What should we do with our savings if we move abroad for work after Covid?
Q&A: Should we purchase a buy-to-rent property, or put it into an investment fund?
You need to put on a sound commercial head, look at areas of rental demand and the yield (return) you can expect on your investment. Photograph: iStock
My partner and I had planned to go abroad in summer 2020 to work for one to two years. We are now hoping we can travel early in 2022.
We currently have combined savings of €80,000, and are each saving €1,000 per month. We are considering two options:
When we return to Ireland, continue to rent out the property, and use the investment fund money as a deposit for our home.
2. Invest our current €80,000 savings into an investment fund and continue to save for the next two to four years.
What are the pros and cons of each?
– Ms AF, email
The longer the current Covid restrictions go on, the more people want to spread their wings. Lockdowns, the precarious nature of work in many sectors over the past year and a general re-evaluation of priorities will likely also see a number of people consider the option of a change of lifestyle.
And, especially for those who are younger and unencumbered by families and bills, that might well make the prospect of travelling abroad for work and adventure more appealing than it might have done previously.
In your case, it seems that you had already been eyeing up such a plan before the Covid pandemic struck. And you’ve also had the foresight to start building up a nest egg as a couple. I imagine the past year has been frustrating for you as you are stuck in limbo – committed to the idea of working abroad but unable to act on it. Fortunately, vaccines mean there is light at the end of the tunnel.
But back to your choices. You are tossing up the option of investing in a property here with at least some of the money or investing the whole sum until you expect you will be back in Ireland and in the market for a home of your own.
I can see the attraction of purchasing a property, not least as the risk-free return on savings right now is close to zero.
Lenders have a had a tough decade and benefit of the doubt is unlikely to feature strongly in any decision on a loan application
So what are the issues you need to consider? First up, if you are buying to rent it out, it’s a very different prospect to buying a place you want to call home. You need to put on a sound commercial head, look at areas of rental demand and the yield (return) you can expect on your investment.
You talk about investing the minimum required in a deposit and salting the rest away in other investments until you come home. However, I think you misunderstand the investment.
As first-time buyers, you can expect to have to ay a 10 per cent deposit on a home and be able to borrow the outstanding 90 per cent as long as it amounts to less than 3.5 times your joint income. But that is only for your own family home.
The rules on rentals are different. The Central Bank requires lenders to seek deposits of 30 per cent of the property price on buy-to-let mortgages and banks will only sanction mortgages of 70 per cent.
In practical terms, this means there will be precious little, if anything, left of your savings even if you can persuade a bank to lend to you.
Take a two-bed apartment currently on the market in Inchicore at a development called the Tramyard. I know nothing about the development or the area as a rental location but, just for the purpose of crunching numbers, it is on the market now at €240,000. That would mean a deposit of €72,000 – using almost all of your current savings – and a mortgage application for the remaining €168,000.
At current mortgage rates, you should be able to get a two-year fixed rate that will require monthly payments of around €1,100 – if you get a mortgage at all.
If either of you is in a sector that has been badly affected by Covid – hospitality, retail, tourism, airlines or even construction – you may find it hard to get any mortgage at the moment, never mind one on what will be an investment property under your current plans.
And then there is security of income. Banks always look for statements of earnings when lending for mortgages. You might be employed right now but how certain is any income when you are abroad? And will you return to your old jobs after your trip or face the uncertainty of the job market?
Lenders have a had a tough decade and benefit of the doubt is unlikely to feature strongly in any decision on a loan application.
One-beds in that Inchicore development are currently seeking tenants at €1,215 a month while three-beds are asking €2,400, so let’s assume a two-bed would go for around €1,800 a month.
That’s a “profit” after paying the mortgage of €700 a month or €8,400 a year gross. But management costs will eat around €1,600 of that and you have not spent a penny yet on any pre-rental maintenance, furnishing and fit-out, professional fees, or allowed for tax, which will be liable at your marginal rate.
Suffice to say that you’ll do well to break even over the two years you’re away.
So that raises the question on how you build up a deposit for the home you hope to buy for yourselves on your return. The investment fund will not exist as deposit and pre-rental costs will have eaten up your €80,000.
You mention that you are currently putting away €1,000 a month between you. But this is at a time when your lives have been largely on hold and there is much less on which to spend money anyway – especially in the area of discretionary spending. Holidays are out, concerts are out, you can’t attend sports events even if you wanted to, or gyms. And meeting friends for a meal or a night out is impossible. Even spending on things like clothes, shoes or accessories is less accessible than it was before Covid.
Remember, with a buy-to-let already behind you, you will no longer qualify for the 10 per cent first-time buyers mortgage deposit
For those who already have homes, the only real avenue for discretionary spending has been upgrading their properties or gardens – and that doesn’t apply to you. As a result, personal savings in Ireland have rocketed. However, there is constant talk of pent-up demand and an expectation that, when the economy reopens, people will be looking to make up for lost time – and will have the funds to do so.
Will you continue to be able to save as much in those circumstances, or do you need to look again at a reasonable post-Covid savings plan? A move abroad in itself will incur costs and your income might well not match what you are making here in Ireland.
And if the job is not arranged before you go, you will need to tap those rapidly diminishing savings to sustain yourselves until the job is secured and starts delivering pay cheques.
Even if you can sustain €1,000 a month in savings while away, it depends on what sort of property you fancy living in yourselves on your return. Remember, with a buy-to-let already behind you, you will no longer qualify for the 10 per cent first-time buyers mortgage deposit: instead, you will need 20 per cent of the value of your prospective home saved.
But what about just investing the money while you’re away?
One of the key things about investing is the term over which you can leave your money to grow. The more likely you are to need it in the short term, the less sense it makes to put the cash into a higher-risk investment – such as shares. Why?
If you get the impression that I think you’re being overly ambitious, that’s because I do
Shares have enjoyed the longest bull market in history. Of course, in itself, that doesn’t mean anything, but market cycles are a reality and history tells us that, at some point, there will be a correction. And with the global economy looking to get back to a more normal standing following Covid, the levels of uncertainty about straight-line stock market growth are greater.
For those who can leave their money invested over the long term, the ups and downs will smooth out and they should see a reasonable return. But you’ll be looking for this money within two to four years. That doesn’t really allow you time to recover if the market takes a plunge in the near future.
The alternative is to invest in less risky areas like bonds. The returns will be lower but hopefully better than the zilch being offered by banks.
If you get the impression that I think you’re being overly ambitious, that’s because I do. Your savings of €80,000 are substantial but they will stretch only so far. I struggle to see how they will meet the cost of both a buy-to-let and a family home for you in the next few years.
If you intend buying a home here in a couple of years’ time, get a sense now of what that might cost you in terms of deposit and meeting loan-to-income multiples at today’s rates. Prices are only likely to rise so you’d need to plan to have wriggle room in your finances for an additional 10 per cent more, at least, in a couple of years’ time.
In practical terms, that means investing what you have in a low-risk or risk-free environment so that you have the makings of a substantial deposit for a family home at the end of your travels.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into