House buy - why shouldnt I do this?

horsesnout

Im 26, have 100 grand and have been approved for a 40 yr mortage of 380,000.

Thinking of buying a house in rathfarnham for 475,000, repayments on the mortgage then being 1200 a month approx. I'd hope to have 800 a month from two tenants living there with me.
Stamp duty 25k approx which I can just about afford.

Basically, Im thinking about going for it but before I do can anyone here give me a good reason NOT to? Or should I just got for it? What alternatives would you suggest as an investment (and preferably in keeping with the property idea as i also need somewhere to live)

Thnx.

Blackjack

Can you not get a mortgage with a shorter term?.
40 years is a hell of a long time to be paying a Mortgage for.

johnnyrotten

Go for it. Don't worry bout the term. You can reduce the term later when you can afford it. If you don't go for it , you will say in a years time that you should have done so!

AARRRGH

If you are the "settling down" type than I see why not? If you'll be happier and you can afford it, go for it.

One thing: when the interest rates go up (which they will) how ****ed will your mortgage payments become?

RainyDay

Your rental income of €9,600 will be subject to tax, and you'll also have a partial Capital Gains Tax liability when you come to sell. If you can keep your rental income below the 'rent-a-room' threshold (around €7k I think, check Revenue.ie), you'll have no tax liability.

Work out the full costs, including legal/survey fees, vacant periods, furnishing, waste charges etc. If you're confident that you can commit to this house for the medium term (e.g. 5 years), then go for it. But don't buy now if you're going to be selling within a few years (e.g. travel, job move).

CCOVICH

Would you not be better off going for a house that is exempt from stamp duty, i.e. one that is under 125 sq. metres?

I would avoid Rathfarnham unless I worked nearby. Nice area, but a nightmare for transport to town, and not likely to improve, as there have been no LUAS/Metro plans announced for the area.

I'm surprised that you are getting 40 years given that you're 26-I thought that banks only lend on the basis your mortgage will be repaid by the time your 65?

coolhandluke

Your only 26 are you mad strapping yourself with a loan that big.Don't bother,in 2 years time the same house will only be worth 425,000.The bubble is about to burst.

Dub13

coolhandluke wrote:

Your only 26 are you mad strapping yourself with a loan that big.Don't bother,in 2 years time the same house will only be worth 425,000.The bubble is about to burst.

This will not happen,there may be a slow down but prices will not fall.

coolhandluke

Dub13 wrote:

This will not happen,there may be a slow down but prices will not fall.

As that's my opinion,that's just your opinion aswell,prove it if your so sure.

Dub13

coolhandluke wrote:

As that's my opinion,that's just your opinion aswell,prove it if your so sure.

http://www.finfacts.com/irelandbusinessnews/publish/article_10003755.shtml

"AIB says it expects close to 77,000 homes a year to be built until 2008. This is similar to last year's record level and the likely out turn this year. The Bank says that annual house price inflation should stay at a relatively high 7% in the same period. This compares with the bank's previous forecast of a slowdown to 2% growth by the end of 2006."



http://www.rte.ie/news/2005/1027/housing.html

"It adds that annual house price inflation should stay at a relatively high 7% in the same period. This compares with the bank's previous prediction of a slowdown to 2% growth by the end of 2006."


http://breakingnews.iol.ie/news/iestory.asp?j=183715267050&p=y837y5z67756&n=183715267810

"It emphatically said there is no house price bubble, which is ironic given an AIB offshoot last year warned the single biggest threat to the Irish economy was the often threatened, but yet to be delivered, property bubble.

AIB Capital Markets was never in that category and its latest review is a pretty solid endorsement of the state of the housing market.

In essence, the report says demand is greater than supply."

Dub13

Can you prove property will take a big hit...?

coolhandluke

Dub13 wrote:

Can you prove property will take a big hit...?

Of course i can't that's the point,however this should be compeling reading especially the second last poster who in my mind has hit the nail on the head

http://www.askaboutmoney.com//showthread.php?t=14317

The 3 links you have posted have all originated from AIB,hardly someone without a vested interest in the market.I wouldn't believe a word they say because their bottom line is profit profit profit whatever the cost,the banks are fueling the price explosion by lending way above the supposed lending guidelines !.It's all goin to end in tears (and i bought a house 5 years ago,have made a substantial profit and have no axe to grind as such.)

garred

One other point is the fact that you will be sharing your house for the forseeable future. I know a mate of mine took out a big mortgage and loan for the deposit to buy a house. He has to have at least 2 people sharing with him to pay his bills. Now this is fine in theory but it can be a pain in the arse living with, more often than not, strangers.

