How important is future big purchases (house) when setting up guaranteed investment accounts?
I moved out of my parents’s house a couple weeks ago. I moved into an apartment in a big city and I am not sure yet if I will like it here or not. I have no idea when I’ll switch to a house and if it will be around the same place.
For now, my apartment has a one year contract so I’m here for at least a year.
I’ve been looking to start investments, saving up for a house. I started a retirement fund.
(I don’t know if that’s the right word, but what I refer to as “guaranteed investment” is my crude translation of a french word for an account that gives you a higher interest rate in exchange for locking your funds away for a certain time. The longer you lock it, the higher the interest rate when the time is up)
I’m very interested in this kind of account because getting 2.5-3.5% interest is much better than the usual 1.25% I get for normal accounts. I’m not sure how liberal I should be with locking away funds if I don’t know when I’ll need to take out as much money as possible for a down payment on a house.
So the question is: How comfortable should I be with investing money like this? If I decide to buy the house 1 year before the term is up, how much money will I lose in interest by having a smaller down payment because of that? Would it still be worth it?
The benefits and drawbacks of locking up savings seem marginal, compared to the direct impact of the decision whether and when to buy a house. I would come down slightly on the side of maintaining liquidity.
First, the comparison of current shorter-term versus longer-term deposit rates is not exactly what it seems. If you keep your savings liquid, the 1.25% rate will not remain the same forever. Arguably it is more likely to go up than down. The long-term deposits would not be paying what they are, if rates were expected to decline. So some of the difference will probably be recouped.
Second, the option to make a larger down payment could help you avoid the cost of private mortgage insurance (PMI) or equivalent. (If you have good credit, the amount of your down payment above say 5% probably won’t have a strong effect on your interest rate, though.)
With liquidity you also would have the option, of course, to make a smaller down payment if that is best at the time (e.g., to retain savings for other expenses or for retirement).
one man’s opinion,
Securing that first mortgage is also a mental-psychological battle.
The fact is the tiny 1% here or there differences under discussion will be dwarfed on all fronts by the economics of the (wonderful) moment of securing that first mortgage.
I suggest keep your financial life totally focussed on that coming moment when you secure your first flat or house…
Forget the issue of the tiney 1-2% differences and stay liquid, with a total focus for you mentally on securing that first mortgage.
Bon chance!
Most importantly, if your aim is to kick around the world and live/work in sundry places, this is the best thing you can do.
OP is in City/Country X presntly. He buys the flat. He decides to go gallavanting around the world and goes off to live in Osaka or Sydney or LA for a year or five. He simply rents out out flat in city X, maintaining ownership of it.
Sure, there may be some tiny random expenses now and again in doing this. But so what: “kicking around the world” involves constant tiny expenses. (Moving things, re-buying cutlery constantly, oddball medical expenses, sudden flights needed, and so on. Once in a blue moon if you have a maintenance cost or the like – believe me, it is no different from the other endless costs you will have in “living globally”.)
With your “handy anchor” back in X, you will be constantly building your overall ultimate wealth, even as you piss about on the world stage. And it is spectacularly advantageous entrée to be able to say “sure I’m a home owner” when you are mucking about globally.