Cash-in-hand makes more sense than paying off mortgage

I recently received a lump sum as a settlement for personal injury. I’m not sure how best to use this money.

My hope is to buy/build a second house in the short term. I don't know whether it would be better to put the money towards this and continue to repay my current mortgage, or I could pay off my existing mortgage and start from scratch with a new mortgage for my second house.

I did look into investing the money for a short period but was advised against same as risks are greater in short-term investment and I don’t want to have the money tied up for too long and prevent my plans to move house.

Could you could possibly give a little guidance on how best I should proceed.

Employers are saving money and should pay staff work-from-home relief

---

Buying mother’s house at less than market value could cause tax headaches

---

Funeral bill outstanding and executor has disappeared

---

Covid wage subsidies delivered pay cut - hidden in a helping hand

---

Ms J.O’C., email

The good news is that you have already done a lot of the hard thinking. It can be challenging to work out what to do with a financial windfall such as from a legal or insurance settlement. And the danger is that the money just flows aimlessly away in bits and pieces for want of a decision.

You know what you want – a second property. The question is how best to go about it.

Clearly the issue that bugs you is what to do with all this money in the not inconsiderable time it might take to buy – or, more so, build – this second home. I wouldn’t worry too much.

You’ve been advised that short-term investment could be risky, and I agree. The issue is that you will not get any real return on your money with taking risks in investment. But if you are going to take risks you need to be ready to play the long game so that you have the time to recover from any short-term volatility.

You want the money at short notice, so that is not an option. That leaves you with deposit accounts where your money will earn nothing. Indeed, if you leave it with a credit union they may charge you for the privilege depending on the sums involved.

I suspect this is why you are considering repaying the mortgage on the current home and then starting from scratch. It depends on your personal circumstances but my instinctive advice would be that this may not be the right option.

I don’t know what mortgage interest rate you are currently on but if it is a tracker it will inevitably be better than anything you would get on a new home loan starting from scratch.

With cash-in-hand you are in control. You can continue to pay down your current home loan and have the freedom to move when it suits you on a new home

There are other issues with starting afresh, not least the fact that we are currently in a pandemic. This means banks are even more cautious about lending than they would normally be. Getting a loan will be more difficult, especially if you have any health issues or if your employment is or might be affected by Covid.

Put simply, there are more risks surrounding your prospect of getting a new loan starting from scratch than there are from simply continuing to pay down the mortgage you already have in the normal way and using these additional funds to purchase your new home. Why take the chance?

Advantage

There is another factor. If you are bidding for a property against other people the fact that you are a cash-in-hand buyer will give you an advantage even against people who might offer the same or a little more.

The seller knows they can complete the deal quickly without any risk of falling foul of a glitch somewhere in a house-selling chain. That is an attractive option to people selling a property.

It also means you are not beholden to bank timelines, delays or changes in what they are prepared to offer. As recently as this week AIB decided to halve the time a mortgage approved in principle is valid for – to six months from a year. Get that timing wrong and you could have to start the process all over again.

And if they have cut it to six months there is nothing stopping them or someone else cutting it to three months or otherwise moving the goalposts.

With cash-in-hand you are in control. You can continue to pay down your current home loan and have the freedom to move when it suits you on a new home. That is a small price to pay for a zero per cent interest rate in a demand deposit account.

One final word of warning, though. Do remember that only €100,000 of your funds are protected by the bank guarantee scheme in each institution. If your windfall is more than this, spread the sum across a number of demand deposit accounts in different banks.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into