Buying for €275k; have €175k cash. Should I use all the cash or keep some and get a bigger mortgage?

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MoneyNovice

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Hi,
My wife and I are first time buyers and need some advice from those more financially savy than ourselves. We have savings of €175K and have gone Sale Agreed on a house for €275K. We are trying to determine what deposit to put on and what size of a mortgage to take out.

From researching on mortgages.ie, I think we should try to get a LTV ratio of less than 50% to get a good interest rate. This would mean a mortgage of €137,000. We plan on taking out a 33 year variable mortgage but overpay (~€1,000 to €1,300 a month) to hopefully clear it off in 10 to 15 years. We'd leave ~$8,000 for the other fees (solicitor, stamp duty, surveyor etc.).

We plan on spending around €20,000 on the house itself afterwards which would leave us with €10,000 remaining for a rainy day. We plan on having kids in next year or two also so need to factor in the increased expenditure around that time. My questions are:

  1. Do we have the right strategy with the deposit? Should we decrease it or leave as is?
  2. Is the general feeling that it is better to go with a variable mortgage or should we fix a portion of it?
  3. Is overpaying the mortgage to clear it off ASAP the right approach?
  4. All other recommendations are welcome :)

Age: 32
Spouse’s/Partner's age: 31

Annual gross income from employment or profession: €52,000 plus average bonus of €10,000
Annual gross income of spouse: €51,000

Type of employment: Both in full time employment in private sector

In general are you:
(a) spending more than you earn, or
(b) saving? Saving around €2,000 per month between us today. Current rent is €775 in total per month but we will have increased maintenance costs now associating with owning a home plus extra commuting costs will also eat into this

Other borrowings – car loans/personal loans etc. None

Do you pay off your full credit card balance each month? Yes

Savings and investments: €175,000 on deposit between us plus ~€25,000 in shares

Do you have a pension scheme? Yes both of us have a pension

Do you own any investment or other property? No

Ages of children: No children but hope to start a family soon
 
Hi MoneyNovice

First off, congratulations on getting yourselves into such a strong financial position for your respective ages. Very impressive.

Running through your questions:-
  1. I think your proposal regarding the deposit looks spot on. I appreciate that it can be a bit scary to see your bank balance drop to this extent but you will still be left with:- (a) your rainy day fund of ~€10k; (b) shares to the value of ~€25k; and (c) your re-refurbishment budget of ~€20k (I am assuming that you could defer some of the re-furbishment expenses in the highly unlikely event that something unexpected cropped up that caused you to burn through the first €35k). Nobody can tell what the future has in store for us but, in my opinion, you have built an adequate safety margin into your plans.
  2. Unfortunately nobody can accurately predict future interest rates with any accuracy but in your circumstances (and given the current situation in the Irish mortgage market) I think you should stick with a variable rate mortgage for the moment. You can always fix at a later stage if your circumstances change such that the certainty provided by a fixed rate product would be attractive.
  3. Yes, I think clearing the mortgage balance as quickly as possible makes sense in the current environment provided:- (a) you have an adequate rainy day fund in place to deal with unexpected emergencies (and it looks like you will); (b) you are not unduly restricting your desired lifestyle; and (c) you are maximising your pension contributions (others posters might disagree with this one but I'm happy to explain my position in further detail if relevant).
  4. You seem to be in a very good place financially - be careful to make sure you have appropriate insurance in place to protect your income and assets.
Hope that helps.
 
Hi Sarenco,
Thank you very much for your reply. I think we will always plan to have at least €10K in a rainy day fund and like you say, my shares provide another safety net. It's good to see that our thinking is in line with yours and I do appreciate that none of us can't predict the future. I just wanted to have a sanity check by people who would know more about this than we would in case we were doing something very obviously wrong.

I have a defined benefit pension and have just been paying the default into it as stipulated by our company policy. I've never made extra contributions but my wife has done so with hers. We do need to figure out our pensions in general which will require some extra research by us as it's not an area I understand very well today.

Thanks again for your advice :)
 
Your overall strategy is correct.

When you buy the house first use just as much of your savings as is required to get you the best interest rate. That is likely to be 50% Loan to Value, but it could be 60%. In other words, if you only need 40%, then just use 40% and keep the rest of the cash available to you for the moment.

When you have settled in, and sorted out the refurbishment, then pay off any spare cash against the mortgage to reduce the balance.

For these reasons, you are correct to go variable.

With a combined income of €110k and a mortgage of €100k, you will not need a large rainy day fund. So use almost all of your savings and investments to contribute to a pension or to pay down your mortgage.

With €137k @3% over 33 years, your monthly repayments would be €545. So overpay this but leave the term the same. At any time, if you need cash, you can return to your low repayments.

Would you borrow money at 3% to buy shares? I know that I wouldn't. So, you should sell your shares and pay the proceeds against your mortgage. You are getting a risk-free and tax-free return of 3% by doing so.

Brendan
 
AIB is the cheapest lender at the moment at 3.1% for an LTV of <50%. They will also give you €2,000 towards your costs.

Which is the cheapest lender?

However, it is expected that rates will fall further over the coming months due to a cheaper lender entering the market and the pressure on lenders to reduce rates in response to the threat of new legislation to control rates if they don't.

Brendan
 
You need to seriously consider whether the commuting distance is worth it, for stress, cost, winter traffic, rainy day traffic and time lost with kids if you both are planning to spend most of your life in a car.
 
