Urban Legends about Mortgages

Sham Squire

I keep hearing some guff about how you should never buy a house outright, even if you can afford it, because of some Tax penaltys. It's always people over 50 who say it to me as well. Is this some sort of ancient Urban legend that if you buy a house without getting a mortgage that the tax man goes "Oi! NOOO" and slaps some big tax bill on your wages to punish you for having money? or is it an old system that has been changed over the years?

Basically is there any penalty to buying a house without getting a mortgage?

antoinolachtnai

There is some mortgage interest relief that you get with a mortgage. It's not very much. It used to be more significant.

The biggest issue is opportunity cost. Obviously you have a chunk of capital. Are you sure you don't need it for some other activity (buying other houses, investing in your business, etc.)?

There is also an interesting benefit to buying with a mortgage in terms of providing a comfort as regards your ownership of the property. It's like this. The bank is an expert in conveyancing and property law. A large bank is involved in the sale and purchase of of to 100 houses per day. They know a lot about it, compared to an ordinary consumer.

If the bank is happy with a property's title (which is examined on their behalf by your solicitor) then the title probably isn't too bad. That's not to say the bank will guarantee the title (because they won't). But their confidence in it does give you some small degree of extra assurance that everything is above-board.

In general, your relatives are right, you should not go around buying houses with cash, unless perhaps you are in your later years. The main reason is that it ties up your capital unnecessarily.

coffee_cake

Probably a myth perpetrated by banks so they can claim their ludicrous interest

nlgbbbblth

bluewolf wrote:

Probably a myth perpetrated by banks so they can claim their ludicrous interest

Rubbish.

ECB is 2.25%.
Tracker mortgages with rates that will always be ECB + 0.85% are not rip-offs.

Banks are not charities. They are out to make a profit.

Idleater

Firstly, there are cost implications to paying off a FIXED rate mortgage before the term is up. I don't think there is much (but there may be a small charge) for ending a variable rate loan before the term is up.

One reason I was told that it may be in your interest to keep a mortgage going is if you plan to build/extend the house in the near future. You can supposedly avail then of the existing mortgage and top it up with say for example €50k rather than applying for a loan which would not be at mortgage rates.

L.

coffee_cake

nlgbbbblth wrote:

Rubbish.

ECB is 2.25%.
Tracker mortgages with rates that will always be ECB + 0.85% are not rip-offs.

Banks are not charities. They are out to make a profit.

On the variable ones - apr is it? - that adds up, though

BOI is 3.75% I think, and they say

A typical variable rate mortgage of €100,000 over 20 years costs €584.55 per month (APR 3.6%).

Which adds up to 140,292euro, doesn't it? That's almost 50% interest in total. Profit yes, but if I couldn't afford to buy a house, I can't afford a house and a half

nlgbbbblth

bluewolf wrote:

On the variable ones - apr is it? - that adds up, though

BOI is 3.75% I think, and they say

A typical variable rate mortgage of €100,000 over 20 years costs €584.55 per month (APR 3.6%).

Which adds up to 140,292euro, doesn't it? That's almost 50% interest in total. Profit yes, but if I couldn't afford to buy a house, I can't afford a house and a half

that rate of ECB + 0.85% equates to 3.1% all in.
The APR on that is 3.2%
Rate is deemed variable and only moves when ECB does.

lomb

bluewolf wrote:

On the variable ones - apr is it? - that adds up, though

BOI is 3.75% I think, and they say

A typical variable rate mortgage of €100,000 over 20 years costs €584.55 per month (APR 3.6%).

Which adds up to 140,292euro, doesn't it? That's almost 50% interest in total. Profit yes, but if I couldn't afford to buy a house, I can't afford a house and a half

lol, borrowing money at 4% is virtually free. inflation is running at around that, and property is increasing by more tham that, so a loan is 'free'
u are paying for the use of the money now.100000 grand today is worth alot more than 140000 in 20 years time. so it is 'free' but not in cash flow terms. so buying property on a mortgage is only a net cash flow loss not a real loss as the property should rise at more than the rate of interest.
the only advantage of not paying off the mortgage early is to let the bank keep the deed and the lein against the property at the land registry in order to buy another property so that the risk of that can be secured to the equity on the first one, without going to the hassle and cost, of solicitors fees to mortgage a clean title and deed.

also it is better to borrow at 3.75% for a car rather than 7.5% on a term loan, so paying off your mortgage early and then borrowing for cars and holidays makes no sense. buy the car with your cash and 'borrow' at 3.75 by letting the bank keep a lein over your property.