Using a lump sum to reduce mortgage required?

C

celtictech

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Hi All
I have a question on using a lump sum to reduce the size of a mortgage needed to buy a house. Compared to getting a mortgage for 90% of the cost of the property. Maybe this is a crazy question but its got me wondering.
Say if a property is priced at 200k and the buyer had a lump sum of 100k (from savings or inheritance or lotto win or whatever!) So obtains a mortgage for the remaining 100k.
Is there a reason not to do this?
 
Why would you borrow money when you already have money?

So - I want to buy a house for 200K. I have 100K and I borrow 100K. Why would I borrow the extra 100K? It is a borrowing - not a gift from the bank - and unless you could earn more interest on it than it costs to borrow, why would you do it.

Most people prefer to only borrow what they need.

There is also the reassurance factor of keeping borrowings low.

mf
 
celtictech said:
Hi All
I have a question on using a lump sum to reduce the size of a mortgage needed to buy a house. Compared to getting a mortgage for 90% of the cost of the property. Maybe this is a crazy question but its got me wondering.
Say if a property is priced at 200k and the buyer had a lump sum of 100k (from savings or inheritance or lotto win or whatever!) So obtains a mortgage for the remaining 100k.
Is there a reason not to do this?
Click to expand...

Unless you needed that money for something of extreme importance I dont see why you would not use it
 
mf1 said:
Why would you borrow money when you already have money?
Click to expand...

Surely it is more complicated than that? What if the OP is entitled to First time buyer tax relief and/or could put the €100k savings to other productive uses, such as pension payments etc? Otherwise generally agree with you. Slim
 
It all depends on the individual and their circumstances/attitude to risk.
Some people are anti debt while others may take the risk of investing the 100k and getting a better return than on their mortgage.

Having a small mortgage is all well and good but IMO you should try and have 6 months salary in a rainy day fund before you start reducing your mortgage sum.

Look after your immediate needs first then focus on paying down longer term debt.

www.moneybackmortgages.ie
 
Thanks for the replies folks, would there be any negative implications in using a lump sum, tax relief issues or anything?
 
Hi Celtitech

It's a very interesting question and people usually approach it from a different direction.

They have €100k. They ask how much they can borrow and then they buy as big a house as they can.

If the €200k house is going to be your forever house, then don't buy a bigger house than you need.

The cost of trading up is huge in Ireland. It is very inefficient to buy a house for €200k today and trade up to a house worth €300k in 5 years' time, if you can comfortably afford a €300k house now.

But assuming that the €200k is the house you are going to buy, then your default plan should be to borrow only €100k.

At 50% LTV, you will find it easier to get a mortgage and you will get a lower interest rate.

It doesn't make any sense to have €100k on deposit at 2% less DIRT, while paying 3.5% interest(less a bit of tax relief) on a mortgage.

If you are thinking of buying a car which will cost you 9% interest next year, then maybe keep the cash available to do that.

If you think that you can invest the money and get a better return than the mortgage rate, then it would make sense to invest the money. However, this is risky as you are effectively borrowing to invest. If you can afford to lose the money because you have a high salary and secure job, then you may be comfortable with the risk.

A few years ago, it was very easy to increase your mortgage if you needed the money for something else. I presume that this is very difficult to do now. The ideal mortgage for you would be a mortgage which allowed you to withdaw extra money if you needed it later. I don't think that they exist anymore.

Brendan
 
In that situation, I think I'd look for a mortgage of (say) €150,000.

I'd leave €20,000 on deposit and untouched as an "emergency fund".

I'd use the other €30,000 to maximise my pension contributions (in line with the age related limits) and possibly to change my car if (for whatever reason) I had to.

That way I'd have a good LTV (75%), savings in case of an emergency, no expensive borrowings and I'd be availing of the generous tax relief available in relation to pension contributions.
 
What about looking at the national solidarity bonds out at the moment. Invest for 10 yrs and you get a return of 50% minus dirt.
You could borrow 200k, aim to have 50k paid off in the first 10 yrs if your salary allows and then more or less clear with the money you had invested.
Just another option.
 
Pat Bateman said:
I'd use the other €30,000 to maximise my pension contributions (in line with the age related limits) and possibly to change my car if (for whatever reason) I had to.

.
Click to expand...

I forgot about pensions. Pensions are a huge and urgent priority now as it will make no sense to contribute to a pension scheme if the proposed tax changes go through. So do it now, before the reliefs are reduced.
 
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