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Gemonster

% Value Of Deposit Compared To Total Cash Worth

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When I first considered buying a house, which is around 2000, I always had in mind that I would be happy to put down 40% of my total cash worth as a deposit. This includes cash in the bank and in shares.

I also had in mind that at least a further 10% should be available to cover expenses. However, I have no basis on which I made these figures up apart from maybe the comfort of knowing I had not put 'all the eggs in one basket'. Plus the remaining cash could be used to generate further earnings, which could then be used to pay off early.

Having never discussed this with anyone I know, I would be interested to know what other HPC members think. What percentage of your total worth would you/have you put down as a deposit.

:D

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When I first considered buying a house, which is around 2000, I always had in mind that I would be happy to put down 40% of my total cash worth as a deposit. This includes cash in the bank and in shares.

I also had in mind that at least a further 10% should be available to cover expenses. However, I have no basis on which I made these figures up apart from maybe the comfort of knowing I had not put 'all the eggs in one basket'. Plus the remaining cash could be used to generate further earnings, which could then be used to pay off early.

Having never discussed this with anyone I know, I would be interested to know what other HPC members think. What percentage of your total worth would you/have you put down as a deposit.

:D

Some of us dont have that choice to make :)

It will take every penny we've got, alot of us are just trying to get up a deposit, for me 10% because of the mortgage deals.

I would prefer to have the smallest mortgage possible so i would put down everything that i could spare whilse holding back enough as a small buffer should things go wrong.

Of course i also intend to make a fortune on the stock market and buy a house outright, just not very likely ey.

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I would think putting down the biggest deposit you can would be sensible.

Why borrow anymore money than you have to? Youre only paying interest on it.

Bigger deposit down and you can get away with a smaller mortgage, so either have more free money each month or go for a shorter term mortgage.

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Guest muttley

I would think putting down the biggest deposit you can would be sensible.

Why borrow anymore money than you have to? Youre only paying interest on it.

Bigger deposit down and you can get away with a smaller mortgage, so either have more free money each month or go for a shorter term mortgage.

I'd tend to agree with this.Just keep enough back to cover emergencies.

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I would think putting down the biggest deposit you can would be sensible.

Why borrow anymore money than you have to? Youre only paying interest on it.

Bigger deposit down and you can get away with a smaller mortgage, so either have more free money each month or go for a shorter term mortgage.

I get your point about the higher the deposit the lower the mortgage and hence the lower monthly repayments.

However, in the past 3 years my return on shares has been 2003: 19.15%, 2004: 10.06% and 2005: 16.52% ( includes dividend income ). Interest on bank/building society accounts not worth mentioning!

Now I am not suggesting that I can repeat this in the next 3 years as it's clearly been a rising market and I just can't predict what's going to happen. If I could, my return would have been way higher having many examples of selling early. Too embarrassing to mention here!

Currently, the deposit my partner and I are considering putting down would represent around 30% of the value of the property we are looking at.

Is it really worth putting in more?

Edit: Apologies for poor grammar

Edited by Gemonster

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Guest muttley

Good luck to you,but remember you would effectively be borrowing against your mortgage to invest on the Stock Market.If that's what you want to do then go for it,but my advice would still be the same.

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Get the biggest mortgage you can if you are a lower rate tax payer .

eg . If you were buying a house for £100,000 cash you would lose £3800 in taxed interest @ 4.75% .

If you got a £100,000 mortgage at say 6.5% that would cost you £6,500 LESS interest receivable of £3800 = £2700 . Therefore you would save £3,800-£2,700=£1100 a year by having a 100% mortgage .

A 40% taxpayer would get £2850 in taxed interest so would cost £6500-£2850=£3650 with a 100% mortgage or £2850 paying by cash . Therefore it is £3650-£2850=£800 a year cheaper to pay cash .

Actually could it not be argued that all lower rate taxpayers without a current mortgage on their house would be better off by getting a mortgage and putting the cash into a savings account ???

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Get the biggest mortgage you can if you are a lower rate tax payer .

If you are going to do a purely tax-based cash vs mortgage analysis, I think the outcome should be the reverse of what you said!

Someone has 100k cash and is going to buy a house for 100k. Do they:

(1) buy the house outright, or

(2) keep the cash in a 4.5% savings account and get a 100% mortgage (with an interest rate of 4.5% for argument's sake)

Obviously these are two extreme positions I have chosen purely to illustrate the analysis. We can safely ignore the premium part of the repayments, or assume the mortgage is interest only.

If you do (1) you make no cash profit or loss.

If you do (2) you make a cash loss, because your savings interest is taxed as income, and is therefore less than the interest payments on the mortgage.

frugalista

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My cunning plan is to put down 10% deposit. With a lot of mortgages, if you overpay you seem to be able to withdraw the equity you have overpaid. I will then immediately overpay my mortgage with most of my remain savings. If an emergency happens I will withdraw this overpaid equity, but in the meantime i will be paying less interest on the mortgage but still be able to cope if I need money to sort out an emergency.

