is it better to save up for a house or take out a mortgage

armabelle

Ok so many people will obviously tell you that a mortgage is better than simply paying rent until you have saved up enough money to buy a house. I say it is obvious because of course, this is what people do. I think people could save up for a house if they save hard and live below their means but would this be better?

If you take an online mortgage calculator and see what it costs you to take out a 300,000 euro mortgage for example, and then see what your repayments are, and then add those repayments up you get a total of almost double the loan amount over a period of around 25 years. If you take what rent would cost you over a period of 25 years then maybe it would be better to take out a loan for your home but if you were a good saver and you could save a lot more and have enough to buy a home in 10 years, then wouldn't that be better than taking out a mortgage?

What are some other peoples thoughts about this? Essentially, I am asking, is it better to pay a landlord or pay the bank for its loan to you?

Suryavarman

Monthly mortgage payments are usually lower than the cost of renting even with a 15 year mortgage.

I'd personally prefer to rent than own a home so I did some calculations recently. I assumed that house price inflation and stock market returns would be the same in the future as they were in the past. Then I compared what would happen if I invested the house deposit in the S&P 500 instead of purchasing the house.

By the time the mortgage was paid off the house would be worth far more than the stocks would. I tried to make things as favourable to the stocks as possible and the house was still worth more at the end. So as far as that basic analysis goes it's better to just get a mortgage.

Now obviously there's benefits to renting over owning a home. You have the freedom to move when you feel like and you don't have a long term debt hanging over your head. The mortgage is still a far better option for most people though.

armabelle

Suryavarman wrote: »

Monthly mortgage payments are usually lower than the cost of renting even with a 15 year mortgage.

Thanks for the breakdown. But if you could save up the money in ten years for example. Wouldn't ten years of rent be less then paying back 550,000 euros on a 300,000 mortgage over the same period?

celtic_oz

Maybe it would be better to take out a loan for your home but if you were a good saver and you could save a lot more and have enough to buy a home in 10 years, then wouldn't that be better than taking out a mortgage?

If you could save that much in 10 years then why couldn't you pay off a mortgage early maybe in close to 10 years.

The quicker you pay off the less interest you pay.

Also if you wait will the house you were going to buy have gone up by more than 4% per year (typical mortgage rate) wiping out some savings ?

armabelle

celtic_oz wrote: »

If you could save that much in 10 years then why couldn't you pay off a mortgage early maybe in close to 10 years.

The quicker you pay off the less interest you pay.

Also if you wait will the house you were going to buy have gone up by more than 4% per year (typical mortgage rate) wiping out some savings ?

Dont you have to first pay the interest before you start paying the actual house?

kyubi

Anything you pay over your monthly repayment amount is taken off the principle

celtic_oz

armabelle wrote: »

Dont you have to first pay the interest before you start paying the actual house?

Yes if you stick to the banks mortgage plan ( and they hope you do ) but if you pay any extra it goes straight off what you owe reducing your term.

Note typically only variable rate mortgages can be paid off early.

Try this calculator : http://www.consumerhelp.ie/extra-repayments-calculator

armabelle

kyubi wrote: »

Anything you pay over your monthly repayment amount is taken off the principle

Ah ok didn't know that. So let's say you don't or can't pay more per month and that you borrow 300,000 from the bank over 25 years. At the end of the term you will have paid the bank 550,000 more or less. Do you think that paying this 250,000 over and above the 300,000 is worth it? Wouldn't it be better to save up the money while renting no matter how long it took?

TOMP

Save up for the house; when the next housing crash comes, as it surely will, you will be able to buy your house outright

celtic_oz

armabelle wrote: »

Ah ok didn't know that. So let's say you don't or can't pay more per month and that you borrow 300,000 from the bank over 25 years. At the end of the term you will have paid the bank 550,000 more or less. Do you think that paying this 250,000 over and above the 300,000 is worth it? Wouldn't it be better to save up the money while renting no matter how long it took?

Nobody knows.

Maybe the house will cost a million in ten years and your thanking your lucky stars you bought when you did. Or maybe its worth half and your cursing your luck.

