Cash buying due to poor mortgage prospects

Hi all,

I'm 31 and back from abroad. I've saved a half decent chunk - about 230k.

My initial plan was to try and buy in the dublin 4 area for about 500k. However, I've had difficulties getting a mortgage. The bank requires 6 months of steady earnings and I work in a freelance capacity. It's possible for me to get a steady PAYE job in order to secure a mortgage but to be honest I'm not really interested in that at the moment.

So it looks like my mortgage prospects are no good.

I've thought of a plan B which involves buying a much cheaper house for cash, in a cheaper location. Then I could either rent this entirely or else live there and rent a room. It's not what I envisaged for myself but at least it avoids mortgaging, debt, leverage etc. Then maybe once I've saved more money or am in a more stable job I can sell and finally trade up.

My questions are as follows:
1. Is this advisable?
2. Is it correct that if I buy with cash I still maintain my first time buyer status for later?
3. What are the economics of this? Obviously if I rent it all out I lose my rent a room status and my capital gains benefits if I sell it. Is buy to rent still profitable etc in Ireland? I don't want to worsen the rent crisis and extort anyone but would also like to make a reasonable return on my property.

EDIT: I also meant to ask if anyone knows historical returns of rent to buy vs the S&P 500 etc

Any thoughts are most welcome

#2 no

settlement said:

I've thought of a plan B which involves buying a much cheaper house for cash, in a cheaper location. Then I could either rent this entirely or else live there and rent a room.

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Profits from a buy-to-let are taxable at your marginal rate, so likely you would lose half of it. Then you would be paying rent somewhere else on your after-tax income to a landlord who will most likely pay half of it in tax again.

This would make no sense.

It is very tax efficient to live in your own wealth if you can. What you are suggesting above would be the opposite.

settlement said:

2. Is it correct that if I buy with cash I still maintain my time buyer status for later?

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Pinoy adventure said:

#2 no

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Just to clarify it depends what you want you want to retain your FTB status for.

Under the central bank mortgage measures a cash buyer would retain their FTB status for future purchases.

However, owning a property (funded my cash or credit) would rule you or for the htb scheme on future purchases.

Obviously the latter is probably more relevant in the OPs case

You should only buy a house that you intend to live in for a few years. So if you want to buy a house for €250k cash, it should be regarded as a step on the housing ladder. After three years with accounts to show the bank, you should be able to get a mortgage to buy the house you really want.

Alternatives
1) Don't buy until you can get a mortgage. Renting is very expensive in Dublin, but you could share a house. And who knows? House prices might be lower when you are ready to buy. Of course, they could be a lot higher as well.

2) Take a permanent job until you are approved for a mortgage. Once you have drawn down the money, you can do what you like. You could then go back to your freelance work. It could be worth it to get on the housing ladder.

Have you spoken to a mortgage broker?

Finance Ireland does sub-prime lending. The rate will be higher, but when you have a decent earnings record, you can switch.

Brendan

NoRegretsCoyote said:

Profits from a buy-to-let are taxable at your marginal rate, so likely you would lose half of it. Then you would be paying rent somewhere else on your after-tax income to a landlord who will most likely pay half of it in tax again.

This would make no sense.

It is very tax efficient to live in your own wealth if you can. What you are suggesting above would be the opposite.

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This is a good argument against. I think if I were to buy a cheaper property I would then have to live in it, for these taxation reasons.

skrooge said:

Just to clarify it depends what you want you want to retain your FTB status for.

Under the central bank mortgage measures a cash buyer would retain their FTB status for future purchases.

However, owning a property (funded my cash or credit) would rule you or for the htb scheme on future purchases.

Obviously the latter is probably more relevant in the OPs case

Click to expand...

I'm not interested in the HTB scheme as I don't want to build. So this would actually be okay as long as I qualify for FTB rules under the central bank.

Brendan Burgess said:

You should only buy a house that you intend to live in for a few years. So if you want to buy a house for €250k cash, it should be regarded as a step on the housing ladder. After three years with accounts to show the bank, you should be able to get a mortgage to buy the house you really want.

Alternatives
1) Don't buy until you can get a mortgage. Renting is very expensive in Dublin, but you could share a house. And who knows? House prices might be lower when you are ready to buy. Of course, they could be a lot higher as well.

2) Take a permanent job until you are approved for a mortgage. Once you have drawn down the money, you can do what you like. You could then go back to your freelance work. It could be worth it to get on the housing ladder.

Have you spoken to a mortgage broker?

Finance Ireland does sub-prime lending. The rate will be higher, but when you have a decent earnings record, you can switch.

Brendan

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Think I'm looking more towards 2. Then after I get the mortgage and house I can get out of the job. I've spoken to a mortgage broker but it was while I was away.

If landlords are unhappy now, and they are generally the prime seller of property around where I live, then its probably not a market that has a great future. On top of this most of the opposition political parties are promising (or pressurising) for increasingly forcing the hands of landlords. Even as it is now - and its certainly landlord's market when it comes to demanding headline rents - reasons for taking back vacant possession are very limited - in most cases now you can only evict if you or your family are moving in or you are selling within 3 months. So unless you are genuinely intending to treat it as a long term rental business, you might get stuck. In fact you can also get stuck with a difficult tenant which will deplete any profit.
All your rental income will be charged at your marginal tax rate plus USC/PRSI. That could be 58%.
What you COULD do is buy a smaller unit somewhere less salubrious than D4 - you can still buy 2 beds in parts of north county Dublin for under 250k, and 1 beds for even less. And if you are buying for cash, the costs of the entire purchase are not going to break you.

I confess here - I was in a similar situation 10 years ago, except my savings were only 15k or so. So there was no option of buying for cash. After about 5 years of renting (cheaply admittedly) and more saving I realised that prices had gone, and while my income had increased by around 50%, the gaps between contracts ate into my savings, so I bit the bullet and got a normal permanent role, at the time at a 15k annual income cut. Roll on a few years, I realised the bonus scheme at work was far better than I expected, I got about 5k of rises, so clawed back most of the loss and it turned out the job was actually very good. So I'm going through the motions of buying the apartment I've rented since then.

So I'd suggest 2 things:
1. moderate your expectations about living in Dublin 4. Consider paying cash for somewhere further out where you can get a nice 1 or 2 bed for cash
2. if you cannot countenance leaving D4, then consider getting a permie role and buy in 2 years time