Today there were announcements from AIB and KBC that they would cut mortgage rates on several of their mortgage products . AIB announced that it would lower its variable rate by 0.25% at the beginning of Q3 and KBC also announced several cuts to its products – see the attached picture for a summary of the cuts.
One area that a lot of people struggle with is understanding the time value of money – often when someone mentions this concept a lot of people take it as a signal to stop paying attention.
There are 4 concepts that you need to get your head around to understand the time value of money
- Present Value
- Future Value
Compound interest is when your interest also earns interest. So if you have savings earning 10% in the first year you will receive €10 Interest and then in the second year you will receive €11 in interest (110*10%)
Is the opposite of compounding. It is calculating the value you need to have on deposit today to get €110 in the future.
Present value is the value today of an amount in the future.
What would you prefer – to receive €100 today or receive €100 in a years time?
Automatically the answer is €100 today as you could put that €100 in a deposit account at 4% and it will be worth €104 in a years time, instead of €100.
Or to put it another way what would you prefer – to pay €100 in a years time or pay it today?
Again the answer is automatically a years time. As you could put €96 into a savings account today and it will be worth €100 in a years time.
So getting €100 next year is only worth €96 today. This is called the present value.
The future value is what your money will be worth in a years time compounded at the interest rate it is earning.
The future value of €100 compounded by 4% over a year is €104.
Use in the Real world
The time value of money is one of the building blocks of finance and it can get more complicated when you take into account inflation, cashflows at different times and different rates of return over the course of an investment – however, if you can get your head around the above example you will have a greater understanding of finance than most.
By understanding the time value and how to discount and compound money can make a huge difference to your financial health over the course of your life, as it can be used to calculate return on investments and in all aspects of personal finance.
Buying a first property is the biggest financial decision that a lot of people make and can have a huge impact on your financial well being both now and for many years into the future.
Putting in some spadework now will save you a lot of hassle in the future.
- Do your research
Find out as much as possible about the areas you are looking at. Use online resources such as daft.ie and google maps to do some preliminary research. Also google the area to see if there are any future developments planned in the area that you should know about.
One useful website is propertypriceregister.ie that contains details of all properties sold since 2010 – if you know how to use excel you can even download a spreadsheet to do some useful pivot tables to chart the movement of house prices since 2010 in the areas your researching.
- Consider the downside
Anything can happen in life so it is important to consider the worst case scenario when buying a property. Compare your monthly mortgage repayments to the current monthly rents that similar properties in the area are commanding – is there any margin of safety? If rents were to fall and interest rates rise would there still be a margin of safety?
This is important to consider as you may need to move in the future but the value of the property may have fallen. By having a margin of safety between the possible rent and the mortgage repayments it will allow you to avoid selling when the property market has crashed. Also it will allow you to cover any extra costs such as tax and repairs that come with becoming a landlord.
- Consider the future
Is there room to expand the property in the future? This is an important consideration if you are planning on having a family in the future.
What is the BER rating? If it is low make sure you build the costs of upgrading the BER into your costs.
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