Most probably there is no real MAJOR difference financially between the 2 choices but you spent half your life renting to be safe .. fine if you dont mind that.

Suryavarman

armabelle wrote: »

Thanks for the breakdown. But if you could save up the money in ten years for example. Wouldn't ten years of rent be less then paying back 550,000 euros on a 300,000 mortgage over the same period?

I'm of the view that it simply isn't feasible to save up the money. Considering it's actually cheaper to pay for your mortgage than rent you're better off just taking out the mortgage and paying it off early as other posters have suggested.

Bruthal

armabelle wrote: »

Dont you have to first pay the interest before you start paying the actual house?

You pay interest and principal in each payment on a standard mortgage. The interest amount reduces and principal amount increases as the mortgage progresses.

Hasschu

Here is a link to a good example of the volatility of pricing in the international housing market.
There is a fair degree of political risk presently in Ireland that could adversely affect house prices.

https://confoundedinterest23.wordpress.com/2016/03/27/swedish-meatballs-swedish-regulators-lower-mortgage-term-to-105-years-average-is-140-years/

Into The Blue

armabelle wrote: »

can't pay more per month and that you borrow 300,000 from the bank over 25 years. At the end of the term you will have paid the bank 550,000 more or less. Do you think that paying this 250,000 over and above the 300,000 is worth it? Wouldn't it be better to save up the money while renting no matter how long it took?

If you can save the price of a mortgage payment while renting, why couldn't you over pay a mortgage?

Lockedout2

OP if you can afford to save €250k and pay rent then you can afford to overpay a loan.

You have to compare like with like.

As it is impossible to predict the future a number of assumptions have to be made.

So let's say that the house you rent is worth €200,000 and you can rent it for €12,000 pa.

So you set yourself the target of saving the €200,000 in 10 years while paying rent. That's €32,000 in after tax income that you need.

Instead you save for one year and purchase the house with a loan of €180,000 and put the €32,000 into paying it off. Let's assume the interest rate is 4%. The loan will be paid off in 77 months.

So you own the house after 89 months and you put the €2,666 into a savings account for the remaining 31 months. Saving €86,646.

This assumes that rent stays the same, that interest rates stay the same and that house prices stay the same!!!

Into The Blue

Lockedout2 wrote: »

This assumes that rent stays the same, that interest rates stay the same and that house prices stay the same...

...and their financial income/number of dependants stays the same...... for the next 20 years

armabelle

Suryavarman wrote: »

I'm of the view that it simply isn't feasible to save up the money. Considering it's actually cheaper to pay for your mortgage than rent you're better off just taking out the mortgage and paying it off early as other posters have suggested.

ok I got you... but then how do the banks make the money off you if you get the better half of the deal? surely banks are not in the charity business and are in it or the profit right, so how do they make a profit?

armabelle

Lockedout2 wrote: »

So you set yourself the target of saving the €200,000 in 10 years while paying rent. That's €32,000 in after tax income that you need.

I lost you on this part. Where does the €32,000 come from?

armabelle

Bruthal wrote: »

You pay interest and principal in each payment on a standard mortgage. The interest amount reduces and principal amount increases as the mortgage progresses.

so then you couldn't pay the loan off before the interest was paid off could you?

Skatedude

bear in mind that you mentioned 300000 for a price guide, you would need to be earning about 85k a year to qualify for a mortgage based on the new 3.5 times your salary cap.

Are you actually earning enough to qualify or will it be a joint mortgage, obviously any savings will help reduce the amount you need to borrow

Lockedout2

armabelle wrote: »

I lost you on this part. Where does the €32,000 come from?

Banks make money by taking it in and paying a modest rate to their lenders and charging a higher rate to its customers.

If you want to save €200,000 over 10 years that's €20,000 per year. You also have to pay rent assumed at €12,000 per annum.

armabelle

Skatedude wrote: »

bear in mind that you mentioned 300000 for a price guide, you would need to be earning about 85k a year to qualify for a mortgage based on the new 3.5 times your salary cap.

Are you actually earning enough to qualify or will it be a joint mortgage?

