Planning to buy a 1M+ property

[Brendan Burgess]

So Steven

To be absolutely clear. You would recommend to people that they should borrow money long term to invest in a global index?

For example, a person with a €1m house and €600k of a mortgage should borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate.

Brendan

 

[Clamball]

Your cash savings are low for your income (especially as you said you are a good saver) so I am wondering if your salary was a recent increase? Will you have future potential to grow your salary?

Do you and your spouse plan to have more cute babies (congrats by the way) in the next 1-3 years, and will your spouse continue to work with subsequent large childcare costs.

I am assuming that you plan to stay in Ireland for at least another decade if you are planning to move to a better area and nicer houses so I would agree that buying rather than renting is best overall.

I agree with Brendan you will get approval for ~ 683K for mortgage. You can scrape together 280K in cash if you sell your current home which means you can afford a house of about €965K

Mortgage - 700K
Home - 190K
Saving - 20K
Fund 1 - 35K
Fund 2 - 0K - you won’t cash this!
Fund 3 - 35K

Your mortgage will be ~ 3600 - 4000 per month over 30 years. Your joint income is ~ €10k per month, then add childcare as the next big expense.

If you don’t sell your current home you won’t have the 20 % mortgage deposit. But if you aggressively save you potential RSU’s over next 3 years you could build up a cash fund of ~ 250K which would mean you could hold on to your current home and still buy a house of ~€1M

It would be great to see your financial position at the end of the year or in 12 months, I think with your saving potential you will be in a lot stronger position. I think you have to balance applying and buying while you are both working full time but waiting maybe ~ 24 months to maximise savings and hope the house you want won’t increase too much in price. Best of luck!

 

[Steven Barrett]

So Steven

To be absolutely clear. You would recommend to people that they should borrow money long term to invest in a global index?

For example, a person with a €1m house and €600k of a mortgage should borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate.

Brendan

Brendan

Life isn't that straight forward. Yes, it is a good idea to pay down debt quickly but it is not at the expense of everything else. If your goal is to reduce a mortgage term from 30 years to 15 years, that is still a long time to be overpaying. And a lot of life events happen in that time. Is someone then supposed to borrow for those big life events that happen during that period? And then repay it as a personal loan at a much higher rate.

If we look at the return of the S&P 500 over the last 10 years, it did 14.63% per annum. Over the last 20 years, it has returned 9.26%. If bring it back to 22 years to include the dotcom crash as well, the returns reduce to 5.65%. After tax, we are still within mortgage rates.

I am not saying do one over the other, there is nothing wrong with doing a bit of both.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Sarenco]

If bring it back to 22 years to include the dotcom crash as well, the returns reduce to 5.65%. After tax, we are still within mortgage rates.

I don't think that's true.

Over the full 22 year period, mortgage rates averaged around 4.25% by my calculations. Deduct taxes and fees/costs from your 5.65% return figure and you would have been better off paying off the mortgage (as things turned out).

I remain of the view that, because of our tax code, it rarely makes sense to invest outside a pension vehicle while carrying debt.

 

[Steven Barrett]

I don't think that's true.

Over the full 22 year period, mortgage rates averaged around 4.25% by my calculations. Deduct taxes and fees/costs from your 5.65% return figure and you would have been better off paying off the mortgage (as things turned out).

I remain of the view that, because of our tax code, it rarely makes sense to invest outside a pension vehicle while carrying debt.

I didn't run the average mortgage rate over 22 years, so I accept your figures. But you can see that even if you get off to the worst possible start by investing in 2000 and invest in Ireland's high tax environment, you are not that far off doing better by investing. That is in one of the worst scenarios. Avoid two major recessions close together (no one can predict the future and these once in a lifetime events as coming thick and fast) and you have an increased chance of doing better.

I maintain my opinion that you don't have to do just one or the other but a bit of both.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

If your goal is to reduce a mortgage term from 30 years to 15 years, that is still a long time to be overpaying. And a lot of life events happen in that time. Is someone then supposed to borrow for those big life events that happen during that period? And then repay it as a personal loan at a much higher rate.

Hi Steven

I think this is where a lot of people go wrong in their financial planning. They think of 30 years and 15 years and maybe they do spreadsheets to prove some point or other.

