40K lump sum pay down mortage or invest

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wolfgang4

Registered User
Messages
2
Personal details
Age: 51
Spouse’s age: 46

Number and age of children: 11, 14


Income and expenditure
Annual gross income from employment or profession: 120K
Annual gross income of spouse: 0

Monthly take-home pay: 4600, + year end bonus usually 20K

Type of employment: Employed Software Engineer, Spouse is homemaker/artist

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

Saving a little


Summary of Assets and Liabilities
Family home worth €500k with a €95k mortgage
Cash of €40K
Individual Shares: €100K
Defined Contribution pension fund: €500k


Family home mortgage information
Lender: Danske Bank now Pepper.
Interest rate: Tracker at ECB + 0.5% so now 4.5%.

Other borrowings – car loans/personal loans etc
No other loans

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


Buy to let properties
None

Other savings and investments:
Do you have a pension scheme?
With work yes. I pay 16% AVC and Company pays 22%.

Do you own any investment or other property?
No

Other information which might be relevant

Life insurance:
With work for me, otherwise just mortgage protection insurance for both of us.


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

What to do with 40K windfall. Pay down mortgage or invest ?
 
Pay down mortgage with the lump sum. Pretty much a no brainer.

An employer contribution of 22% to your pension is exceptional. Still, you have scope to increase your own contributions.
 
wolfgang4 said:
Interest rate: Tracker at ECB + 0.5% so now 4.5%.
Click to expand...

When you pay off a mortgage, it is the same as getting a tax-free, risk-free return of the mortgage rate.
So at the moment, you would be getting a tax-free, risk-free return of 4.5%. This will fall if interest rates fall, but it is still going to be a lot better than any investment you might make.


wolfgang4 said:
Individual Shares: €100K
Defined Contribution pension fund: €500k
Click to expand...

Likewise you should sell enough shares to clear the balance of your mortgage. By holding onto shares, you are, in effect, borrowing at 4.5% to invest in a risky asset.

This made some sense when the ECB rate was 0% and so your mortgage was costing you only 0.5%. But it makes no sense at 4.5%,

Brendan
 
Brendan Burgess said:
Likewise you should sell enough shares to clear the balance of your mortgage.
Click to expand...
And, if they are shares in your employer (via share incentive schemes, for example), you should consider selling them all and investing the balance after any mortgage lump sum repayment elsewhere in other, more diversified, shares. Holding onto them in such circumstances is concentrating risk by putting at least two eggs in one basket - your employment remuneration package and a big chunk of your net worth/savings.
 
Cash in your shares, if you can. Pay off mortgage. Use previous monthly mortgage payments to top up your AVC's and maybe build up a small emergency fund.
 
One you have cleared your mortgage and maximised your tax-relieved pension contributions, it might make sense to acquire some income generating assets in your spouse’s name (assuming s/he will have no other taxable income for the foreseeable future).
 
Sarenco said:
One you have cleared your mortgage and maximised your tax-relieved pension contributions, it might make sense to acquire some income generating assets in your spouse’s name (assuming s/he will have no other taxable income for the foreseeable future).
Click to expand...
Apropos of that point, this thread might be of relevance:

Where should someone with no taxable income invest?

A friend of mine has retired early and has no income other than deposit income and some small dividend income. I thought this was discussed previously on Askaboutmoney but I can't find it. Investing in a company like Ryanair which pays no dividends would not be a good idea as he will be taxed...
www.askaboutmoney.com
 
Sarenco said:
it might make sense to acquire some income generating assets in your spouse’s name (assuming s/he will have no other taxable income for the foreseeable future).
Click to expand...
Your spouse won’t be eligible for homemaker’s scheme once youngest child is 12 so this will impact state pension eligibility.

Once she is making €5k in investment or self-employed oincome (even for example from art sales) she will pay €500k a year Class S PRSI and build up eligibility for contributory state pension at 66.
 
Not disagreeing with any of the above, but as they say in The Simpsons 'Won't somebody please think of the children'

If you fund them through college, young adulthood, your child related expenses are going through the roof soon. Very roughly 2 children by 4 years by €8k that's €64k without accommodation, maybe €144 to include accommodation.

I would agree with the suggestion that you pay off your mortgage, then you need to put the money aside to cover coming costs. Given the time frame wether that be in cash or equities is marginal, though I would suggest mostly shares given your income and age.
 
If shares were sold and mortgage paid, there would be 45k left, a good start on education fund. If needed, the pension contributions could be revised in the future. If reduced then to the percentage they are now, it would roughly mean 1k a month to cover education.

If you fund them through college, young adulthood, your child related expenses are going through the roof soon. Very roughly 2 children by 4 years by €8k that's €64k without accommodation, maybe €144 to include accommodation.
Just coming back to your budget of 8k when students live at home, what do you put into that? Is it just school related expenses? Just wondering as I have 2 secondary students and I already find there are a lot of hidden costs.
 
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