Joint mortgage. Heck I wish I earned 85k. That is a seriously high salary. I was just speculating with the amount. I am not sure we really want to buy in Ireland... I do like the place but I just can't face a life with this much cloud and rain.

Skatedude

Joint mortage then, It seems it's the only way to do it nowadays, cant imagine been able to afford anything on a single wage.

L'prof

Not that I or many would be able to save this amount while renting but a mortgage will work out better unless you have seriously low rent.

House price: €350k
Loan amount: €302k
Term: 10 years
Repayment: €365827.20
Interest: €63827.20
Interest per month: €531.89

If your rent is lower than interest per month then rent and save until you have enough for house, taking into consideration that you could get more bang for your buck now than in 10 years time. Otherwise, just get a mortgage.

Suryavarman

armabelle wrote: »

ok I got you... but then how do the banks make the money off you if you get the better half of the deal? surely banks are not in the charity business and are in it or the profit right, so how do they make a profit?

You pay interest on the mortgage.

KomradeBishop

A mortgage is locked in for a very long time, and rents are variable - nobody here has any idea what is going to happen to house prices or rents, over the time period it would take to pay off a mortgage.

In the current property market, in both cases (renting and mortgage) it's a bad deal - though one that people probably can't avoid if they want to live in Dublin, given they can't spend a good period of their lives waiting for the property market mess to be fixed up.

armabelle

Suryavarman wrote: »

You pay interest on the mortgage.

Yes for sure but in 25 years time, won't the money the bank gave you be worth less than what it is now?

armabelle

KomradeBishop wrote: »

In the current property market, in both cases (renting and mortgage) it's a bad deal - though one that people probably can't avoid if they want to live in Dublin, given they can't spend a good period of their lives waiting for the property market mess to be fixed up.

Why is this? I thought just the rental market was a bad deal in dublin, which it is IMO

armabelle

L'prof wrote: »

Not that I or many would be able to save this amount while renting but a mortgage will work out better unless you have seriously low rent.

House price: €350k
Loan amount: €302k
Term: 10 years
Repayment: €365827.20
Interest: €63827.20
Interest per month: €531.89

If your rent is lower than interest per month then rent and save until you have enough for house, taking into consideration that you could get more bang for your buck now than in 10 years time. Otherwise, just get a mortgage.

Where did you get the Repayment amount from? 60K on 300k mortgage seems low. Did you just use it as an example?

L'prof

armabelle wrote: »

Where did you get the Repayment amount from? 60K on 300k mortgage seems low. Did you just use it as an example?

I used a mortgage calculator that was on my phone.

Just used BOIs mortgage calculator there and it actually works out cheaper.

€58726 interest over 10 years

So, if your rent is higher than €489pm you should seriously consider getting a mortgage based on the info you provided.

Bruthal

armabelle wrote: »

so then you couldn't pay the loan off before the interest was paid off could you?

You can, as you only owe interest on money still owed back. So you can clear the loan early, although it is easier when on standard variable rates.

Fixed rate mortgages usually have an early repayment penalties.

armabelle

L'prof wrote: »

I used a mortgage calculator that was on my phone.

Just used BOIs mortgage calculator there and it actually works out cheaper.

€58726 interest over 10 years

So, if your rent is higher than €489pm you should seriously consider getting a mortgage based on the info you provided.

Thanks, We will consider that. Are there any other fees / expenses you have to consider when taking a mortgage?

KomradeBishop

armabelle wrote: »

Why is this? I thought just the rental market was a bad deal in dublin, which it is IMO

There are massive supply issues with property in the Dublin market - and both the private sector and government are MIA when it comes to resolving this - so the house prices and rents are skyrocketing.

lisasimpson

KomradeBishop wrote: »

There are massive supply issues with property in the Dublin market - and both the private sector and government are MIA when it comes to resolving this - so the house prices and rents are skyrocketing.

its also a massive problem in cork now. no new residential developments happening in city or surrounding areas. rents have rocketed since Christmas too

armabelle

KomradeBishop wrote: »

There are massive supply issues with property in the Dublin market - and both the private sector and government are MIA when it comes to resolving this - so the house prices and rents are skyrocketing.

