We have a lovely house in a great location in Dublin and our mortgage is now quite low. The house is too small for us so we are saving a substantial amount monthly to upsize.
My question is: should that cash stay in a quick withdrawal account (where it is now) because we don’t know when we’ll need it. If the right house came up tomorrow we’d buy it. But, equally, because of where we live and the housing market, it could be years before something comes up/we win a bidding war. Also, if we keep saving we could get into a higher bracket, which could make it easier.
I am concerned it is sitting in the bank on deposit earning more or less nothing but afraid to put it in anywhere else as we would need to move fast if anything did come up. I think I might be about to get a large lump sum but we again need that for house-buying so should we open another savings account? Or are we completely mad and just get a higher mortgage and invest some cash?
My other question is: bearing in mind all of the above, is it worth going to a financial adviser or will they just say “yes you’re doing fine”, considering maybe we just need a few savings accounts.
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Finally, the pensions guy in work kept trying to convince me to stop saving and put it all into the pension but then we are stuck in our small house forever and I think we are lucky enough to have a choice and we want space.
MS
This is the recurring dilemma, isn’t it – seeking a better return on our savings without locking them away in case we need them.
You’ve a few different elements in your question, although they are all somewhat interlinked.
When looking at savings and what to do with them, the biggest question you need to ask yourself is what your savings goal is. And in your case, it is pretty clear. You feel your current home is too small and are very focused on trying to upgrade to a bigger house.
The challenge, of course, is that supply of such properties is extremely limited and when they do come up, demand can be intense.
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As you note yourself, if the right house came up tomorrow, you’d buy it if you could but you’re well aware that because of where you live and the housing market, it could be years before something comes up that you can have success in getting, given the almost inevitable bidding war.
If you keep saving, you might have access to a wider range of homes given your greater resources but then, property prices are themselves rising all the time, offsetting some of your improved financial status.
If you are expecting your savings to do the heavy lifting, your options are certainly limited if you need to have immediate access to your money. I’m conscious you would appear to be in substantial equity in your current home but it is likely you would not be selling until you have found your new home; so that doesn’t really address the immediate requirement for quick access to funds.
However, you can still do better than a bog-standard deposit account.
Ireland’s three main banks – AIB, Bank of Ireland and PTSB – are paying 0.25 per cent, 0.1 per cent and 0.01 per cent respectively on lump-sum savings at a time when inflation is now running at 3.6 per cent. That’s a quick way to erode the value of your savings.
You can do better with Raisin bank, which offers a return of 3.1 per cent on sums up to €100,000 without having to lock them into a fixed term. The money is also protected by Germany’s deposit guarantee, which, like ours, protects sums up to €100,000.
The downside is that you still have deposit interest retention tax (Dirt) to address, which will knock a third off that return. And you will have to file a tax return yourself to pay it as Raisin does not deduct Dirt at source like the Irish banks do.
Bank of Ireland does offer a 3 per cent rate on regular monthly savings of up to €2,500 a month but the catch here is that the interest rate falls dramatically – to just 0.5 per cent – when your savings top €30,000. And that 3 per cent headline rate is also before accounting for Dirt.
And locking your money away for longer periods will not do you any good at present, at least according to price comparison site Bonkers.ie. The best rate it can find for savings locked into fixed terms of one, three and five years is 2.92 per cent.
So, if you are sticking with the banks, you are losing money – whether it is with your existing savings, anything else you put away month by month or any lump sum you might receive by way of a workplace bonus or otherwise. There’s no way around that.
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However, you ask, almost in passing, whether you should “just get a higher mortgage and invest some cash”? That seems to suggest you were locking your savings into loss-making deposits simply to minimise any mortgage. It also suggests that you have the financial capacity between you to take on a significantly larger mortgage.
This opens up a whole new vista.
Most importantly, it offers the option of investing your fairly significant savings where they might secure a better return than they will sitting in any bank account, assuming you are open to taking on a measure of risk.
And this is where a financial adviser comes in. They can advise where best to invest in line with the risk you are prepared to take and your investment timeline. It seems to be an eminently sensible move to meet one.
That timeline is important. Taking on a bigger mortgage brings with it heavier longer-term financial commitments. But if you know your plan is to invest for a five-, 10- or even three-year term, you can lock in at a fixed interest rate for that period and then use the maturing investment to pay down a chunk of the mortgage once the fixed term ends.
The risk, of course, is that markets are volatile and you could find them turning against you just as you intend to access the money in your investment. But as you appear to have the financial capacity to meet higher mortgage payments, that still gives you the option of waiting for a market recovery before knocking a significant lump sum off the mortgage which will either reduce monthly payments or the planned lifetime of the home loan.
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And of course, once you buy this new home, you will be selling your current place in which you seem to have a lot of equity as you say your mortgage there is now quite low. That, in itself, would free up funds to pay down the new mortgage outside of any fixed term.
Only you can determine whether you have the borrowing capacity to allow a mortgage to cover the full cost of any new home, but your savings appear to be substantial allowing you to hold some on deposit, or even in An Post savings, and invest the rest in search of better returns.
Finally, I’m a big fan of investing in pensions as regular readers of this column will know. However, putting all your savings into a pension really is locking it away, potentially for decades. And that will certainly narrow your options in terms of funding any move to a bigger home.
You are actively looking to upgrade and, from your letter, that is clearly your priority. I think, in this case, it probably makes sense to get that sorted before seeing what you can afford to put aside into your pension.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
