How can I keep substantial savings secure?

I am about to close the sale of my first home and will be making a substantial windfall on the sale after costs – in the region of €300,000. Given the home was my principal private residence, I do not have a CGT liability.

I am not currently in the market to buy my next home as I want to wait until the market cools and, due to Covid-19 I had relocated back to my parents’ home to help them out during the lockdown (I am working remotely) and plan on staying for a while or at least until the Covid situation abates.

I only have one current account and a credit union account I opened last year with the intention of saving the odd bit here and there. However, I have yet to use it. I also have another old credit union account in my home town which I set up when I was at school.

My question is what do I do with the money while I am waiting to buy again which could be a year or more down the road? Should I set up a savings account and which account would be the best?

How much income will banks look for when considering my mortgage?

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I have heard of negative interest. Will the bank charge me interest to hold my money for me? Also, should I consider setting up a number of savings accounts with banks/credit unions and placing small amounts in lots of accounts?

Ms S.M., email

Well, first of all, congratulations. After the housing market turmoil of the past decade or so, to clear a profit on €300,000 or thereabouts on the sale of your first home is impressive.

It clearly gives you substantial equity in any future property purchase you make. That will make it easier to get a mortgage and also to secure the more attractive rates on offer to those with lower loan to value on their mortgages.

But that’s for the future. For your own reasons, you’re not in the market for a new home right now. Covid has created a lot of uncertainties and as long as you think you’re best off being closer to your parents, well and good.

One thing I would say is that you wouldn’t want to bet on the market cooling. Supply is still an issue and current demand suggests that property prices are likely to continue to rise for the foreseeable future. Still, that’s your call.

The question, though, is what to do about the money – not least as your solicitor is hassling you for bank details so that he or she can expedite the closing of the sale on your property.

Interest rates

There are two issues here: security and interest rates.

Taking them in reverse order, the first thing to be aware of is that it is going to cost you to keep your money on deposit. The best interest rate you will secure is about 0.5 per cent per annum, and that is only if you lock your money up for five years with Permanent TSB. Otherwise, you are looking for a fraction of that amount. You might do slightly better with a credit union but not a lot.

And even then, if you do get any interest at all, it will be subject to Dirt, which will take a third of any pittance you make.

Meanwhile inflation is currently running at over 5 per cent. With interest rates so far short of that, the value of your cash is withering every year.

What about negative interest rates? Well, you are right to be concerned. The banks have operated negative interest rates for some time now, initially on corporate accounts. Their argument is that they are having to pay the European Central Bank to hold their cash and need to pass this on.

Negative rates have now spread to private customer accounts and the banks have indicated that they continue to keep them under review with a view to lowering the threshold on savings which will be subject to negative interest. However, for now, at least with the big banks, the threshold is about €1 million. Over that figure, they will charge about 0.5 per cent or 0.65 per cent per annum.

Online bank N26 also imposes a 0.5 per cent charge on savings and this is above a much lower limit – €50,000 – for new customer deposits.

Other banks, such as EBS, may not charge negative interest but they do impose limits on savings accounts. In EBS's case, that is €50,000. The same is true for credit unions where the cap on savings can be as low as €10,000. You'd need to check with your own credit union for their rules.

Security

So much for rates, what about security?

This is important. Banks are a lot more stable now than they were at the time of the financial crash in 2008 but, if they did collapse, your money would be at risk. To protect consumers, the State has put in place a deposit guarantee scheme to protect savings at banks, building societies and credit unions.

The key thing to remember is the cap – €100,000. The guarantee will cover that sum of money for any one customer in any one institution. So if, for example, you put €100,000 in each of three accounts with your bank, you would only be covered for €100,000 of that sum as it is all with the same institution.

Under the guarantee, you would need to break your €300,000 profit on the house sale into at least three –and preferably four – institutions. And, of course, with the credit unions the current limit on new savings is well below the guarantee cap anyway, a situation that could dictate how you choose to spread your cash.

An Post is not covered by the scheme but savings there are protected under a separate absolute government guarantee within the limits of the various products it offers.

So you could lump it all into An Post, either in a savings account in in savings bonds or certificates – or a mixture of all three, depending on how long you want to lock your money in.

Otherwise – and certainly if you are only talking about one year – I would suggest you open probably two accounts with banks other than your current one which, along with your credit union facilities, should allow you secure your savings until you are ready to buy again.

For the purposes of your solicitor, I’d be inclined just to give him or her the details for your main account as it stands now. You can move the funds yourself to the new accounts from there. House sales are complicated enough without asking the lawyers to package the proceeds piecemeal across multiple accounts. It’d be easier for you to do that yourself and it means the house sale can proceed even as you get the new accounts set up.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.