Tuesday 27 September 2016

Building up that deposit

Charlie Weston on tips for building up a lump sum that can be used as a deposit and where to get the best interest rates

Published 09/04/2015 | 02:30

Rhona and Aidan Carty, and their daughter Emily (4-and-a-half months) at their home in Carrowmore, Sligo.
Rhona and Aidan Carty, and their daughter Emily (4-and-a-half months) at their home in Carrowmore, Sligo.
Picture posed

The new rules introduced by the Central Bank on mortgage deposit requirements have many people focused more heavily on building up a deposit.

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This is in case they aren't able to get a higher loan to value mortgage.

Building a deposit takes time if you do it the old-fashioned way, according to Karl Deeter, who is the compliance manager at Irish Mortgage Brokers in Dublin.

This is particularly true at a time when rents and property prices are going up, while higher tax rates kick in below average wages and deposit rates are at all-time lows, he says.

So how do people do it?

A lot of them get help from relatives either as a cash sum or by living with them for free or very cheap, which makes saving up easier.

Many others get an inheritance or some other "kick-start".

"This is still incredibly common because many parents are of the view, rightly or wrongly, that helping a child buy a home gives them a good start in life," Mr Deeter says.

Even with help, though, you have to show that you can support making a mortgage payment and that means saving a similar amount per month, or showing that you can meet costs of an equivalent amount by paying rent and saving.

If you want to borrow €200,000, then the actual repayment would be in the region of €1,100 a month.

This means you will need to show that you can save that amount or more, Mr Deeter explained.

"Even if you were to get the entire deposit as a gift from a family member, you need to demonstrate repayment capacity so a deposit is really only one part of the puzzle," he said.

And some lenders won't consider a loan unless you saved 50pc of the deposit yourself. So, no matter how rich your parents are, you can't get around that, he added.

As for the options:

Regular savings accounts usually have a cap above which you earn less interest. So you need to start from scratch, and compounding only works as you add money in each month. This means the final outcome will be less than the advertised figure.

"The likes of NationwideUK Ireland offers an account with an interest rate of 4pc, but to get this rate you need you to run the account for 15 months.

"If you put in €1,000 per month, your net annual return for one year isn't 4pc of the €12,000 saved, which would be €480," Mr Deeter said.

Instead, it is €222 - this is because the 4pc applies over 15 months not 12 months.

There is the new Revenue DIRT (deposit interest retention scheme) refund scheme which allows a first-time buyer to claim back DIRT paid over the previous four years up to the December 31, 2017.

But that is unlikely to yield substantial amounts for a first-time buyer building up a deposit because the tax rate was lower in the past (meaning less to refund) and the amount saved for a person buying now is also likely to have been small, he added.

Deposits are slow but sure. Other people use savings accounts that are investments, and some even actively buy and sell shares.

The advantage is that at least in recent times, favourable markets would have given superior returns to what deposits were doing.

The likes of Standard Life's absolute returns fund gained retail investors over 18pc in the last three years, Mr Deeter said.

No deposit product on earth would have matched that, but the risks were also far higher.

Growth goes both ways - you can lose or make money. Had things gone badly these savers would be saving for many years more.

The truth is that due to the new Central Bank rules many savers will be saving for longer anyway, but you don't need losses to compound the situation, Mr Deeter added.

The bad news is that if you "invest your way to a deposit" lenders tend to take a dim view of it because it's seen almost as gambling.

It doesn't mean they'll say 'no' but it does mean they'll be extra stringent on your ability to repay calculations.

"Sadly, there is no easy route to building a deposit. It takes time, money, sacrificing your spending in order to save, and that's before you get hit with all of the other lending criteria," Mr Deeter said.

"Getting help is a big boon but not something you can plan for, that's down to the fluke of the family you are born into."

So the best solution is save early and save often, cut unnecessary spending and try to manage your money to get the best return possible.

But in order to get there quicker understand risk and take it if you can accept what goes with it, Mr Deeter added.

'We are so happy  that we bought when we did - and where we did...'

SLIGO-based Rhona and Aidan Carty are making the happy adjustment to life with a new baby at the moment.

Baby Emly, their first child, was born almost five months ago.

The couple lives outside Sligo town.

Ms Carty is on maternity leave from St Clare's secondary school in Mannorhamilton, where she teaches geography and business.

Aidan works in the family firm, Sligo Glass Company.

They bought a home in 2012, and feel they would not have been able to afford the property earlier during the housing boom.

They feel that it has turned out to be a good deal. The mortgage payments are only slightly higher than what they were paying in rent.

"If you can get the money together and if that is what you want, then go for it, as long as it is within your means," Ms Carty says.

"We are happy we bought when we did, and where we did."

Mr Carty is from the area where they now live, and Ms Carty is originally from Donegal. Changes in the private health insurance regime have prompted them to take out a new family plan with Vhi Healthcare.

They are on One Plan Starter, with the State's largest health insurer.

New rules coming in next May mean that they will face a penalty if they wait until then to buy health insurance.

"We were spurred to take out a plan because of the pending changes. That was the clincher," she explained.

Irish Independent

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