When the crisis happened there was a ton of stuff that was left half built, can't they finish those developments? Or has that already been done?

Suryavarman

armabelle wrote: »

When the crisis happened there was a ton of stuff that was left half built, can't they finish those developments? Or has that already been done?

The cost of building a home has increased substantially since the beginning of the financial crisis. So it isn't profitable to finish those houses without a large increase in price.

Many of the ghost estates that are left are in locations that houses aren't needed. There are many ghost estates in Leitrim but few if any in Dublin.

armabelle

Suryavarman wrote: »

The cost of building a home has increased substantially since the beginning of the financial crisis. So it isn't profitable to finish those houses without a large increase in price.

Many of the ghost estates that are left are in locations that houses aren't needed. There are many ghost estates in Leitrim but few if any in Dublin.

Well now hasn't housing gone up and isn't it still going up so this should be incentive to get building but they aren't for some reason. This is a bit weird isn't it?

Also, why on earth did they build all those estates up there and in places where they are not needed?

Suryavarman

armabelle wrote: »

Well now hasn't housing gone up and isn't it still going up so this should be incentive to get building but they aren't for some reason. This is a bit weird isn't it?

Also, why on earth did they build all those estates up there and in places where they are not needed?

The actual cost of building a home is far higher than the price it can be sold for.

The population was growing rapidly and was expected to continue to do so. Things didn't work out like that.

armabelle

Suryavarman wrote: »

The actual cost of building a home is far higher than the price it can be sold for.

why, how can that be? I can't get my brain around it. And there are people coming into Dublin that can't find decent rentals so surely now is as good a time as any

Suryavarman

armabelle wrote: »

why, how can that be? I can't get my brain around it. And there are people coming into Dublin that can't find decent rentals so surely now is as good a time as any

Ronan Lyons (professor of Economics at TCD and chief economist at Daft) gives a good overview of the situation in this paper. He notes that the typical 3 bedroom home sells for €270,000 but costs €400,000 to build. He also mentions that the break even rent of the typical two bedroom apartment is €1,700 per month. Dublin 2 is the only area in the country where rents exceed €1,700 per month.

armabelle

Suryavarman wrote: »

Ronan Lyons (professor of Economics at TCD and chief economist at Daft) gives a good overview of the situation in this paper. He notes that the typical 3 bedroom home sells for €270,000 but costs €400,000 to build. He also mentions that the break even rent of the typical two bedroom apartment is €1,700 per month. Dublin 2 is the only area in the country where rents exceed €1,700 per month.

We pay that in ballsbridge for 55sqm

Suryavarman

armabelle wrote: »

We pay that in ballsbridge for 55sqm

That's fair enough but the average monthly rent in Ballsbridge for a 2 bedroom flat is still below €1,700

armabelle

Suryavarman wrote: »

That's fair enough but the average monthly rent in Ballsbridge for a 2 bedroom flat is still below €1,700

Most 2 bed apartments in nice neighborhoods are over 1700 now according to this

https://www.expatistan.com/cost-of-living/dublin

Suryavarman

armabelle wrote: »

Most 2 bed apartments in nice neighborhoods are over 1700 now according to this

https://www.expatistan.com/cost-of-living/dublin

Daft's 2015 Q4 rental report says that average rents for a 2 bed house fail to exceed €1,700 anywhere in Ireland. Although they come closest in D4 and D2.

mirrorwall14

Suryavarman wrote: »

Ronan Lyons (professor of Economics at TCD and chief economist at Daft) gives a good overview of the situation in this paper. He notes that the typical 3 bedroom home sells for €270,000 but costs €400,000 to build. He also mentions that the break even rent of the typical two bedroom apartment is €1,700 per month. Dublin 2 is the only area in the country where rents exceed €1,700 per month.

400k to build? What? That has to be based on looney land prices from the boom?

