Sunday 24 September 2017

How to get that bigger deposit together for your dream home

Many financial advisers and mortgage brokers believe the rules will make it impossible for people to save up the deposit they need to buy a home over two or three years
Many financial advisers and mortgage brokers believe the rules will make it impossible for people to save up the deposit they need to buy a home over two or three years
Louise McBride

Louise McBride

The Central Bank's new lending rules could push house hunters into risky investments because they may feel they will never get a house deposit together if they stick with ordinary savings accounts.

The new rules, which were announced last month, have doubled the deposit that trader-uppers must have when getting a mortgage. First-time buyers after homes worth more than €220,000 - as most of the properties in Dublin are - have also to stump up larger deposits than had previously been the case.

Many financial advisers and mortgage brokers believe the rules will make it impossible for people to save up the deposit they need to buy a home over two or three years - which until now, has been a typical savings time-frame taken by those planning to buy property.

"Deposit accounts are not an option now, as the length of time you will need to save for [to hit your deposit target] has dramatically increased," said Eoin McGee, principal of Kildare-based financial advisers Prosperous Financial Planning. "The amount you need to save has also jumped up considerably."

Under the rules, an individual trading up needs an €80,000 deposit to buy a home worth €400,000 - compared to €40,000 before. You would need to save about €3,300 a month to hit a target of €80,000 over two years if using an ordinary savings account which doesn't pay much interest - or €2,200 a month if you have three years to hit your target. That's a hell of a lot of savings.

Why might I consider investments?

Choose the right investment product and you could save about an eighth less than you would if you stuck with an ordinary savings account - and you'll still hit your target, according to Mr McGee.

"Let's say you want to buy in five years' time and you need a €40,000 deposit," said Mr McGee. "To reach that target, you will need to start saving €650 per month into an ordinary savings account which pays 1pc interest - if you ignore tax and charges. That figure drops to €573 a month if you invest in a well-diversified investment portfolio and get a return of 6pc a year. If you are looking at a deposit of €80,000, you will have to save €1300 per month over five years into your deposit account - but €1,146 a month through the diversified portfolio."

What investment products could I consider?

Zurich Life's Lifesave Savings Plus or Aviva's Regular Saver plan are some life-assurance savings plans recommended by Mr McGee.

However, although these products may deliver a higher return than ordinary deposit accounts, you could get back less than what you put in if your investment performs poorly. Furthermore, these products are aimed at those who want to save regularly for at least five years.

Indeed, many life-assurance savings plans are aimed at those who can commit to the product for at least five years - so be sure you can do so before signing up to one. Check if you will be hit with any penalties should you find your dream home before those five years are up - and need to cash in your investment early.

Another investment product worth considering is the Davy Plus Trading Plus regular savings account, according to Mr McGee. This account, which will be introduced in April, will invest your money in the Global Portfolio Strategies (GPS) funds - once you have more than €500 in your account. "The GPS are portfolios of funds from the leading global fund managers," said a spokesman for Davy.

Understand exactly what you are getting into if considering an investment product to save up for your house deposit. Make sure the product doesn't come with too much risk too - otherwise, you could lose all of the money you are saving for your home.

What if I want to play it safe?

Rory Nelson, founder of the Galway financial advisers Nelson Life, believes that house-hunters should stick with ordinary savings accounts and avoid any investment risk when saving up for a deposit.

At 4.5pc interest, KBC Bank's Bonus Regular Saver account pays the best interest rate on regular savings. However, you must open a current account with KBC to get the 4.5pc interest - otherwise, you'll earn 3.5pc.

The main drawback of KBC's account is that the interest rate will be slashed to 0.5pc once you have more than €50,000 of savings built up in the account - so don't go over this limit.

Nationwide UK Ireland pays 4pc interest on its 15-month regular savings account - the second best rate out there. Next in line are AIB's Online Regular Saver and EBS's Family Savings Account - which both pay 2.25pc interest.

Permanent TSB's Online Regular Saver and 21-day Notice Regular Saver pay 2.1pc interest on savings up to €50,000.

With all regular savings accounts, know if there is a limit on the amount of savings which can earn the interest rate you are after - and what conditions you must meet to get the rate.

Keep an eye on the interest rate paid on these accounts too as banks often chop rates over time.

What can I do to speed up getting a deposit together?

You will find it easier to hit your savings target if you cut back on spending and boost your income.

"Consider moving back in with parents if renting, demoting ideas about new cars or holidays, gym membership, golf fees, mobile usage, TV, new clothes and lunches out," said Mr Nelson. "See if you do can anything to increase your capacity to earn more income - consider more overtime, weekend employment or a big push for promotion." (See 'How to get a pay rise', page 8.)

Check too if there are other ways you can get quick access to cash.

"Are there assets you could sell to accumulate extra cash such as share schemes, shares, your car and so on," said Mr Nelson. You may be able to cash in some of your pension additional voluntary contributions (AVCs) - if you have them. "You have the option to access up to 30pc of your AVCs if you are a member of an occupational pension scheme," said Mr Nelson. "You will have to pay income tax at your higher rate. The deadline to take up this option is March 27, 2016."

And, of course, you could also try the bank of mum and dad...

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