What have I done!!!

S

States

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Just thought I'd share my recent experience on house buying. My bid on a house in Cabinteely Dublin was accepted and I was all ready to sign (mortgage OK etc) but during the Easter holidays I had a chance to work on the figures and it turns out to be not such a good deal.

I'm a contractor and can put quite an amount of money in a pension fund I set up. I've been renting accomadation up until now. The mortgage would mean an increase in gross pay to me of €1000 per month. So the question I asked myself was wether this money is better in the pension fund or in the house.

So if I assume I'm paying about 2% of someones mortage in rent, and I'd pay up to 6% on a mortgage, this would mean I'd end up paying 4% (the increase in outlay) * 40% (gross to figure up to show real amount in salary increase) = 6.66%.

So if I expect say a 6% return on my pension, I would also forgo this and put the money into the house do this would add up to about 12.6%!

So over say 20 years I'm looking for 12.6% increase and assume earnings rise at 4% pre annum, that works out as about 9% ....so the house wiil have gone up 5 times in value in 20 yrs!!

Do you see a 3 bed house in Cabinteely being worth €3.1m in 20yrs time

Think I've made the right choice!
 
Not sure I follow your line of thinking, but your house probably wont increase in value that much (lets hope house prices in general dont) but at the end of the day, it will be your house whereas a rented house will never be. And rents will probably do up in line with interest rates to cover the land lords mortgage.
 
Yes the house would increase in value....but not at the rate I'd make by putting tax-free money into a pension fund.
 
Are you trying to work out whether you should be buying a house, or whether you should be paying extra into the mortgage? Based on your comment about the mortgage meaning an increase in pay to you, I presume the latter.

If I'm correct, forget about the convoluted logic. By paying extra money into your mortgage, you're getting whatever rate your mortgage is at - about 5%. If you put it in your pension, you'll get the 42% saving on tax plus whatever your pension increases by.
 
Sorry states, I'm having trouble understanding your numbers. What I've interpreted:
- you've bought a house for approx €500K
- the difference between rent & your new monthly mortgage will be €1000 gross, sounds like a 20 yr mortgage
- assuming a 6% return on a pension as the opportunity cost, the house would need to grow in value 5 fold over the 20 years to match this. (I cannot understand the calculations above to reach this).

Leaving aside the "home vs. investment" argument, there is also one factor missing, after the (20 yrs?) mortgage is paid, you can now live in the house mortgage/rent free. It becomes "income generating", in the sense that you avoid the cost of rent.
 
Tiger
The 6% opportunity cost grosses up to about 13% as I'd need to cover the interent plus the opporutunity cost...so for a 13% odd return after 20 yrs. When you take earnings increase into account of say 4% per annum, you're left with 9% per annum.
9% per annum of compound intereat means approx 5 fold increase in value.
 
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