Article about how current mortgage rates are negating property price falls.
Long article. I don’t like her figures much.
The only people who got trackers + 0.5% had strong LTVs and her example for a 2-bed apt for 400K would hardly have achieved that.
The big lesson really is to keep saving. Every 1 euro saved is 2 euro you won’t repay the bank over the lifetime of a mortgage costing c.5% p.a.
** Sorry, I’m about to go on a rant **
You know, I’ve been thinking about this ‘scenario’ for some time.
It has the classic lies, damned lies and statistics feel to it.
More importantly, this is what people were being told on the way up - ‘sure you may be paying €400,000 for a property that used to be worth €200,000, but it’s really only €250 a month extra, so nothing to worry about’.
In truth, there’s a huge fucking difference between the two.
Trust me, I’d take a €200,000 mortgage at a rate of 10%, over a €400,000 mortgage at a rate of 5% any day of the week !
Scenario 1 :
How about you take that extra €250 monthly and use it to pay off the capital ?
On a 30 year mortgage, €250 x 12 x 30 = €90,000.
That’s 45% of the entire mortgage if you waited and bought for €200,000.
And we all know the moment you start reducing your loan, the lower your interest payments will be, so if you include those saving and increase your capital repayments according, the benefits will be compounded.
That €90,000 or 45% is the absolute minimum saving.
Scenario 2 :
Two identical twins buy identical apartments.
The first bought at €400,000.
The second at €200,000
Their monthly repayments are ‘only’ €250 in the difference.
Their parents die and both inherit €200,000.
Tell me, what’s the difference in their monthly repayments now … still €250 ?
Aghhhh we’ve had one of the biggest property crashes in the world and still people don’t fucking get it.
No only that, but the one who bought at 400k on a tracker is now the proud owner of golden handcuffs, because if he sells up, he wont be getting another sweet tracker and is in the exact same position as his twin, but with 200k of negative equity.
He had also better hope that the two bed apartment he bought it suitable for his needs for the duration of the mortgage, or until it regains the lost equity, because he cannot sell without absorbing 200k in negative equity - a luxury most of us do not have.
Not everybody bought with trackers when things were bad 5 years ago. I think we can safely consign tracker mortgages to history forever more so the future buyer needs to prioritise house prices and ignore the interest rates.
Or as I was about to add to my post, if the market fell by 50% and they had to sell, one would have to take a €200,000 loss, the other €100,000.
But of course, such a fall would ***never ***happen now, would it.
This is from the Conor Pope Institute of Advanced Studies or CPIAS, pronounced See Piss.
Why would you fix when variable rates are and will remain low? A better comparison is €180,000 at 3.5% which is a gross monthly repayment of €808.
Again, a variable rate of 3.5%, which is not going anywhere, will have a total gross cost of €290,981 over the 30 years of this example.
In the example purchase price is €400,000 less 10% = €360,000. Total repayments of €447,275 less €360,000 = €87,275 which is 24.24% more than the price paid.
Additionally, I read the whole article… and the same old techniques are used to give the best case scenario from 2006 against the worst case scenario for 2012.
She chooses the cheapest ever tracker of 0.5 above ECB, which few would have gotten.
She compares this against PTSB’s rate, who will admit themselves are not in business, of 5.05.
Now we know that the only banks actively lending are AIB and BOI, with respective variable rates of 3.25 and 3.75. Lets see how her logic plays out with that.
Start date: March 2006
Interest %: 1.5
Total interest: €87,275.79
Start date: March 2012
Interest %: 3.25
Total interest: €102,013.69
Lets say the seller has a family and wants to sell in 2020. The Buyer from 2006 has a balance of €202,133.28 after 14 years of repayments of €1,242.43 per month. The buyer from 2012 has a balance of €143,728.73 after 8 years of repayments of €783.37 per month.
If they wanted to sell tomorrow, the 2006 buyer would have a mortgage of €291,618.51 to clear, and the buyer from 2012 would have to clear €177,004.97.
Apart from having an extra €459 to spend every month, if it came to selling, I know who’s shoes I would rather be in!
Yes, you are paying more interest on half the borrowing, because, guess what, the tracker rate is less than half the variable rate. This situation is never coming back and was a huge mistake on the part of the market-grabbing banks who got caught up trying to entice every tom dick and harry into a jumbo mortgage at unsuitably low rates, tied to an irrelevant benchmark.