My only dilema is what to do with savings in an ISA, as at the moment they are tax protected, but if I withdraw them I will lose this tax examption.

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If I put most of my available cash in now (2006) as a deposit, would that not restrict any move up the ladder in the next 10 years or so through negative equity?

On the other hand, if I put half in now, I might lose the 30% deposit as I stated earlier. However, I would still have the other half of my cash to use as a deposit on the next house on the ladder in 5 years time when the market is nearer the bottom.

Or does none of this matter?

My cunning plan is to put down 10% deposit. With a lot of mortgages, if you overpay you seem to be able to withdraw the equity you have overpaid. I will then immediately overpay my mortgage with most of my remain savings. If an emergency happens I will withdraw this overpaid equity, but in the meantime i will be paying less interest on the mortgage but still be able to cope if I need money to sort out an emergency.

I like the idea. Itss those emergencies that concern me and having the freedom of cash in hand that appeal more than the minimum of repayments.

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My cunning plan is to put down 10% deposit. With a lot of mortgages, if you overpay you seem to be able to withdraw the equity you have overpaid. I will then immediately overpay my mortgage with most of my remain savings. If an emergency happens I will withdraw this overpaid equity, but in the meantime i will be paying less interest on the mortgage but still be able to cope if I need money to sort out an emergency.

My only dilema is what to do with savings in an ISA, as at the moment they are tax protected, but if I withdraw them I will lose this tax examption.

Cool plan. So, it seems if you get the right mortgage, you can basically have tax free savings!

I'd keep the ISA if I were you though, if possible. The flexible mortgage thing might dry up some day, in which case you'd want the ISA entitlement to get a bit of tax relief.

frugalista

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If you are going to do a purely tax-based cash vs mortgage analysis, I think the outcome should be the reverse of what you said!

Someone has 100k cash and is going to buy a house for 100k. Do they:

(1) buy the house outright, or

(2) keep the cash in a 4.5% savings account and get a 100% mortgage (with an interest rate of 4.5% for argument's sake)

Obviously these are two extreme positions I have chosen purely to illustrate the analysis. We can safely ignore the premium part of the repayments, or assume the mortgage is interest only.

If you do (1) you make no cash profit or loss.

If you do (2) you make a cash loss, because your savings interest is taxed as income, and is therefore less than the interest payments on the mortgage.

frugalista

In (1) Buying something always has an extra cost . If I go out tomorrow and buy anything for cash then it's going to cost me additional money in lost taxed interest . You would "pay" the same lost taxed income each year if you paid cash for a house .

In (2) you would pay the mortgage LESS taxed interest receivale which is less than (1) , in these years of lower rates .

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When I first considered buying a house, which is around 2000, I always had in mind that I would be happy to put down 40% of my total cash worth as a deposit. This includes cash in the bank and in shares.

I also had in mind that at least a further 10% should be available to cover expenses. However, I have no basis on which I made these figures up apart from maybe the comfort of knowing I had not put 'all the eggs in one basket'. Plus the remaining cash could be used to generate further earnings, which could then be used to pay off early.

Having never discussed this with anyone I know, I would be interested to know what other HPC members think. What percentage of your total worth would you/have you put down as a deposit.

:D

The trouble with using all (or most) of your funds as deposit is that you lose control of it i.e. you can't use it for any other purpose. Why not put in the minimum deposit and have a set-off (or off-set) mortgage. You then have the best of both worlds.

p

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The trouble with using all (or most) of your funds as deposit is that you lose control of it i.e. you can't use it for any other purpose. Why not put in the minimum deposit and have a set-off (or off-set) mortgage. You then have the best of both worlds.

p

Do set-off mortgages give a good "paying" rate or lower mortgage rate ?

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40% sounds about right. Don't want to put all the proverbial eggs in one basket.

If can wait till house prices fall, then smaller mortgage and smaller deposit. Fingers crossed.

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As someone previously impoverished by crippling student debt and poverty pay I've been put off debt for life.

When the market has settled I'd be tempted to plough the vast majority of our savings into the deposit. I'd also see overpayment as a good form of saving as it's tax free and saves loads over the long term - it's the best thing someone who doesn't want to make many financial gambles can do to make themselves better off.

We'll keep out small number of shares, though, as they have risen quite nicely over the last few years and we don't really count them as savings anyway.

If we end up with a mortgage about the same as our current rent, or a lot less than our current rent if we move to a cheaper region then we'd soon get some savings happening again.

Edited by CrashedOutAndBurned

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40% sounds about right. Don't want to put all the proverbial eggs in one basket.

If can wait till house prices fall, then smaller mortgage and smaller deposit. Fingers crossed.

Would like to see what happens over the next 3 months. :blink:

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Do set-off mortgages give a good "paying" rate or lower mortgage rate ?

In effect you get _net_ credit interest on your deposit balance equal to the mortgage interest rate charged by the lender. That is likely to be a lot higher than you would get elsewhere. But, instead of actually paying you any interest, they pool your credit and debit balances and only charge you mortgage interest on the net, i.e. reduced, balance.

