Home or car: what’s the best use of my savings?

Q&A: Dominic Coyle answers your personal finance questions

I have substantial savings sitting in my bank account, approximately €200,000. I was hoping to put the majority towards purchasing a house with a mortgage of €300,000. However, I need to purchase a car and was considering spending €30,000 on this.

The question is should I pay for the car in cash now leaving me with a larger mortgage to fund or am I better off looking for a finance deal or PCP to fund the car and have a smaller mortgage.

I’m also concerned that if I take out a bank loan or finance this will impact on the amount I will be able to borrow.

Mr J.F., email


It’s a happy position to be in although, unless those savings have been accumulating elsewhere, it does mean you have been building up a pot of €200,000 that has been earning little or nothing in terms of bank interest over recent years.

Be that as it may, you now have choices. You want a house; you need a car. How do you juggle your available funds and access to finance?

Putting your €200,000 towards a house with a mortgage of €300,000 would give you a property worth €500,000 and a loan to value on your mortgage of 60 per cent. That’s a strong position to be in and will give you access to better mortgage rates.

Spending €30,000 on a car now will increase your home borrowings on the same property to 66 per cent. That should not create a problem in accessing the same mortgage rates. The only issue is whether it will create a headache with the second measure of mortgage borrowing – loan to income.

This measure of affordability is monitored by the Central Bank and is generally pegged at 3.5 times earnings. If your added €30,000 mortgage borrowing takes you over that, you may have a problem.

And, of course, you might want to borrow more and keep some of those existing savings for a rainy day fund.

Lenders can allow exemptions on the lending limits but experience since the coronavirus shutdown is that most lenders are adopted a very cautious approach, most particularly not granting many exemptions.

Borrowing separately for the car, or availing of a personal contract plan (PCP), will be taken into account by any mortgage lender in assessing affordability even if you do meet the Central Bank rules.

That aside, it is a simple matter of studying comparable loan rates. Mortgage borrowing costs a fraction of what you will pay for a personal loan. That means, all other things being equal, you’re best off using your savings for the car and borrowing slightly more for the property.