To mortgage or blow the savings

T

thrifty12

Registered User
Messages
6
Hi,
Scratching my head on an unusual and very fortunate predicament and wondering what others think.
I'm hoping to start building a house later this year. I'm lucky enough to have built up enough reserves to go ahead and finance the build without a mortgage. However the current lowest variable mortgage rates are below 3%. I'll qualify for mortgage interest relief which will bring the effective rate down to just about 2%. Given that I can get over 4% by leaving savings in the bank, which will give me around 3% allowing for DIRT, am I better off to max up on the mortgage and keep the savings in the bank.
Thanks in advance for any comments
 
I would have thought the lowest available rate is circ 3.5%. However, what you are proposing does appear to make sense. I.e. borrow what you can afford to pay from your income & invest your surplus funds to allow for contingencies etc. The information provided by you is limited so it is difficult to be more exact without full info on total spend/ savings etc.
 
Also remember it can cost you as much again to landscape, finish, equip and furnish a house as it cost to build.
 
thrifty12 said:
Given that I can get over 4% by leaving savings in the bank
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Presumably on a c. 1+ year fixed term?
which will give me around 3% allowing for DIRT
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I guess you know that DIRT is 27% these days?

Also - don't forget to factor in the additional mortgage related cost of having life insurance.
 
Thanks for helpful tips so far guys. Wasn't sure if I was off the wall in my analysis which tells me the more I can borrow, the more I can keep in saving and the better off I would be ... just seems counter intuitive.
44brendan said:
I would have thought the lowest available rate is circ 3.5%.... The information provided by you is limited so it is difficult to be more exact without full info on total spend/ savings etc.
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Am using
*****************.com/mortgages/standard-variable-rates
as a rough guide of what's out there, apparently 2.84% is lowest. Sorry about lack of detail information. I'm still at pre planning so figures are rough (and hopefully realistic) but I'm confident my savings are sufficient if I need to go without mortgage. If I choose one of the low LTV loans I should have a healthy surplus.

ClubMan said:
Presumably on a c. 1+ year fixed term?
I guess you know that DIRT is 27% these days?
Also - don't forget to factor in the additional mortgage related cost of having life insurance.
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Ya there are a few reasonable fixed term deals from 1-3 years out there. Best I know of is 4.52% for 18 months. Unfortunately DIRT is now up to 30% but still gives effective rate of 3.2%
Good point about the extra mortgage related cost which I had thought about but not sure how to put flesh on it or how much
Life cover - hmm.. 600 per year ... is this a legal requirement?
professional fees - valuation and legal - not sure how much there.
 
thrifty12 said:
Unfortunately DIRT is now up to 30%
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OK - I'm behind the times so!
Life cover - hmm.. 600 per year ... is this a legal requirement?
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Most or all lenders will require an owner occupier to take out mortgage protection life insurance to cover the loan. You can get indicative quotes online easily enough.
professional fees - valuation and legal - not sure how much there.
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I'm not sure if lenders make the borrower foot the bill for a valuation but if they do then I'd imagine it would cost a couple of hundred € max.

Legal fees probably vary but I'd allow a few grand for them. You can probably get a better idea of the going rate in other threads here.
 
In the current economic climate I think it is foolhardly to borrow unnecessarily. For a start, you run an ongoing risk of having your cash devalued.
 
Hi Thrifty

A few points. In general, the safest place to save is to pay off your loans. Your savings could be hit by a bank default or a government default. The safest deposits are in Germany, where the rate is 1%.

You are not really comparing like with like. It's wrong to compare an 18 month deposit account with a mortgage interest rate. The mortgage rate can be increase at short notice and you are stuck waiting for your deposit account to mature. If there is a 2.84% rate out there, then it is too low and is likely to be increased above and beyond any ECB rate increases.

The legal fees will be cheaper if you are not taking out a mortgage.
As ClubMan pointed out, you won't need mortgage protection insurance.
just seems counter intuitive.
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Your initial intuition is correct. Don't borrow if you don't need to.

If you are earning more than you are spending, you will soon build up a rainday fund anyway.

Brendan
 
Do not borrow unless you have to.

What if the Euro goes wallop and we have to introduce a devalued punt? Your savings could be worth half what they were.
 
Thanks all for very constructive comments and to be honest I agree with general sentiment/instinct of don't borrow more than you need to, but the logic went against this and I try to make decisions on the logic. 2 point I didn't mention were

  • a lot of my savings are in Sterling so would avoid or at least be buffered a little if Euro went wallop and a devaluation happened.

  • there is also a pretty low 2 year fixed mortgage at 3.1% so would be hedged for a few years
Having said that will probably just go with instinct anyway and stay clear of the money grabbing banks.

Btw - as a first time poster (been reading it for years and finally took the plunge), should have opened with a heap of praise on Brendan and all those involved in running and posting on this forum. Its a fantastic source of information and a day hardly goes by that I (and I'm sure thousands of others) don't quote from it. Keep up the good work. There is the makings of a great book in here!
 
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