In the meantime, of course, you're free to do as you like with your credit balance.

p

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In (1) Buying something always has an extra cost . If I go out tomorrow and buy anything for cash then it's going to cost me additional money in lost taxed interest . You would "pay" the same lost taxed income each year if you paid cash for a house .

In (2) you would pay the mortgage LESS taxed interest receivale which is less than (1) , in these years of lower rates .

If option (2) was best then the buyer wins, the building society wins, the treasury wins, Everyone's a winner!

But in option (2) you are already giving up the income from the savings as a portion of the mortgage payments. Therefore, although the wording sounds convincing, it is wrong.

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If option (2) was best then the buyer wins, the building society wins, the treasury wins, Everyone's a winner!

But in option (2) you are already giving up the income from the savings as a portion of the mortgage payments. Therefore, although the wording sounds convincing, it is wrong.

Already giving up the income from the savings .

How ?????

In (1) I lose all my interest income ie . 4.75%-20%tax=3.8%

In (2) I only lose the difference between the loan and savings rate less tax which is a lower percentage . ie 6.5%-(4.75%-20%tax)=2.7% rather than losing the whole 4.75%-20%tax=3.8%

Edit to add:

and still have access to the £100,000 savings .

Edited by Wankan

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Guest wrongmove

In (2), you are effectively borrowing money (at say 4.5%) to invest it at NET savings rate (i.e. 4.5% - 20%). You are obviously worse off, though you still have access to the cash.

Put another way, the interest you earn in (2) is not enough to pay the mortgage, even if the borrowing rate is the same as the savings rate, because of tax. If the borrowing rate is higher than the gross savings rate, you are even worse off.

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In (2), you are effectively borrowing money (at say 4.5%) to invest it at NET savings rate (i.e. 4.5% - 20%). You are obviously worse off, though you still have access to the cash.

Effectively borrowing money to invest at NET savings rate ????????

Uh ?? No I wouldn't be .

That would be stupid .

Do you agree that if I used say £100,000 , which is currently invested at 4.75% , to buy a house (or anything) it would cost me £3,800 a year in lost net interest ?

Okay as that is agreed , so do you agree that if I bought a house with a £100,000 mortgage at 6.5% it would cost me £6,500 a year in interest ?

Okay that is agreed . Ah but I still have my £100,000 in the bank so I still get the interest paid to me making the cost £6500-3800=£2700 .

As £2700 is less that £3800 it must be cheaper to have a large mortgage and keep the savings in the bank gaining interest .

In (2), you are effectively borrowing money (at say 4.5%) to invest it at NET savings rate (i.e. 4.5% - 20%). You are obviously worse off, though you still have access to the cash.

Put another way, the interest you earn in (2) is not enough to pay the mortgage, even if the borrowing rate is the same as the savings rate, because of tax. If the borrowing rate is higher than the gross savings rate, you are even worse off.

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Effectively borrowing money to invest at NET savings rate ????????

Uh ?? No I wouldn't be .

That would be stupid .

Do you agree that if I used say £100,000 , which is currently invested at 4.75% , to buy a house (or anything) it would cost me £3,800 a year in lost net interest ?

Okay as that is agreed , so do you agree that if I bought a house with a £100,000 mortgage at 6.5% it would cost me £6,500 a year in interest ?

Okay that is agreed . Ah but I still have my £100,000 in the bank so I still get the interest paid to me making the cost £6500-3800=£2700 .

As £2700 is less that £3800 it must be cheaper to have a large mortgage and keep the savings in the bank gaining interest .

This cant be right? Am I missing something?

Seems to me that if I put 100k into the mortgage, I would have reduced the annual repayment by 6.5k although I would lose 3.8k in the interest I could earn.

The way I see it is that the reduction of 6.5k in payments that I would be making is larger than the 3.8k I would be paid. So I would be better off paying the 100k as a deposit.

Can I have some backing on this???

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This cant be right? Am I missing something?

Seems to me that if I put 100k into the mortgage, I would have reduced the annual repayment by 6.5k although I would lose 3.8k in the interest I could earn.

The way I see it is that the reduction of 6.5k in payments that I would be making is larger than the 3.8k I would be paid. So I would be better off paying the 100k as a deposit.

Can I have some backing on this???

Yes

:)

This cant be right? Am I missing something?

Seems to me that if I put 100k into the mortgage, I would have reduced the annual repayment by 6.5k although I would lose 3.8k in the interest I could earn.

The way I see it is that the reduction of 6.5k in payments that I would be making is larger than the 3.8k I would be paid. So I would be better off paying the 100k as a deposit.

Can I have some backing on this???

I think *****an is trying to tell me that if I buy a house for £100k at a cost of 6.5k interest but offset 3.8k interest gained against it. It is cheaper than buying the house outright and losing the 3.8k interest on savings and not paying the 6.5k mortgage.

HHHhmmmmmm <_<

Limpet

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