These figures and his percentages for 2012 and 2014 appear to be based on a firm of project managers and architects called Walsh Associates. Could he not have found a more appropriate and less likely to tend to bias source?

bilbot79

It's a pure numbers game. Rent a room in a crap houseshare then you're better off renting. Buy a mediocre house and pay off quickly and you're better buying. Check the amount which represents interest and compare it to the alternative rent. Interest is just rent to the bank but bear in mind that rent goes up over time but interest cam go up or down

Suryavarman

mirrorwall14 wrote: »

400k to build? What? That has to be based on looney land prices from the boom?

These figures and his percentages for 2012 and 2014 appear to be based on a firm of project managers and architects called Walsh Associates. Could he not have found a more appropriate and less likely to tend to bias source?

What exactly is wrong with the estimates that they provided? Would you have preferred him to ask his local shopkeeper? No bias there. It seems pretty sensible to quote experts in the industry when discussing such matters.

Would you prefer him to use the Department of the Environment's index that only measures materials and labour costs which showed a 70% increase in build costs between 1997 an 2014? How about the Society of Chartered Surveyors that also include professional fees and regulatory standards that showed a 150% increase in that timeframe? The Walsh Associates figures give broader estimates and therefore their estimates are more accurate.

KomradeBishop

It's not appropriate to use data from people with such an obvious conflict of interest. Including highly-inflated site costs in build costs is very misleading for starters.

There are a ton of sites presently lying undeveloped in Dublin - about 61 hectares - slap a very hefty yearly tax on these undeveloped sites, and you'll see the site costs coming down fast.

Suryavarman

KomradeBishop wrote: »

It's not appropriate to use data from people with such an obvious conflict of interest. Including highly-inflated site costs in build costs is very misleading for starters.

There are a ton of sites presently lying undeveloped in Dublin - about 61 hectares - slap a very hefty yearly tax on these undeveloped sites, and you'll see the site costs coming down fast.

Why isn't appropriate? Why would they falsify figures? What is your qualification to decide what is and isn't appropriate? Why should we care about your opinion more than the opinion of a professor in economics? Why is it misleading to include a major cost factor when working out how much it costs to build something? Why are you bringing up site costs when it is explicitly stated that site costs are omitted? What figures should we then use? Or are all figures biased unless they conform to your world view?

KomradeBishop

Uh, yea - some people with a monetary or professional conflict of interest falsify figures all the time. That's why conflicts of interest are an ethical concern.

I view 'arguments from authority' very dimly - they are inherently fallacious.

You're right that site costs were factored out of the Ronan Lyons figures, I missed that - he doesn't provide base stats, so I can't verify this though.

However, if you look at actual quotes for house builds - and these are large houses, often once-off builds (which cost more to build than a large development) - then the build prices are arguably a good half of what is quoted in Lyons paper.

His stats in that paper are not well sourced, and he doesn't provide base stats - so I'm not going to take his data as accurate. If he did things properly, he'd get stats from actual housing developments, in aggregate, and see what the raw building cost figures are on average.

Suryavarman

KomradeBishop wrote: »

Uh, yea - some people with a monetary or professional conflict of interest falsify figures all the time. That's why conflicts of interest are an ethical concern.

I view 'arguments from authority' very dimly - they are inherently fallacious.

You're right that site costs were factored out of the Ronan Lyons figures, I missed that - he doesn't provide base stats, so I can't verify this though.

However, if you look at actual quotes for house builds - and these are large houses, often once-off builds (which cost more to build than a large development) - then the build prices are arguably a good half of what is quoted in Lyons paper.

His stats in that paper are not well sourced, and he doesn't provide base stats - so I'm not going to take his data as accurate. If he did things properly, he'd get stats from actual housing developments, in aggregate, and see what the raw building cost figures are on average.

Why would they falsify figures? What benefit is there from falsifying figures?

Wow. So you expect him to reference Boards posts instead of industry professionals?

I will admit his data isn't very well sourced. The Department of the Environment, the Society of Chartered Surveyors Ireland and Walsh Associates aren't exactly some random poster on Boards. I can't believe he didn't ask for the opinions of random posters on Boards. You should shoot him an email and tell him how to do his job properly. Don't forget to scold him for using "biased" sources.