a variable rate, I can overpay the mortgage considerably and that also reduces any future stress of a change in financial situation.
 
I'm assuming your base salary is €115k? What is making up the additional ~42k?
Is this all bonus? Is the bonus guaranteed?
Or are you including the quarterly vested stock in the €156k total?
 
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