Buying property? Mortgage?

igiveup2

Hi everyone, I am just looking for some advice.

Here's my situation: I'm 23, I've just finished college and I've a permanent job that pays 25k a year + benefits. I am currently living in a shared house, where my rent is €425 a month. I have no debt and just over €200k in the bank that are currently sitting idle and earning no interest.

I was thinking it might be a good idea to buy a property, since prices seem to have fallen much further than rent, and the yield on offer is quite attractive compared to the non-existent rate of return on offer elsewhere. I was looking at one- or two-bedroom apartments in Dublin city centre, around the 150k-200k mark. If I bought a two-bedroom apartment I wouldn't make any rent from it, as I would let my sister stay for free.
I have been thinking about buying a property for a while, I just can't get my head around the fact that yields are so high compared to elsewhere. I know that there is probably oversupply of properties and lack of demand due to unavailability of financing, but it still seems too good to be true. I guess I am looking for someone more experienced than me to be the devil's advocate, and point out possible issues with this.

The second issue is whether in my situation I could get a mortgage and at what terms. If the rates on offer were attractive, I think it would make sense for me to take out, say, a 15-year mortgage rather than tie up my cash. I could put down a substantial deposit on the property, and finance the rest through a mortgage, using my €200k as guarantee.
Would this make sense from a financial perspective? I would have to invest my funds at a rate of return higher than the interest rate on the mortgage for it to make sense, so I guess the next question is whether the banks would be willing to offer me a relatively low interest rate given the lack of risk? Does the rate offered on a mortgage decrease at all with the level of equity one has in the property? I would be willing to put down a 30-40% cash deposit, if this made a significant difference.

Sorry for the lengthy post and thanks a lot in advance to anyone who will reply. I hope this is the right section for this type of questions.

shamrock55

What the hell do you need a mortgage for if you have 200k in the bank??

igiveup2

shamrock55 wrote: »

What the hell do you need a mortgage for if you have 200k in the bank??

Interest rates are at an all-time low, so it may make sense to lock in a good rate on a small mortgage rather than tie up most of my cash in the property and be unable to pursue any other investment while my savings replenish.

NIMAN

Mortgage interest rates are higher than savings rates, are they not?

igiveup2

NIMAN wrote: »

Mortgage interest rates are higher than savings rates, are they not?

Yes, otherwise the banks would make no margin. However, I was thinking of taking on some risk, with the intention of making higher returns. Of course that would be with a small portion of my savings, rather than with the whole lot.

chris85

igiveup2 wrote: »

Yes, otherwise the banks would make no margin. However, I was thinking of taking on some risk, with the intention of making higher returns. Of course that would be with a small portion of my savings, rather than with the whole lot.

So you would hope the bank would give you a lower interest rate on a mortgage based on the savings you will have, but you will be investing this money in higher risk investments. Doesnt seem good for the bank.

Maybe use €150k to buy a place, keep a further €25k into investments and €25k in low risk readily accessible funds to use if required at short notice.

Also consider buying a house and not an apartment. Some banks aren't even considering mortgages for some apartments. A lot of them thrown up and poorly built. A house in an established area prior to the boom will hold up better in the long term from an investment viewpoint.

igiveup2

chris85 wrote: »

So you would hope the bank would give you a lower interest rate on a mortgage based on the savings you will have, but you will be investing this money in higher risk investments. Doesnt seem good for the bank.

Say I buy a 150k property using 40% cash (i.e. paying 60k out of my own pocket) and 60% mortgage. That would leave me with 130k in cash, if you factor in 10k to buy furniture etc. I believe there will be a correction in asset prices once the flood of cheap money is reined in by central banks, and I want to make sure that if this happens, I can buy, say, 80k of investment-grade bonds and 30k of stocks.

Anyone

Buy the house with cash, and put the money you were planning to use to pay the mortage into some kind of savings account each month.