With regard to bubble, its been done to the death here and its all speculation. If by some unforseen nature there is a propery crash it is your home and not solely an investment property.

Look if you like/are from the area go for it. No-one I know has lost in longterm property investment.

GreeBo

My concern would be that you (seemt to) have no safety net built in.
I went for 30 years so that if something goes badly wrong, lose job, interest rates go mad I can always change to a 35 year and still be able to afford the repayments.
If rates go up and your tenants decide to bugger off, or your roof falls off you are screwed. You have no way of easing the burden because you can only afford the house if you are able to celebrate the feast of max occupancy and rates stay where they are.
Buy something for €400 and do it over 30 years.
You MIGHT regret not going for this particular house but there will be others, you WILL regret losing the house to the bank.

Out of interest, where in Rathfarnham is it?

Kinetic^

Go for a shorter term, even by 5 or 10 years.

If you've got tenants then you should be able to afford it.

ck1

Just be careful that you can afford it in the future or at least be aware of the effect of a rise in interest rates. Based on what you said, you are being quoted a preference rate of aproximately 2.25%. If this was calculated on the present standard variable from most lenders this would amount to monthly payment of just under €1,450. And if there was an interest rise of .5%, this would cost you €1,600 per month.

RainyDay

Keyser Soze 69 wrote:

Go for a shorter term, even by 5 or 10 years.

If you've got tenants then you should be able to afford it.

This can be dangerous. If he goes with the longer term, he can always make over-payments to reduce the term when he has spare cash available (assuming it's a variable rate loan). If he goes for the shorter time, he is tied into the higher level of repayments. If you are disciplined, go for the longer term & make overpayments when you can.

dublinguy05

Take the mortgage at 40 years, reduce the term in a few years. At your current figures, two years down the line if you don't buy now you won't be able to afford the same house. AIb predicts a 7% growth per annuam falling off at 2008. I know loads of people who could afford to buy a house a few years ago but held out for some reason, in the mean time the market has risen and they can't afford to buy the same house. Personally I would rather put upo with the burden of lodgers in the house for a few years until your financial sitution is good enough to take on the mortgage yourself and still live a good lifestyle, just go for it, you won't regret it.

horsesnout

Thanks all for the replies and all the good advice.

I dont believe all that crap about the bubble bursting, to me it seems we've all been hearing that for about 10 years now and still nothing seems to have changed, and basically.. I feel I'd regret it more if I didnt go for it.

Im looking at places around the churchtown/lower dundrum area around that luas line really.

Anyway, cheers all.

ronbyrne2005

if your going to live in the house for the foreseeable future then any fall in house prices is generally not relevant(unless rents also fall which is unlikely as they are already very low) as if your house price falls all house prices will fall and you can sell your home at a lower price but buy other homes at a lower price too,for the owner occupier its only the relative price change that is relevant.

your main problem is likely to be rising interest rates which ecb president trichet has indicated are going higher,be prepared to pay 5-6 % interest per annum(worst case scenario) although they wont hit this level unless a) growth rates improve dramatically in ecb or b) inflation continues to escalate,the ecb's primary aim is to control inflation.gdp growth is secondary.

you say you think talk of house price crash is crap,this is dangerous thinking,the irish economy is a small open economy largely dependent on foreign multinationals and construction industry,it is very sensitive to external shocks and unlike other economies doesnt have the ability to change monetary policy to counter any shocks.
the world economy is booming but there were many recessions in last century and there will be many in this century too, the irish economy rides on the booming world economy but will suffer more than most when there is a global slowdown.
most metrics indicate that irish property is overpriced,just because it keeps rising doesnt mean it wont fall back at some stage.
if the house is a pure investment i would say dont buy ,if its just a home then buy but remember you wont have tenants for the entire duration of mortgage especially if you get married or the like.
the fact we have been tied into an artificially low interet rate for several years ,that immigrant workers have come here and rented "temporary housing " and pushed up demand ,that every man and his dog have bought a second or 3rd house with the belief that houses are a sure bet all indicate to me that the market is overpriced,bear in mind that ireland has a very low poulation density which indicates there is loads of room to build in future,we are a high cost economy,many multinationals will leave to find cheaper operations abroad, that we have very poor inovation and research capabilites and achievments which means we cant make ourselves attractive to the indutries of the fututre,then when the housing supply meets and exceed s demand not only while house prices be affected but the drop offf in construction employment will be a double whammy hitting the economy further affecting house demand and prices.see the economist article below regarding house prices

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from economist
WHEN The Economist launched its global house-price indicators in 2002, residential-property markets were merely warming up. Today they are red hot in many of the 20 countries we cover: in half of them, prices have risen by around 10% or more in the past year (see table). But for the first time since we started to track them, housing markets in several countries have slowed sharply.

