Loan or Savings?

LyndseyFHTFH

Hi folks, can I get your opinion on something please?


We are currently looking to do some work on our home which we are renovating.


We have around 6k in savings and are currently saving £300 each a month, plus a small additional amount into our joint account that is left over once all of the bills are paid.


We're looking to get a hallway/kitchen/utility knock through and refit and a downstairs bathroom installed under the stairs. We had intended to wait to begin work until the Summer as by June we'll have much closer to 10k and bonuses we don't yet know the value of to allow us a bit more of a budget for the work.


I've been told by a few people that we'll need about £20k for the work, but I'm not willing to accept that. I am hoping that it's doable within the original 6k (we have lots of friends with trades and are very handy and willing to do work if it saves ££s), but accepting of up to 10k max.


My only concern with using our savings to do the work is that we then have no savings! While we'll continue to be able to build them back up at the previous rate for a time (we're a couple in our late 10's early 30's, with no dependants and are currently debt free, aside from the mortgage), it doesn't leave us with a bumper if we were to lose our jobs or our salaries were to change. We live very frugally already, so with the exception of a yearly holiday there's very little else we could cut if our circumstances changed. We're also going to need to consider having children in the next year or two and were planning a big holiday in late 2017 (sort of a last hurrah before we settle down and have kids!).


As a result, we're considering getting a loan to cover the cost of the works rather than spending our savings. A 10k loan over 3 years would cost us <£300 a month, so is manageable in terms of our current situation and would simply mean we'd save slightly less each month. The upshot being that if our circumstances did change at some point during those three years we would still have a nice pot of savings to cushion any financial blow and ensure that we were able to continue to meet our financial commitments. Our mortgage fix ends in Jan 2021, so in theory we will be debt free again by the time we come to remortgage/refix.


Neither of our jobs are particularly unsafe, but I would like to have a cushion as it isn't rare for the OH to have his hours reduced for a month each year and as I work at a Council, the possibility that I will be made redundant is never a far away possibility as restructures are constantly on the horizon (my pay out wouldn't be much more than a month's pay if it were to happen). The OH can also earn some money on the side labouring for friends if things get tight, but that is obviously not certain.


Not getting the work done is always an option, but we bought the house knowing it was a fixer upper and while the kitchen is serviceable, it isn't practical and whether it's safe is anyone's guess as the previous owners work is shoddy at best. There aren't any smaller layout changes/rejigs that would improve it due to the layout of the rooms. We aren't planning to sell, ever, so not hugely concerned with value added but it's a consideration for practical reasons should we ever need to sell.


I really like being debt free, but really hate the kitchen. Decisions, decisions!


If you were in our situation would you use savings or get a loan? Just an opinions question! Thanks in advance.

Ebe_Scrooge

If it were me, I'd say use the savings. Then build them back up again.


As an example, you say a £10k loan over 3 years is manageable for you. So use your savings to pay for the work, then every month, make a payment to your savings pot for the amount you would have had to pay to a loan. Hey presto, in 3 years you've got the £10k saved back up again. Well, actually you'll have more than £10k if you pay the same amount as what you'd have had to pay to the loan, because you'll have had to pay interest at well.


I full appreciate what you say about job insecurity, but realistically nobody could honestly say their job is secure these days. Look at it this way - what if you lost your job and had a loan that still needed to be paid ? At least by using your savings, that would be one less headache to worry about. Yes, you'd not have your savings to fall back on, but you'd manage.


Well, that's my opinion, for what it's worth. As I say, I can see your dilemma, but that's what I would do.

Mogley

Well done building your savings pot. I would use your savings for this work and build them back up as quickly as possible.
This is a good motivational article written by the monevator blog http://monevator.com/the-really-obvious-thing-we-all-forget-when-borrowing-money/
Essentially it says that when you borrow money, you borrow from your future self and you will be far worse off because of it. It's helped me change my saving/spending philosophy.

MallyGirl

LyndseyFHTFH wrote: »

We're also going to need to consider having children in the next year or two

In this situation I would not want to be paying out on a loan from Maternity pay

foxy-stoat

Just use savings.

Apply for the £10,000 loan anyway if you like, see what rate you get offered...you may get 3% or you may get offered 7%.

[Deleted User]

I'd start by getting a builder (or more than one) to give me a price for the job, then see if anything could be saved by doing some of the work myself/by family. You seem to think the work will cost £10k others have told you £20k, you need realistic estimates before you make a decision as to how to finance the work.

underwurlde

Money makes money. Debt makes debt.

The interest on a £10K loan (4.9% if you could get it that low for a relatively short 3 year period) would surely out-strip the interest on your £10,000 life-savings (1.5% at best?). Hence on this basis it's a non-brainer: use your savings to pay for the costs of renovation.

Your renovation: would more than pay for itself if you were to do your kitchen 'right' as this is the biggest selling point of any home. As for the other renovations I would consider asking someone such as an estate agent if your plans to change your house around are a good / bad idea.

Cheers, Andy

Mogley

Money does make money.

If you do your renovations right then you could class spending your savings as an investment in the house. £10k to add £15k to the value for example (get an estate agent to verify your plans will add market value). However this only applies if you are planning to sell your house within a time frame that ensures your renovations remain appealing to the potential buyers so that you can profit from your investment. If you are not planning on selling, the renovations will depreciate over time.

Using this example you would have £5k profit but if you financed the renovation with a interest paying loan, you will lose a chunk of that profit. Your future self is worse off.