Which loan suits best?

B

bonzos

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Hi, I am currrent in the process of getting quotations for some revenoation works on my house. The total cost of works is coming in at approx €23k, I have a very manageable mortgage on a low fixed rate,no car loans and are currently saving €180pw into the credit union. All savings included I have about €26k in cash savings, I am a bit nervous about throwing all my savings into this project as I believe having access to emergency cash is vital (I got caught in the past!) so my options are as follows...

(1) Borrow €13k@5% sercure loan over 4 years (€69pw) and take remaining €10k from savings, my logic is I can still save and will be constantly reducing my loan plus have my original €13k after the loan is repaid.
(2) Credit union offered a home improvement loan of min €[email protected]% over 7 years (€87pw)...it €2k more than I need but I was told that I could pay back any excess within 1st 3 months .
(3) Use my savings, no repayments but no saftey net in short term.

Any opinion?
 
You should use your savings. Yes, you’ll be down to your last €3k, but you’ll start building your savings back up again to the tune of circa €800 a month.

Plus you may also have a credit card or the ability to get one to cover any short term emergency.

Fast forward a year, and you’ve €12,500 saved.

That’s what I’d do.
 
Agree, use your savings. The €800 + savings per month, is key here.

However, these projects can easily go off piste. Triple check all costs, and have some contingency funds available, as extra costs can creep in. Even with the most well prepared and researched plans, the unexpected can happen.

We did an attic conversion a few years back, including ensuite. it went a little out of control, and went way over budget, but we learnt a lot. Fast forward a few years later, we did a big renovation job, way bigger than the attic conversion, all came in under budget, thanks to the first experience.
 
Of the 3 options you list I would go for No. 1 as it's the cheapest rate. I totally get that you don't want to spend all your savings, I would be the same and would prefer to pay the bit of interest and know I had a cushion of savings to fall back on just in case!

Having said that is a mortgage top up a possibility? Where is the 5% rate from, is that the CU too?

Just to echo what others have said as regards going over budget, definitely allow for this as it nearly always seems to happen with unexpected things that pop up. I would borrow some anyway and if you come in under budget and feel you are comfortable enough with your savings rate and cushion you can always repay it early from the savings you have left anyway. Better be looking at it than looking for it as my father always said!
 
Option 4 - save for another 6-12 months and then do a full cash job. No loans and your safety net will be healthier at €8-10k. Or you can start saving a bit more than the €180pw for the next few months to get there sooner

I don't think you are looking at the real cost of the loans but rather how manageable your monthly payments are. Option 3 may not look too bad at €87pw but will cost you a small fortune in interest. In the first 2 years of that loan you will pay just over €3k in interest. Crazy to pay that for a safety net. And most people will spend it when they have it so your budget is far more likely to creep up above €23k.

If you really want the 'comfort' of safety net, then go with option 1 but only borrow the absolute minimum that you need to feel comfortable. E.g if 10k in your bank account keeps you happy, then only borrow 7k at 5% and pay it off as soon as possible

Year (option 1)InterestPrincipalTotalBalance
1585307036559929
2418316835866761
3256333035863431
486343135170

Year (option 2)InterestPrincipalTotalBalance
116542935458922064
214163087450318977
311963306450315670
49603542450312128
5708379445038333
6438406545034268
7148426844160
 
Cost wise it makes sense to use your savings but it really does come down to how risk averse you are/concerned about your buffer. Cost-benefit wise, if it gives you peace of mind, keeping your reserve and borrowing extra might be the way to go. Think of it as an insurance policy. Assuming you've the financial headroom for the additional repayments it really comes down to your own tolerances

People have mentioned possible cost over runs, something else to consider is how old is the car, will it need replacing during the life is the loan? Likewise the boiler?
 
It really depends on your attitude to risk. I was in a similar situation a while ago with a smaller amount to finance. I wanted to keep my emergency fund in case my car or fridge break down. I decided to take a loan, and although I spent more than originally anticipated, I had cash at hand and could easily throw additional 3k without any hassle or delays. When I was sure no other cost will be incurred and my future cash flows are certain I paid off my loan giving an effective interest of 1%.
 
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