The most dramatic slowdown has been in Australia where, according to official figures, the 12-month rate of increase in house prices fell to only 2.7% in the fourth quarter of last year, down from nearly 19% at the end of 2003. Another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are signed rather than at settlement, shows that average house prices fell by 7% in the year to December; prices in Sydney plunged by 16%. The Reserve Bank of Australia's quarter-point increase in interest rates this week is likely to give prices another downward nudge.

Britain's housing market has also cooled since last summer. The Nationwide index, which we use, was still up by 10% in the year to February, down from 20% growth in July. Other anecdotal evidence suggests that prices have fallen since last summer in many parts of the country.

In contrast, America's housing bubble continues to inflate. Although the rate of increase slowed in the fourth quarter, prices were still up by 11.2% over the year. In California and Washington, DC, housing prices rose by more than 20%. Alan Greenspan, the Fed's chairman, recently admitted in congressional testimony that there may be property bubbles in “certain areas” and a risk that prices could decline. There is certainly evidence that prices are being driven by speculative demand: a new study by the National Association of Realtors shows that one-quarter of all houses bought in 2004 were for investment, not owner-occupation.

.

Punishing prices, puny yields
The main reason why housing markets have cooled in Australia and Britain is that first-time buyers have been priced out and demand from buy-to-let investors has slumped. While house prices have soared, rents have risen modestly or even fallen in some cities. In America, Britain, Spain New Zealand and Australia, average net rental yields (allowing for management fees, maintenance and empty periods) have fallen to 3.5% or less, well below mortgage rates. Shane Oliver, the chief economist at AMP Capital Investors, estimates that net rental yields on houses in Sydney are only 1%. Landlords are nowhere near covering their true costs, but many still hope to make their profit from capital gains. That sounds ominously similar to the days of the dotcom bubble, when it was argued that the link between share prices and profits no longer mattered.

According to calculations by The Economist (with the help of Julian Callow of Barclays Capital), house prices are at record levels in relation to rents (ie, yields are at record lows) in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. America's ratio of prices to rents is 32% above its average level during 1975-2000. By the same gauge, property is “overvalued” by 60% or more in Britain, Australia and Spain, and by 46% in France
The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier. To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall. Yet central banks cannot allow rents to surge as this would feed into inflation. Rents directly or indirectly account for 29% of America's consumer-price index, so rising inflation would force the Fed to raise interest rates more swiftly, which could trigger a fall in house prices. Alternatively, if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall.

Lower real interest rates might justify a higher p/e ratio. For example, real interest rates in Ireland and Spain were reduced significantly when these countries joined Europe's single currency—though not by enough to explain the whole rise in house prices. In Britain, where tax relief on interest payments has been scrapped, real after-tax rates are close to their average over the past 30 years, and so do not justify a higher price/rent ratio. In America, too, real post-tax interest rates are not historically low, in part because mortgage-interest tax relief is worth less at lower rates of inflation. For instance, if interest rates are 10%, tax relief is 30% and inflation is 7%, the real after-tax interest rate is 0%. If interest rates are 6% and inflation is 3% (ie, the same gap as before), and tax rates stays the same, the real interest rate is 1.2%.

The unusual divergence between house prices and rents does not just affect investors; it also undermines the conventional wisdom that it is always better to buy a house, because “rent is money down the drain”. Today in many countries it is much cheaper to rent than to buy.

Rent asunder
Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.

Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.

The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.
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ronbyrne2005

p.s remember inflation has risen to 3% so a 7% increase in house prices is in reality a real return of 4% . many professional irish property developers and buyers have started buying abroad as the returns just arent there in irish market anymore,its now the middle classes driving the property market higher and they willbe the losers if it falls , it cant go much higher unless average wages increases massively or population continues to grow at the same rate(unlikely-the boost in population will slow after the initial inflow following euoprean asscession ) and base rates would have to stay at current rates.

