Spending on home the best option for SSIAs

Astute savers will use payout for improvements or to reduce mortgages, writes Laura Slattery

Retail parks on the outskirts of Dublin and beyond may need to expand their car parks over the coming year.

In just over two weeks' time, Special Savings Incentive Accounts (SSIAs) start to mature and home improvement has already topped countless lists in survey after survey of SSIA holders' spending intentions.

Whether it is a new bathroom, solid wooden floors or some garden decking, the theory goes that savers have been waiting for their SSIA lump sums to make the necessary - and not so necessary - upgrades to their homes.

The recent strip scheduling of DIY, property investment and home improvement television shows has coincided with the massive increase in equity built up by homeowners since the property boom kicked off in the mid-1990s.

With the size of their mortgages falling in proportion to the enhanced value of their homes, financial institutions have been only too willing to lend homeowners extra cash to do up their places at mortgage interest rates rather than the higher personal loan rates.

Adding an extension or converting a garage or attic is often the solution for people who are suddenly stuck for space as a result of new additions to the family, but are deterred from moving to a new property by the stamp duty they would pay as second-time buyers.

Now, many of the same people who looked to their lender for mortgage top-ups will probably choose to pay for their property facelifts out of their SSIA funds.

Again, many SSIA holders won't want to use their cash to boost their trading up power. It would be somewhat galling to patiently accrue the Government's €1 for every €4 saved - a maximum of €3,810 - only to hand it all back to the Exchequer in the form of stamp duty of up to 9 per cent of the purchase price.

An SSIA holder who has contributed the maximum €254 every month since the start of the scheme should be in line to receive about €20,000, although the average maturity is estimated to be about €15,000.

While this may not be enough to put down a deposit on an investment property, it would rather handily pay for a more modern kitchen, and have the effect of further increasing the market value of the property.

But, according to recent analysis by IIB Bank and the Economic and Social Research Institute (ESRI), maturing SSIAs could add an extra 10 per cent to house prices.

Austin Hughes, IIB Bank's chief economist, believes that roughly €2 billion of SSIA money will flow into property.

When the related borrowings are taken into account, around €9-€12 billion will be used to buy Irish property, with a further €3-€4 billion used to invest in property overseas.

Hughes points to the likelihood that the Republic's 1.1 million SSIA holders are concentrated within families - people who both realised the unprecedented nature of the Government's 25 per cent bonus offer and could afford to take advantage of it.

The latest IIB/ESRI consumer sentiment survey suggests that SSIA holders are older, wealthier and better educated than the population as a whole.

A couple who were both maximum contributors for the full five-year term could easily have €40,000 coming their way that would serve as a down payment on a property, either as an investment or as a gift to adult children.

Meanwhile, a new survey conducted on behalf of Irish Life by market research company Behaviour & Attitudes has found that one in three respondents will use their SSIA savings to transform their humble abodes.

It estimates that around one-fifth of the total of €16 billion of SSIA money, about €2.3 billion, will be spent on home improvements.

But rather than just give their properties a cosmetic alteration, homeowners can invest their SSIA lump sums in their existing property in a less exciting but financially sensible manner - by paying down their mortgage.

Interest rates are rising, meaning the monthly cost of repaying a mortgage is increasing for every homeowner with a variable rate mortgage. The larger the mortgage, the bigger the additional cost, meaning people who applied for top-ups to revamp their homes a couple of years ago when money was cheaper will now be paying the price.

This time last year, typical first-time buyer tracker variable mortgage rates were 3.1 per cent, while people whose loans were less than 60 per cent of the property value could borrow at even lower rates.

As a result of two interest rate rises by the European Central Bank (ECB), typical tracker rates for people whose loans are greater than 60 per cent are now 3.6 per cent.

On a mortgage with an outstanding balance of €250,000 and 25 years left to run on the loan, this adds €67 to the monthly repayment, which increases from €1,198 to €1,265.

If a couple with such a mortgage was to make an overpayment of €40,000 from their combined SSIA lump sums, their mortgage repayment would fall back to €1,063. They would also save thousands in interest over the full term of the mortgage.

Alternatively, they could leave their monthly repayments at €1,265 and use the lump sum overpayment to shorten their mortgage term by five years and nine months.

If interest rates were to stay on the same path, this would cut a massive €48,453 in interest off their total interest bill for the remainder of the mortgage term.

For homeowners further into the life of their mortgage, the total interest bill savings are smaller, but nevertheless worth considering.

Many SSIA holders who have diligently saved over the last few years will have more fun ideas in mind for their money than putting a dent in their mortgage.

According to Irish Life's survey, holidays were second to home improvement on savers' wishlists, with one in four saying they would run off somewhere nice, while one in six said they would buy a car.

Just one in eight - 12 per cent - said they would pay off debts. But even if SSIA holders have other plans for their lump sums, they will also have up to €254 spare each month once their five years are up.

Massive interest savings can be achieved if homeowners were to arrange with their lender to overpay their mortgage by this amount each month.

For example, someone with a mortgage of €200,000 being repaid over 25 years could be three years into the term of their mortgage by the time they are free of their SSIA payments.

If they were to overpay their mortgage by €254 each month from year four onwards, based on an interest rate of 3.6 per cent, they would shorten the term of their mortgage by six years and cut €24,667 from their total interest bill.