It's actually much simpler than that. You should not borrow money to invest in the stockmarket. That is the key point and there is no need to complicate it with 30 year forecasts.

The exception is that it's ok to have a rainy day fund, but not a very big one.
And if you anticipate "big life expenditure" then you should build up a fund to pay for that.

So I will answer the question I asked you.

For example, [should] a person with a €1m house and €600k of a mortgage borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate?

I would strongly advise someone with a mortgage of €600k not to borrow a further €200k to invest in the stock market.

And the corollary of that is that someone with an €800k mortgage and €200k in the stock market, should sell the shares and pay down the mortgage - perhaps keeping a small amount available for the "big life expenditure" that they won't be able to pay out of income.

Brendan

 

[Steven Barrett]

Brendan

You keep on saying these people are borrowing to invest in the stock market. They are not, this is disposable income that they have.

Let's go back to the beginning. They take out a mortgage to buy a house. It is perfectly reasonable and sensible to do so. Otherwise they are trying to save for their lifetime to accumulate this money to buy the house outright. This debit is paid back over 30 - 35 years, a long time. But at a fairly reasonable rate (at the moment anyway).

They may try to pay down this mortgage earlier than the 30 years but they will still probably be paying it for 2 decades at least. Any overpayments they make into that mortgage is gone and they cannot release equity from it to pay for any future expenditure.

The exception is that it's ok to have a rainy day fund, but not a very big one.
And if you anticipate "big life expenditure" then you should build up a fund to pay for that.

The next stage is building that rainy day fund to pay for holidays and other near term expenditure.

Then there is the big life expenditure that they "should build up a fund to pay for". Where should this money be put? I want to save for my child's education costs? Do I build up a fund in a deposit account? Or do I invest this amount over the years and use capital markets to pay for some of the cost of the education so the entire cost doesn't come from earned income? This is my entire argument.

As to debt, obviously the more debt a person has, the more exposed they are. Things like Covid 19 can upturn even high paying occupations and turn them to zero overnight. This needs to be looked at and living on debt because you have a good income is not a good thing. It is not building wealth either. Then there are cases when people have very little debt but don't pay it off as they don't want to deplete the investments that they have built up, when they should and start again.

Not all cases are the same and it is important to understand what people are trying to achieve and what matters to them. It's not always straightforward.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Hi Steven

Please tell me the difference between the following two people. Both have a house worth €1m.

A - who took out a mortgage of €800k and has €200k in shares
and

B - who took out a mortgage of €600k and later borrowed another €200k to buy shares?

There is no difference.

Someone who has a mortgage of €800k while having €200k in shares, has borrowed to buy shares.

That is difficult for some people to understand.

Let me rephrase the question.

Would you advise someone with a mortgage of €600k to add €200k to it to buy shares? I presume not.
But you would advise someone with a mortgage of €800k and €200k in shares not to sell the shares to pay down the mortgage.

I think it's called the "endowment fallacy".

Brendan

 

[galway_blow_in]

The only way anyone " borrows to invest in the stock market " is if they buy on margin- CFD,s

Rest is just ideological opposition to buying stocks while debt exists elsewhere for the same individual

 

[NoRegretsCoyote]

For example, [should] a person with a €1m house and €600k of a mortgage borrow €200k to invest in a global index, if his lender were happy to lend him €200k at the mortgage rate?

The answer is not always "no".

Suppose you are a couple both aged 35 with a €250k joint income, a €1m house, a €600k mortgage, and zero in any other wealth.

An €800k mortgage is sustainable and over several decades (and no less) it will return more than what you will pay in mortgage interest.

I agree with @Sarenco that buying equities outside a pension doesn't make sense due to tax treatment in Ireland.

But in principle it's fine to hold debt secured against residential property while also investing in equities.

I see far more money makeover threads with people overweight Irish residential property than overweight in global equities.

 

[moneymakeover]

Is it better then to save in a deposit account for a rainy day fund?

Over time people will need a rainy day fund for
Car
Holidays
College fees
Annual tax bill rental income

Better to have the savings than to borrow?
If the savings fund is say 40k does it make sense to place in deposit account or in equities?
Previously with low zero interest rates maybe?
Now with interest rates picking up perhaps the deposit account?