I note you completely ignore the rent paid while waiting the 6 years for prices to fall
I don’t agree with the article but using his numbers (and your idea of using 2 identical twins).
Twin A buys in 2006, 400k @ 1.5% over 30 years.
Over the 36 years between 2006 and 2042 Twin A pays approx. €1,378 per month in mortgage payments for 30 years then lives rent and mortgage free, to give a total of approx. €496k
Twin B rents for 6 years while waiting for prices to fall and then buys for 200k @ 5.05% for 30 years.
Assume Twin B pays €1k per month in rent between 2006 and 2012 and then mortgage repayments of €1,064 per month between 2012 and 2042. The total amount paid by Twin B between 2006 and 2042 comes to approx €455k, just 8.3% less than the total paid by Twin A.
The maths in the article are correct if you think his mortgage rates are appropriate but I’d question his use of ECB + 0.5% when very few people would have been able to get that low a rate and the use of a current rate of 5.05% when there are far lower rates in the market.
As has been pointed out, it also completely ignores the negative equity trap.
She doesn’t seem to take into account the 2006 buyer paying a 40k deposit compared to the 2012 buyer paying just 20k and earning interest on the deposit. That would go some way to covering your rent.
Completely accept your point on renting in the meantime.
However, you could also calculate it on the basis that the person may rent a room rather than an apartment, thus spending just €500pm, or indeed, living at home (rent free).
They are saving for a deposit after all !
Furthermore, if Twin B can save the difference between what they are paying in rent and what Twin A is paying in mortgage repayments for the first 6 years, then Twin B needs even less of a mortgage.
Go one step further and include my renting a room for €500 or living rent free and the savings just explode.
They would have paid 7% stamp duty on €275K in 2006 = €19.25K
They would pay 1% on €200K now = €2K
Difference = -€17.25K
True, but then you have Twin A living on their own in a 2 bed apartment whilst Twin B lives at home or shares with others, which is not comparing like with like. You’d have to assume that living at home or sharing would not be their preferred options given that they want to buy so how do you factor in Twin B having to put up with mammy and daddy for another 6 years.
Similarly, if you’re going to assume that Twin B moves out of home shares with others then surely you have to assume that Twin A is equally happy to share with people (they are identical after all) and gets in a lodger thus reducing their costs.
Therefore, IMO, if you want to control for quality of life and remove introducing very subjective measures, you have to assume that if Twin A has bought an apartment, Twin B has decided to rent a comparable apartment.
I also think that my estimate of €1k for a 2 bed apartment in Dublin is pretty low for 2006 so again you could argue that the cost of renting is greater than I have allowed for.
(as I said, I don’t agree with this article but can’t help notice how, at times, people on here (not aiming this at you, just a general observation), tend to compare costs over the term of a mortgage therefore ignoring rent paid while waiting or rent saved by having paid off a mortgage earlier than someone that waited)
For instruments executed on or after 2 December 2004 and before 31 March 2007, First Time Buyer of €381,001 - 635,000 paid 6%.
However, can we just all agree this article is just one more in a litany of superficial and incorrect such articles published in the paper of record?
They are no more than journalistic polyfilla designed to fill gaps in the paper, are not subject to any fact-checking or review and are pushing a there-has-never-been-a-better-time-to-buy agenda.
Let’s compromise, Twin B rents a room off Twin A for €550pm.
Adding up all the benefits, I’d still prefer to be Twin B.
The little matter of service charge/maintenance has also been ignored.
Overpaying your mortgage changes everything. If and when I get a mortgage Im gonna overpay the shit out of it then all these crummy sc. enarios wont apply. One month Ill be broke, the next month Ill be minted
Love the analogy with the twins, this is why I read the pin.
Holy crap, we’re on to something! If somebody can now just explain how the extra mortgage repayments makes one of the twins age prematurely, we could overturn most of 20th century science and be in line for the Pin’s first Nobel Prize!
The Twins buy on different floors !
(The one with the higher mortgage could only afford the ground floor*)
*This aging process is compounded by the fact that the Twin on the ground floor is closer to the communal letter boxes, so they see their bank (loan) statement before the other Twin on the upper levels.
(physics makes perfect sense when you’re drunk )