36 - huge mortgage

N

Nicetoknow

Registered User
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Hello. Looking for opinions on whether we are off the charts at risk or generally in an ok position - because my own assessment of the situation varies from day to day!

Age: 36
Spouse’s/Partner's age: 38

Annual gross income from employment or profession: PAYE 70000 from employer plus 65000 PAYE from own company - total PAYE 135000.

Annual gross income of spouse: PAYE 70000 plus


Monthly take-home pay: 6000 plus lump of 32000 net at end of year (salary from own company)


In general are you:
(a) spending more than you earn, or
(b) saving?

Saving - about 500 a month


Rough estimate of value of home - 925000
Amount outstanding on your mortgage: 650000

What interest rate are you paying?

2.5 fixed for 4 years with UB

Other borrowings – car loans/personal loans etc

None

Do you pay off your full credit card balance each month?

Yes

Savings and investments:
10000 in shares
20000 in savings

Do you have a pension scheme?
Yes - DC, 20000 balance, have just upped cons to 20%, Employer cons at 8%. I also have Directors pension with balance of 60,000. I expect to contribute 48000 each year for next 5 years ( all going well ).

Partner has DC, balance of 45000, also recently upped cons to 20%. Employer cons at 8%

Do you own any investment or other property? No

Ages of children: 1 and 4

Childcare is 1500 a month

Life insurance:
We both have some cover with work
We have mortgage protection but no Life cover.
We do not have income protection or serious illness. I have company policy that will pay out 400000 if I die.

What specific question do you have or what issues are of concern to you?

We are working really hard, basically two jobs. I can't see us sustaining our current high income for more than 5 years. Our salaries may rise somewhat but we both want to do reduced hours to spend time with our kids.

Our house is old and realistically needs another 100000 spent on it (new roof, windows, rebuild small extension due to a structural issue that isn't going to go away).

Our mortgage is frighteningly large. The repayments are fine for us at the moment because we have the extra income from my own company and we are on a low interest rate. We are thinking that next year and yearly thereafter we will overpay the mortgage by 15000 when we get the lump sum from company but since our balance is so high, those overpayments feel like a drop in the ocean. I was thinking that I could take lump from directors pension at 50 to pay a chunk off mortgage. That is the rational for our pension over mortgage strategy. I feel we shouldn't really have more than 450000 of a mortgage (3.5 combined salary from employment).

We do not want to sell our house although we both get that it's a money drain. We love where we live and it's our forever home.

We both had to retrain during the recession so got started in pensions very late. I worry about having nothing when we are older, which is why we are maxing our pension cons now.

Would appreciate your views. Thank you.
 
The best way to eat an elephant is one bite at a time.

Same with reducing your mortgage. Unless you come into a large sum of money, any over payment will look like a drop in the ocean. But make them and keep on making them. Over time you will see the amount reduce. Like with investing, it takes time to see the benefits of compounding but it happens over time. Why not start with increasing your monthly repayments.


Steven
www.bluewaterfp.ie
 
Nicetoknow said:
Our mortgage is frighteningly large.
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This is a prime example of a case where you should not be making any unmatched pension contributions. In other words, if your employer's contribution is dependent on you making a contribution, then make that contribution.

Your mortgage is frighteningly large.

You want too spend money on your house.

Eliminating the immediate and short-term risk is your absolute priority.

Nicetoknow said:
Our house is old and realistically needs another 100000 spent on it (new roof, windows, rebuild small extension due to a structural issue that isn't going to go away).
Click to expand...

You have to decide how urgent this is. Do the urgent bits. Do the bits with a financial return e.g. if the windows cut your energy bills. The extension does not sound like a priority.

After that pay down your mortgage aggressively.

With three sources of income, you probably do not need €30,000 in savings. Pay it off your mortgage or use it for the essential building works.

When you get your mortgage down to a comfortable level, resume pension contributions.

Brendan
 
I would be very conservative so to me a comfortable mortgage is twice your reliable salary.

So €450k with an income of €200k is in the right area.

But it depends on age and other expenditure as well.

When you hit 50, contributing to a pension becomes more important than when you are 40 as you have less time to contribute.
 
Brendan Burgess said:
When you hit 50, contributing to a pension becomes more important than when you are 40 as you have less time to contribute.
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This is a fallacy. Arguably it is more important at a younger age as you can take advantage of compound interest.

