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Original poster

Borrow or use savings?

17 replies

poppytin · 22/04/2012 15:34

Hi all,

We are planning an extension to our house and wonder whether we should use our savings or borrow. We are in our early thirties with no debt apart from a mortgage which we have been paying down every month and which is now just less than 2x our combined gross income. If we used our savings we would be left with a small sum to cover approx two months living cost. I have heard that loans are quite cheap these days but interest rates charged on loans are still higher than what we earn on our cash ISAs. What do you think? Shall we go for loans or use up the savings which is earning nothing after inflation?

OP posts:

Chubfuddler · 22/04/2012 15:36

Borrowing is cheap but the interest is still greater than the interest on your savings, so use savings.

RandomMess · 22/04/2012 15:37

savings

faintpinkline · 22/04/2012 16:59

Savings Interest rates on saving is ludicrously low at the moment but its hasn't gone down on borrowing in the same way

CogitoErgoSometimes · 22/04/2012 18:23

I'm going to make a different suggestion. Ordinarily I'd say to use savings since a loan will cost more. However, if you deplete your savings to just 2 months' expenses, you could end up with a cash-flow problem if there is an emergency. I would therefore suggest adding some or all of the cost of the extension to the mortgage and leaving yourself a healthier balance in savings... say six months' costs instead. If there is plenty of equity in your house you should get an excellent rate from your lender, it probably won't add much to your monthly payments & you will realise far more than the cost of the work when you come to sell the property. You can still overpay the mortgage if you want to reduce the balance quicker.

ginmakesitallok · 22/04/2012 18:27

Use savings - but pay whatever you would have been paying to pay off loan into savings account.

Original poster

poppytin · 22/04/2012 22:00

Thanks everybody. Yes my initial thoughts are just like many of yours ie using the savings up as its earning peanuts but I don't like to see it go all in once while having a loan could spread the cost out and we'd feel somehow comfortable if there is an emergency. We'll have to figure something out. Thank you all anyway.

OP posts:

ceeveebee · 22/04/2012 22:03

I would definitely not use all savings, is sensible to keep a few months cash buffer. Add to the mortgage as the extension will add value to the house so makes sense to do this.

BonkeyMollocks · 22/04/2012 22:04

Savings

Oakmaiden · 22/04/2012 22:05

Do both? Use the savings for part of it, but leave yourself a bigger margin for safety and cover the last bit with a loan?

myron · 24/04/2012 01:49

Offset mortgae option - i.e borrow to do your extension and allows any savings you don't use accessible (just in case you do need to use it!)

nickelhasababy · 24/04/2012 16:55

I say use your savings.

A loan is about 9% (minimum!) and your savings are probably coming in at 3-4% (max)

using your savings is much wiser.

If you're worried about spreading the cost out - work out if you can make up your savings with your income. - work out how much a loan for the same amount would cost you, and pay the "interest" of that loan into your savings account.
eg: a loan for £1000 would cost you £80 in total, but probably only £10 over an 8-month period.
So pay £10 a month into your savings account.
(on top of any money you would be saving anyway!)

AppleCrumbleAndFish · 24/04/2012 17:01

Another vote for using savings. We 'borrow' from our savings for big items. Car, kitchen etc. We then repay the money into our savings account as quickly as possible. If you feel that 2 months emergency cash is too little - and it probably is - then borrow a small amount and top ut up with savings.

DaisySteiner · 24/04/2012 17:34

Or save up some more until you have a bigger reserve after paying for the extension.

If you put it onto the mortgage you need to work out how much you'll be paying in interest over the lifetime of the mortgage - unless you pay it off quickly that can really mount up a lot and potentially be more than a shorter term loan.

Jacaqueen · 24/04/2012 22:56

We are about to embark on a large extenson and will be re mortgaging.

Mortgage is almost paid off and we have lots of equity. We will use some saving for decoration and new furnishings as I wouldn't be happy paying interest on items like that but don't mind so much for bricks and mortar

CogitoErgoSometimes · 25/04/2012 07:22

"A loan is about 9% (minimum!) and your savings are probably coming in at 3-4% (max)"

A unsecured short-term loan may cost that much but a secured loan (mortgage) will be in the 4.5% region if there is plenty of equity in the house. No point dramatically depleting savings if it can be spread out relatively cheaply.

nickelhasababy · 25/04/2012 11:04

that's true, but then you're paying for it for 25years.

(god i sound like my dad)

CogitoErgoSometimes · 25/04/2012 11:13

Not necessarily. If the OP keeps paying down the mortgage balance as they have been or if they were to sell up and realise the increased house value, then it's gone. Large-scale improvements are the one category of expenditure that IMHO can legitimately be paid for through an extension of the mortgage because, unlike buying a car on credit, a new kitchen or bathroom etc. cannot be sold off as a separate entity.. you're investing in an existing asset.

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