Should I use my savings or get a personal loan or mortgage to extend or renovate my home?

Posted on: 6th February, 2018

Category: Home, Garden & Environment

Contributor: West Cork People

Noel Forde T/A Forde Financial Services in Bantry and Gmac Financial in Castletownbere is regulated by the Central Bank of Ireland. Call 027 55610.

On the face of it, the question in the headline of this article seems to be very simple, with an equally simple answer. Deposit interest rates are at an all time low currently rates on instant access deposit accounts vary from between 0.15 per cent pa to 0.30 per cent per annum, some accounts may be paying less than this and some paying nothing at all.

On the other hand, personal loan rates can vary from 6.3 per cent pa to 8.5 per cent pa and mortgage rates vary from 2.75 per cent to 4.60 per cent per annum. So, on the face of it seems silly to borrow money from the bank and pay them much more in interest than they are paying you for your savings.

There we are, a simple answer to a simple question. If only things were that simple. Before deciding to use your savings you need to ask yourself a few questions:

1. What was I saving this money for?

Were you saving for your children’s education? Or to help pay for a deposit on a house or help with wedding expenses or were you just saving so as you could have a nest egg to help boost your retirement income?

2. If I use this money now what effect will it have on any or all of the above?

If you use this money now will you have time to build up enough savings to pay for college fees and accommodation.

3. What happens in an emergency?

Perhaps the most important question is if you use up all your savings to pay for the renovations, will you have enough money left for a rainy-day emergency?

Taking all of the above into consideration, if you have sufficient funds in place, you will have enough to provide for a rainy-day emergency should it occur, so in that case it makes perfect sense to use your savings to pay for your renovation or extension.

However, if using your savings will leave you with insufficient funds to take care of events, as they arise in the future, you should look at, getting a personal loan or mortgage.

Getting a personal loan is probably the easiest way of getting the funds you need quickly, however it can be quite expensive.

Remortgaging or getting a further advance on your current mortgage is the cheapest way of raising funds for your renovation or extension.

There are a number of criteria which you must fulfill when you apply for a mortgage, which I will outline below.

You can apply for a mortgage in two ways:

• Directly to the lender (banks, building societies, certain credit unions and retail credit firms who are not banks or building societies) – in this case, you will deal directly with the lender

• Through mortgage intermediary (broker) – in this case, your intermediary will apply to all the lenders on your behalf and will also deal directly with the lender for you.

What documents do you need to apply?

• Photo ID: such as a valid passport or driving licence

• Proof of your current address: such as a household bill in your name

• Proof of your income: your latest P60 and at least three recent salary slips

• Evidence of how you manage your money: bring current account and loan account statements for the previous 12 months

• Don’t panic and take the first mortgage you are offered. Apply to a number of lenders and if you are offered more than one mortgage, compare the rates carefully. Keep your eyes open for better offers from other lenders. If you use a mortgage intermediary they will help explain the different terms on each mortgage offer.

• Don’t be seduced by ‘freebies’, like free legal expenses or discounted insurance without looking at the mortgage as a whole. Introductory and first-time buyer packages can save you money in the short term but remember to consider the long-term costs when the ‘introductory rate’ runs out

What is your application based on?

When you apply for a mortgage, a lender will look at:

• Your income – lenders will look at your annual income and some may take bonuses or overtime into account. Some lenders may factor in rental income if you plan to rent out spare rooms

• Your age and number of years left until you retire, this determines the term of your mortgage. Normally lenders will only allow mortgages to run to normal retirement age 65.

• Outstanding loans – if you have other loans, this may reduce the amount of money you can borrow or you may find it difficult to get a mortgage

• Outgoings – in addition to any loan repayments, lenders will look at any financial commitments you have, such as childcare costs

• Savings – this shows you have an ability to save and have built up enough money to pay for your deposit and other expense

• Credit Record – this shows the repayments you have made on any loans you have. If you have missed repayments in the past, it may make it more difficult for you to get a mortgage

• The value of your house – this is the market value of your house this will determine if you have sufficient equity available in your property to get a mortgage.

• The amount you need to borrow

• Whether you are borrowing on your own or with someone else

The interest rate shown on your mortgage loan approval is not necessarily the rate you will pay. Usually, the interest rate for your mortgage will be set only on the day that the money is actually lent to you

Keep a copy of all correspondence and documentation from your lender in a safe place

Shop around for mortgage protection and home insurance. Brokers and lenders cannot link services. This means they cannot offer you a mortgage or a certain interest rate on condition that you deal with a particular estate agent, solicitor or buy a particular mortgage protection product. Your lender can insist that you have mortgage protection insurance in place, but you don’t have to buy it from them.

Whether you are using your savings, getting a personal loan or applying for a mortgage the most important thing is to get Financial Advice. You can find a Financial Advisor near you by logging onto www.brokersireland.ie.

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