Assuming a 3% real annual return, you get a 142% total return by age 65 for everything you contribute at 35. You only get 34% by 65 if you contribute at 55. 142% is a lot more than three times 34%.

However, in your case your mortgage is extremely large and would become a burden if one of you loses a job, or wants a change in lifestyle. I would prioritise mortgage overpayments for maybe five years, then re-assess and maybe switch back into pension.
 
The mortgage is not “frighteningly large”. It’s 3.17 times income in a world where Central Bank ‘macroprudential rules’ stipulate a maximum of 3.5 times with scope to go to 4.5/5.0 times. If it was me, I’d keep going as you are but start overpaying the mortgage to the tune of €500 a month. Ulster Bank will give up to €60k via a top-up and you have the rest for the renovation. Then just build your savings back up to their current levels. I would not reduce the pension funding. It’s the compounding that delivers the returns and the ‘use it or lose it’ nature of pension funding is an issue, although slightly less so given that you can backfund via your own company. What does the company do?
 
What jumps out for me is the risk to the earned income when you don't have a large emergency fund or pool of savings. It may be impossible to protect against redundancy but if I were you I would absolutely look at income protection cover for both of you. If it is a case of either/or then prioritise income protection over and above pensions savings for now. Re your own company I would consider building up a contingency fund in the company post paying CT. You can invest in the company name as you would with a pension but the crucial difference is that you will have liquidity to access these funds if you need them before retirement. Under current rules you can back end company pension contributions at a later date unlike personal contributions. If I were in your shoes I would do the above first to de-risk your family balance sheet before attempting to over pay mortgages or fund pensions i.e. you currently dont have enough of a liquidity buffer in case of any risk to earned income. Just a thought.
All the best Vincent
 
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Gordon Gekko said:
The mortgage is not “frighteningly large”. It’s 3.17 times income in a world where Central Bank ‘macroprudential rules’ stipulate a maximum of 3.5 times with scope to go to 4.5/5.0 times.
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Large is an absolute as well as a relative concept. This mortgage is easily 99th percentile of all outstanding mortgages in Ireland. Servicing it relies on the OP's family income remaining at about 200k, which is 99th percentile as well.

Granted there is very little risk of negative equity but downsizing in response to a lower income is something the OP doesn't seem to want to do. OP seems to really, really want to stay in the house. If this is his priority then he should pay down the mortgage.
 
"We are working really hard, basically two jobs. I can't see us sustaining our current high income for more than 5 years. Our salaries may rise somewhat but we both want to do reduced hours to spend time with our kids."

This is what sticks out for me. The current income is based on an unsustainable/undesired level of activity. OP family has a mortgage of a family earning 200k a year from two salaries, not three. Risk of burnout/ill health can be high in these circumstances.
 
Thanks all for comments to date. Really appreciate your input.

The company is an online service. It is an asset and could be sold if the other shareholder agreed. I don't want to bank on a future buyout since there is no certainty as to what the value of the company would be in 5 years...it could be more, could be very little. Also the other shareholder may not want to sell when I do.

The risk of burn out is definitely something we need to consider- no point having cash in the bank if getting it makes us ill and unable to enjoy what we have in life. We could look at selling to buy a new build that is a bit cheaper and requires lower running costs and no investment in next 10 years.

Partially it is the future cost of renovation / maintenance that scares me.

Worth considering what down sizing would look like for us.

I am going to start "eating the elephant" in the mean time.
 
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The mortgage is large in absolute terms but in terms of OPs earning it is fine. What is intriguing is that you are working full time but have your own business that pays almost the same. The question is what is the effort required to earn that amount? For example you can't be doing a 40 hour work week and 40 hours in the business as well or at least it would not be sustainable. My question would be is there potential to grow the 65k if you spent more time on it? That may allow you to meet your goals of working less without having to give up the business, especially if it is something you are pasisonate about.

I echo others comments just start paying off 500 a month on the mortgage,
 
I have to say this again, paying off mortage is the wrong priority until you have covered the following first;
1) life cover to support dependants
2) Income protection
3) build up a liquidity buffer

I honestly cant see the merit in making larger monthly contributions to the mortgage until the above have been dealt with. Its always prudent to plan for the worst and then hope for the best.

All my opinion of course but a strongly help opinion none the less.