rebelchick

This bubble is certainly going to burst within the next couple of years.Yes,it's true we've been hearing that for the last 10 years........but bear in mind that with all the continuing increases in the last ten years.........it has always been possible to cover most mortgage repayments with renting out the house.Now the gap between rent and repayment is getting larger and larger.I'm living in Cork and 2 bed townhouses in city suburbs are now starting at approx 275 -280K......additional contributions to repay mortgage on these properties is at an alltime madness high.House prices will increase again in the New Year and I've decided it's too risky to buy.Getting a mortgage for 317500 as a first time buyer for a small 3 bed semi way outside the city cannot be justified anymore.Investors who are buying up properties and causing all these increases are not interested in having to contribute substantial amounts on top of rent to cover mortgage repayments therefore the tables will turn because these investors will start pulling out and making the property market a more realistic market for the first time in years.I am related to somebody investing in properties and he has ZERO interest in ever having to contribute to rent to cover repayments but reality is that's the way it's heading.I most certainly do not want to buy a house that I can never live in on my own because the mortgage is too high and risk that losing 20% of it's value within the coming couple of years.Regardless of how much money banks are willing to give at the end of the day if you can't make the monthly repayment it doesn't matter if the bank approve you for millions! That's my 2 cents on all this and I can't wait for the day when it crashes and houses will finally be valued correctly.

CCOVICH

rebelchick wrote:

That's my 2 cents on all this and I can't wait for the day when it crashes and houses will finally be valued correctly.

A house price crash could very well coincide with high inflation, high interest rates and high unemployment. Just because house prices crash, doesn't necessarliy mean they will be any more affordable. Be careful for what you wish for.......

garred

Ah Jesus not the property bubble again...run, run for your lives

rebelchick wrote:

Investors who are buying up properties and causing all these increases are not interested in having to contribute substantial amounts on top of rent to cover mortgage repayments therefore the tables will turn because these investors will start pulling out and making the property market a more realistic market for the first time in years.

There is more that affects property prices than investors: low unemployment, high incomes, changing attitudes of population, inflation, interest rates, etc...

rebelchick

I see where you are coming from but at the end of the day it's plain and simple.......if people can't afford repayments they can't get a mortgage >>> they can't buy a house >>>>less demand >>>price decreases......simple economic supply and demand.And the fact is that this is now happening to more and more people that they cannot get a mortgage without parents help.........and even with that now repayments are becoming too much.Most houses are over valued in Ireland that's a fact, and no economy can sustain that long term !

garred

I don't know. I could'nt afford a house when I was 22, did that mean they were overpriced then? People can't afford ferraris, boats, but can a family car. What I'm trying to get is that a average income earner can afford their own property, it may not be a 3 bed semi or a great location but they can afford it (within reason). Which is why you see these satelite towns growing and growing.

gamer

u can use rent a room scheme to get rent up to 7,500 e tax free.see revenue.ie.

coolhandluke

From rte.ie:

Construction industry slams ESRI report

16 December 2005 17:33
A call from the Economic and Social Research Institute to reduce investment in building has been sharply criticised by the construction industry which warned it could lead to higher house prices.

The ESRI has said a major shock to the construction industry could lead to a significant increase in unemployment.

The warning came in a Medium Term Review of the economy by the independent think tank.

One of the report's authors, Professor John Fitzgerald, said there was a strong dependence on the construction industry which, coupled with a downturn in the United States, could lead to a recession.

Speaking on RTÉ Radio's Morning Ireland, Prof Fitzgerald said mortgage interest relief should be scrapped.

The report suggests scrapping the relief or introducing a property tax to reduce investment in construction.

The report looks far further ahead than economic forecasts usually do and highlights what it calls a number of dangers over the next seven years.

The biggest danger is that our healthy economy simply relies too much on the building industry, which employs 250,000 people.

The ESRI says it is vulnerable, with the threat coming from the US, which is on an unsustainably strong growth path.

When it slows, this could affect Ireland and the construction industry is likely to feel it more acutely.

A major building downturn could double unemployment and bringing us into recession, the report warns.

While economic prospects are good right now, the long-range forecast is less favourable, and the ESRI says like all long-range predictions they tend to be less reliable.

The warnings continue.Is anyone in government listening though !

Lex Luthor

Capital Gains Tax....
Rental Income.....

Come on....this is the guys main residence. How many people do you know who pay these just by renting a room?

gamer

if u use rent a room scheme u r not liable for tax on 7,500 ,if u get 7600,u may be liable for tax on all ur rental income,ur are not liable for capitalgains,if u live in the house,fix it up and sell it ,if its UR PRINCIBLEPRIVATE RESIDENCE. ie if u live with ur gf and fix up a gaff u will have to pay 20percent cgt,,revenue is very STRICT ON THIS,,ONCE ITS LIVABLE SAFE U HAVE ESB u shud move in to it and submit ur tax returns from this ADRESS.u can get buy to let or an investment mortgage,they prefer it if u have 10percent saved up already.theres no stamp duty under 317k .