Posted by Jill Kerby on September 24 2013 @ 09:00
BUYING YOUR LOCAL AUTHORITY HOME DOESN’T ALWAYS MAKE SENSE
One of those ‘…and finally” moments at the end of the nine o’oclock news caught my attention last week. RTE’s Eileen Dunne introduced an item about a lucky group of 36 families who had just moved into newly renovated four bedroom, three bathroom properties on what had been an unfinished ghost estate in Co Carlow.
The families, all of them coming off long housing waiting lists were delighted with not just their beautiful new homes, which had been purchased for a song by a voluntary housing association from NAMA, the national asset management agency that is now allocating thousands of properties for social housing purposes but the low rents of €70-€80 rent each week. Not surprising, one of the tenants loved her house so much she said she would try to buy it some day.
Becoming a homeowner may be hot-wired into every Irish person’s brain, but renting a property from a voluntary housing association and taking out a mortgage is a very different thing.
Even valued at a modest €100,000, this woman would need at least €8,000 as a down payment and would pay a variable monthly mortgage rate of at least c€500-€600, perhaps €180-€250 a month more than her rent. Even higher mortgage interest would have to be factored in – tax relief goes by 2017 - and she would also need to insure the building and the loan (via a mortgage protection policy) and pay not just her local authority charges, but the property tax.
In addition to her existing gas and electricity charges, next year this lady will be paying water charges, which are expected to be at least €150, but could be more depending on usage. Then there are on-going home ownership costs: even the nicest, newest homes need upgrading as they age. All those costs can amount to another €1,000 a year.
Lower income earners, especially those fortunate enough to qualify for high quality, low cost homes should always think twice about buying. (Many housing associations’ policy is not sell these properties anyway.)
By remaining a tenant, this lady will not be committing scarce capital to own ‘a liability’, a property/asset that instead of generating an income eats up her already limited income or savings.
This is why a family home, when you discount its usefulness (or ‘utility’, as economists describe it) as a place of shelter, is always a financial liability until it starts to pay its own way, that is, until it produces an income, via rent, to cover its expenses and produce a profit.
As many have discovered, not every house produces a capital gain either at retirement. Thousands of 50 and 60 year olds, who borrowed against the value of their homes during the boom years to buy what they hoped would be their pension, now find themselves in negative equity. (Some pension…)
The greatest advantage of remaining the low outlay tenant is that they may actually have surplus income or savings that can be used to create a sizeable, long-term nest egg. Their lovely affordable home means they are not pouring excessive rent money ‘down the sink’ or ‘paying someone else’s mortgage’.
Instead, even a modest €100-€200 a month (in the context of what they would be paying for their own mortgage plus expenses) can be deposited in the best (and safest) deposit account, or better still, a conservative, low cost investment fund, or best of all into a conservatively managed, low cost pension fund that attracts tax relief. Also, registered pension funds allow the money you contribute and invest to grow tax-free.
The tax issue is important. Deposit interest is taxed every year in this country at 33%. Investment funds are taxed every eight years and then at exit at rates as high as 36%. In contrast, pension funds allow 25% of the money tax-free at retirement and then your income tax rate. (Pensioners whose entire income from age 65 does not exceed €18,000 a year or €36,000 for a couple do not pay ANY income tax.)
Finding that steady growth, low cost pension investment isn’t easy and requires good professional advice. But the younger you start putting away even that €100-€200 a month, the greater the end result.
The lady in the news clip looked about 30. No matter her family circumstances, she needs to be saving for retirement. More than half the population have no pension savings. Too many are expecting to live on the already in deficit state pension, which will never deliver their expectations.
A steady, monthly contribution of €100 a month, earning a modest 5% net per annum for 35 years (at a cost of just €33,600 net with 20% income tax relief or just €24,780 with 41% relief) would produce a retirement fund worth about €113,600. €200 a month would create a fund worth over €227,000. A 7% return would result in that €200 a month turning into over €360,000.