All the best Vincent
 
North Star said:
I have to say this again, paying off mortage is the wrong priority until you have covered the following first;
1) life cover to support dependants
2) Income protection
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I am not convinced. OP has a very good net equity position in the house (easily €250k after fees). If the worst happened and they were down to one income they could easily move to a house just as large, just not in as desirable a location.

North Star said:
3) build up a liquidity buffer
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Agree.
 
Both OP and spouse are now paying 20% of two 70k salaries into pensions, in addition to two 8% employer contributions.

Given the large mortgage debt involved, I think enough is now going towards pensions, and mortgage overpayments should be prioritised.
 
Just to clarify, we were intending on contributing 20% of both salaries, plus 8% employer cons PLUS 48000 a year to directors pension so approx 90000. I know it sounds huge but given we have tiny pensions we thought it might be wise to do this for a few years while we can benefit from relief at higher tax bracket (i understand this may be fazed out in the near future ) and then switch to mortgage overpayments.
 
North Star said:
I have to say this again, paying off mortage is the wrong priority until you have covered the following first;
1) life cover to support dependants
2) Income protection
3) build up a liquidity buffer

I honestly cant see the merit in making larger monthly contributions to the mortgage until the above have been dealt with. Its always prudent to plan for the worst and then hope for the best.

All my opinion of course but a strongly help opinion none the less.

All the best Vincent
Click to expand...

I will definitely sort this out. Thanks for the advice.
 
NoRegretsCoyote said:
  1. This is a fallacy. Arguably it is more important at a younger age as you can take advantage of coAmpound interest.
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This is the line used by the pensions industry.

Paying off your mortgage gets you a guaranteed tax-free return equal to the mortgage rate. If you make a whole pile of assumptions you may be able to show that, at age 65, you would be financially better off maxing your pension contributions instead. These assumptions include
  • High pre-tax returns on your pension fund
  • Low mortgage rates to continue indefinitely
  • The tax regime on pensions to remain the same or improve
About 150,000 Irish people went through the misery of mortgage arrears. I would guess that a lot of them had made voluntary pension contributions.

The OP faces two clear and present risks which could cause him huge distress in the medium term
  • A significant drop in income - he is using the word "burn-out"
  • A significant rise in interest rates
It is these risks which he needs to deal with immediately.

He also needs €100k for home repairs.

He has a very high mortgage.
He has a 70% LTV

His absolute first priority is to get that mortgage down.

I would think that a 50% LTV would be a good target as that will usually mean that he will get a lower mortgage rate on the entire mortgage.

But for the moment, go for a 60% LTV and then review matters. You will be in a more comfortable position then and might decided to split your surplus income between your pension and mortgage overpayments. But worry about that when you get there.

North Star said:
1) life cover to support dependants
2) Income protection
3) build up a liquidity buffer
Click to expand...

1) and 2) are very bad value. You shouldn't be paying high premiums to protect against extremely unlikely risks while you are facing the real risks arising from a very high mortgage.

I just don't agree with the liquidity buffer while you have three incomes which are reasonably safe in the short term. If they become uncertain by all means, build up a buffer then.

Of course, you will build one up anyway on the way to saving for your home improvements.

Brendan
 
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Nicetoknow said:
Just to clarify, we were intending on contributing 20% of both salaries, plus 8% employer cons PLUS 48000 a year to directors pension so approx 90000. I know it sounds huge but given we have tiny pensions we thought it might be wise to do this for a few years while we can benefit from relief at higher tax bracket (i understand this may be fazed out in the near future ) and then switch to mortgage overpayments.
Click to expand...

Apologies, I had mis-read your post.
In your high mortgage, high burnout probability situation, I would simply match the 8% employer contribution, and really focus on mortgage overpayments.
I definitely wouldn't put more than 10% into the pension at this stage.
 
Gordon Gekko said:
The mortgage is not “frighteningly large”. It’s 3.17 times income in a world where Central Bank ‘macroprudential rules’ stipulate a maximum of 3.5 times with scope to go to 4.5/5.0 times.
Click to expand...

The Central Bank 3.5 is a maximum and not a target. The are macroprudential rules designed first and foremost for making sure that the banks remain solvent.

By any standards 3.17 times an income for a couple suffering from burnout is huge. Actually, it is frightening.

You should plan your life to get out of the burnout lifestyle asap.

Then work out what 3 times that income would be. And that should be your immediate target as regards LTI.

Brendan
 
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