Does it make sense to use savings as a deposit?

[Pondering Paddy]

Background - I'm single male in mid/late 20s. Living in Dublin area and renting. Over the past few years I've saved up enough to make up a deposit on a flat and recent pay rises means I can afford to save more than I have been up to now so could build up more quite quickly if I wish. I’m in a secure permeant job. Separately I'm paying into a pension plan already. I was never really saving for anything in particular other than to have savings (although I was always conscious that at some stage I'd look to buy a house that I'd plan to live in for rest of life - don't like the idea of paying rent in retirement.) Given the low interest rates at the moment I'm considering if buying an apartment is a sensible investment. Based on current asking prices and using savings as a deposit, I could afford a mortgage on a fairly nice 2 bed apartment in a good location that I'd be very happy to rent and on a 20 year mortgage my repayments would be less than my current rent + my monthly savings (i.e. if I live there I could make the repayments and still save something without reducing money I spend on myself.) I'd probably be able to rent a room as well which would reduce the cost even more but not really counting that as not guaranteed and unlikely to last anywhere near the length of a mortgage. Rent on similar properties would currently just cover the mortgage repayments so although I'd be hit by management fees and property tax, I wouldn't be far down if I end up not living in it.

Although I have no long term plan to live in an apartment, and don't particularly want to own property for the sake of it (in the sense of feeling a need to be on the "property ladder"), with my savings doing so little for me, rents going up and interest rates expected to be low for a number of years and the state of the current property market (which as I see it should mean that long term house prices and rents continue going up.) It seems to me to be a pretty solid investment and much better then leaving that money in the bank? Downsides would be losing first time buyers aids (which I don't see as that big of a deal If I can trade up on anything I buy in future, assuming house prices rise I'll be better off as I'd be using the full €220k limit this time round) and potentially being tied to a property if I ever want to move (but again given the current market I would expect to be able to sell or rent.) I'm aware that there's a risk I'm wrong on property market and prices/rents will fall too obviously and I'm also aware of the potential consequences of that happening (I only need to look at those who were my age in 2005/06 to see that!)

So the way I see it right now, If I buy a property I’m,

• Avoiding low interest rates on my savings,
  
  
• Benefiting from historic low interest rates on borrowings
  
  
• Avoiding rising rents (assuming I live in it, alternatively benefiting from risking rental income v. static mortgage repayments)
  
  
• Benefiting from rising property prices
  

Am I mad? Am I catching by this mad Irish notion that I should get on the property ladder and it can't go wrong? Am I better off leaving the money in bank and to keep saving with an eye to having cash deposit for a proper house in future? Or would I be missing an opportunity by not doing this now when I can afford to and have no other responsibilities or drains on my finances?

 

[Cervelo]

Judging by your post I think you already have the answer.
If it was me I would buy, your money is only growing dust in the bank, at least with the apt you should see some growth over the years but even if their isn't, you have said its cheaper then renting and you will also have a property to sell when you do find the house you really want to settle down in.

 

[Brendan Burgess]

You should not buy a property as an investment. You lose your first time buyer status. The value of this at the moment, is that it allows you borrow up to 90% of the purchase price. If you buy an investment and trade up later, you will be limited to 80%.

So, if you can afford to buy a house in which you want to live for 4 or 5 years at the minimum, you should probably do so.

The key thing is that it is cheaper to rent money than to rent property. And so if you can afford a decent place to live, you should buy now.

You should not make any assumptions about house prices rising or falling. No one can predict that.

Brendan

 

[Brendan Burgess]

I was always conscious that at some stage I'd look to buy a house that I'd plan to live in for rest of life -

It's unlikely that your first purchase would be a house in which you would live for the rest of your life. Your single so an apartment is perfect for you. If you end up in a relationship with kids, you will probably want a 3 bed semi-d.

Separately I'm paying into a pension plan already.

I don't think it's a good idea to be making pension contributions unless your employer is matching them. You will buy a house sooner rather than later. The more cash you have the better. You can either buy a bigger house or get a mortgage below 80% LTV which would have a much lower rate.

Brendan