Brendan Burgess said:
AIB is the cheapest lender at the moment at 3.1% for an LTV of <50%. They will also give you €2,000 towards your costs.
Click to expand...

Hi Brendan

Has AIB confirmed that the €2,000 contribution for switchers will be extended to FTBs/movers? I can't anything on their website to that effect.
 
You should also factor in childcare costs (c. 1k a month) or the loss of one income.
Ideally you should be able to do whatever you are hoping to do, on a single income. So one person has the luxury of giving up work to become a full time parent for a few years, if they wish. Especially if the mother is going to be commuting, going to part-time or giving up work may indeed become a reality or even a necessity. This is where real 'being comfortably off' comes into play.
The 10k sounds fine as a rainy day fund if all holidays, replacing cars etc comes out of the monthly wages.
If it were me, I would not necessarily put all my savings into overpaying the Mortgage - because you can never get it back out.
I would overpay a little each month, and save the rest.
Best of luck with it. With house buying it is never over till the keys are in your hand, so hope it all goes smoothly for you.
 
Brendan - Thanks for the detailed feedback. My shares are locked in for now but will be selling them at the first available opportunity. We also have mortgage approval from AIB and plan to go with them. Like you say, we can always fix at a later point if our circumstances change.

Bronte - It's a fair point about the commute and something we have strongly considered. However, we feel the pros outweigh the cons for a variety of reasons.

Sadie - We have also considered what happens if one of us loses a job and also the childcare costs. This is why I want to overpay on a longer term mortgage so we can revert back if money becomes an issue in future. We plan on paying for our holidays, cars etc out of our wages rather than our rainy day fund. We'd effectively save up for items like that again and leave the 10k idle. Hopefully we will accumulate more than 10k though in savings. I wouldn't necessarily put any extra savings straight into the mortgage though. The main reason I want to put so much into the initial deposit is to get the 3.1% interest rate for a LTV of less than 50%. It would be the bare minimum of 49% (i.e. mortgage of 137k)
 
MoneyNovice said:
Bronte - It's a fair point about the commute and something we have strongly considered. However, we feel the pros outweigh the cons for a variety of reasons.
Click to expand...

I didn't understand the point about the commute.

But it does raise an important point not already addressed. With income of €100k and €200k of cash and shares, you can afford to pay more than €275k for your home. Obviously if the ideal home is €275k, then there is no need to spend any more than that. However, if you had to spend an extra €100k to buy a home in a more convenient location, then you should do so.

Brendan
 
Brendan - While the location is not absolutely ideal for work (~1 hour for me, 30 minutes for my wife), it is where her family live and where she grew up so that is the main appeal. That and a cheaper house :)
 
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MoneyNovice said:
We plan on paying for our holidays, cars etc out of our wages rather than our rainy day fund. We'd effectively save up for items like that again and leave the 10k idle. Hopefully we will accumulate more than 10k though in savings.
Click to expand...

You are absolutely right to keep your rainy day fund in reserve for unbudgeted emergencies but it shouldn't be completely idle - it should sit in an interest-bearing, instant access deposit account.

If you make your mortgage payments by direct debit from an AIB personal current account, AIB will waive all maintenance and transaction fees that might otherwise apply to that account. It's a pretty modest benefit but it does mean that you don't need to maintain a minimum balance in your current account to avoid bank charges and you can maximise the amount earning interest in a savings account.

It's not going to make a life altering difference to you but even small amounts compound over time into something meaningful.
 
Sarenco - The 10k will be in an interest earning deposit account. I just meant idle in terms of not spending it. We already have free banking with PTSB so will probably leave that as is. Thanks again for your helpful advice.
 
No problem at all.

The comment about leaving your reserve fund "idle" wasn't really directed at you.

To be honest, I haven't really told you anything you hadn't already figured out for yourself. If you have the time to chip in here from time to time I'm sure others would hugely benefit from your experiences.

Now, tell us about your pension options... ;)
 
I'm a great believer in keeping some cash (maybe €10k) in a credit union, as it should give you access to a bigger sum in case of an emergency.

That was the case, even in 2008/2009 when the pillar banks may as well have been closed for business.
 
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Sarenco - Yep I'll let you know how it is going from time to time and if there is anything I would have done different. I really need to sit down and look at our pension options this summer. It's about 7-8 years since I last looked at it and I don't really remember the options that are out there.

Gordon - Yep that's a very good point. The whole point of the 10k is for emergencies so it's very possible a loan could be needed depending on what it is.

Some more questions..

If we were to go with a variable rate mortgage of 150k (~54% LTV ratio paying a higher interest rate) to free up some additional funds possibly for a new car next year, would we automatically drop to the lower interest rate when we eventually hit a LTV ratio of the less than 50% or would it be at the bank's discretion? Would we be better off just getting a car loan if required next year instead?

Also, if we overpay the mortgage and our circumstances change resulting in us needing to revert back to the original payment rate based on a 33 year term, are banks usually flexible with doing so or do they try to hold you to the overpayment rate? The bank we are looking at is AIB.
 
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Usually overpayment is optional and can be stopped whenever you want. This is why you keep a longer term and overpay, rather than getting shorter term.
Not sure why you'd bother getting a car loan at 15% or so? Would you not save and buy for cash or else lower mortgage overpayment and divert funds into car? Usually it's best to reduce/eliminate high rate debt before saving. In this case, paying car loan off (or not getting one at all) should outweigh lowered mortgage payment for few months. That would be my approach anyway.
 
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