 

[Brendan Burgess]

But in principle it's fine to hold debt secured against residential property while also investing in equities.

But then you are borrowing to invest in equities!

And you should not do that.

All the discussion of "sustainable mortgage" is clouding people's judgment of this very basic issue.

Brendan

 

[Clamball]

I want to own a house that suits my needs so when I have some financial stability I save as much as possible and buy the best house I can afford and then pay off the mortgage over the next 20-35 years. The moment I move in I am so broke, all my savings and more have gone into the house purchase. The future value of the house does not bother me because it is my home.

After a couple of years when I can afford the mortgage and life is good I find I am saving a bit each month, it is building up nicely. So I invest in shares, I will be thrilled if they go up in value, but disappointed if they tank, but I am willing to take a risk. Maybe after 10-15 years my shares are valued at €200K, happy days.

All I have is the one major debt, the house. If life does not go pear shaped I will retire with the house, my pension fund and maybe some wealth I grew along the way. I never made the decision to use all my extra cash to pay down the mortgage, I could have, but I also serviced the debt at the rate I agreed when I started out.

Maybe my assets might have increased faster in value if I paid off my mortgage first but my house is not an asset, it is where I am living. It is a home. In my mind I have to treat my home and my savings separately.

 

[Brendan Burgess]

Maybe my assets might have increased faster in value if I paid off my mortgage first but my house is not an asset, it is where I am living. It is a home. In my mind I have to treat my home and my savings separately.

A very common mistake that people make.

Think of it like this.

Scenario A
1) You own a house with no mortgage attached to it.
2) Would you borrow €300k to buy €300k worth of shares?

Scenario B
1) You own a house with no mortgage attached to it.
2) You have an unsecured loan of €300k at the mortgage rate. It is not attached in any way to your home or anything else and you are paying this off over 20 years.
3) You have €300k worth of shares.

Would you sell the shares and repay the loan?


Brendan

 

[Itchy]

Please tell me the difference between the following two people. Both have a house worth €1m.

A - who took out a mortgage of €800k and has €200k in shares
and

B - who took out a mortgage of €600k and later borrowed another €200k to buy shares?

There is no difference.

Person A is far more secure than person B, all else being equal.

 

[Blackrock1]

Person A is far more secure than person B, all else being equal.

how so? they both owe 800k and own 200k worth of shares.

 

[Itchy]

how so? they both owe 800k and own 200k worth of shares.

T&C's of credit and protections from recourse are more beneficial for person A.

I see the elaboration of the point further down the thread

 

[Clamball]

A very common mistake that people make.

Think of it like this.

Scenario A
1) You own a house with no mortgage attached to it.
2) Would you borrow €300k to buy €300k worth of shares?

Scenario B
1) You own a house with no mortgage attached to it.
2) You have an unsecured loan of €300k at the mortgage rate. It is not attached in any way to your home or anything else and you are paying this off over 20 years.
3) You have €300k worth of shares.

Would you sell the shares and repay the loan?


Brendan

OK I will play, I see a lot of am I a low risk or high risk person in both these scenarios.

Scenario A I would not borrow €300K to buy shares.

Scenario B. I would sell the shares to pay off the €300K loan.

But I have seen you argue before to hold onto properties that had a cheap tracker rate because they were good value, so in scenario B would you not have advised me to hold onto the cheap unsecured loan and grow my wealth with the €300K of shares?

I think when you remove the home from it, it makes more sense to me but when it is the family home I have that in a totally different section in my brain, and I behave differently.

 

[Brendan Burgess]

I think when you remove the home from it, it makes more sense to me but when it is the family home I have that in a totally different section in my brain, and I behave differently.

But this is a bias which you need to overcome to make the right financial decision.

Brendan

 

[DublinHead54]

What is really the point of paying down your mortgage quicker?

All you are really doing is locking away your free cashflow in an asset that can't be realised unless you sell your home.

The semantics of it saves you X amount in interest or is a guaranteed risk free return are financially correct but miss the point many make here.

Say I've paid off my mortgage 15 years early, what do I suddenly do with the free cashflow?invest in equities? Spend friviously.

The last point in my opinion is we miss the concept of risk tolerance and risk taking here. Overpaying a mortgage is a risk free return, investing in equities is a riskier option and that's down to the individual to decide.