Eat into mortgage capital or keep saving

[Seabass]

Hi

Newish mortgage, thirty years left to run. Only 10k equity due to historical reasons but house value moving in right direction. Would like to move to a bigger home in 5-10 years (assuming ours is currently worth 315k then target would be something currently worth 400k). Currently mortgage is top heavy with interest. Should we be overpaying capital on this variable rate mortgage by reducing savings? Or paying standard mortgage repayments and building up the savings to add to the equity if we're able to trade up in a few years?....Or does it matter?


Age: 35
Spouse’s age: 33
Annual gross income from employment or profession: 60k
Annual gross income of spouse: 50k
Monthly take-home pay : ~5800pm
Type of employment: Private Sector perm, Spouse Public Sector perm
In general are you:
(a) spending more than you earn, or
(b) saving? Saving
Rough estimate of value of home: 315,000
Amount outstanding on your mortgage: 305,000
What interest rate are you paying? 3.7% var
Other borrowings – car loans/personal loans etc: None
Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 0
Savings and investments: ~20k Monthly savings: ~1300 at standard deposit rate
Do you have a pension scheme?
1 x Private sector defined contribution scheme 15% total contribution monthly (7.5 + company match)
1 x Public sector pension
Do you own any investment or other property?
Holiday Home, no debt. May consider long term let of same in future
Ages of children: None but planning to have a family.
Life insurance: Mortgage cover & extra life cover
Other: Will need to change at least one of the cars in next 3 years

 

[cremeegg]

You are paying 3.7% interest on the mortgage. You will not get this on savings. Pay down what you can on the mortgage.

As far as the calculations go it is that simple.

Bear in mind that once you put the money into the mortgage you cannot get it out again, its gone. If you keep it in a savings account it is under your control.

If you are sure of your plans, i.e. that the money is for a house move, then pay down the mortgage, as son as you can.

 

[gnf_ireland]

Ages of children: None but planning to have a family.

This line did catch my eye - kids are very expensive so do factor this into your discussions. Extended maternity leave may also need to be planned in. A single child in creche is around 1000 euro a month, and ECCE is around a 250 euro a month discount on that when they reach 3. You could easily end up spending in excess of 40k on putting a single child through creche before they start primary school !

Would like to move to a bigger home in 5-10 years

Can I ask why if it is just the two of you?

Do you own any investment or other property?
Holiday Home, no debt. May consider long term let of same in future

Given your high mortgage level, is it a good idea to hold a holiday home? Do you get sufficient use from it to justify it, and the associated costs of holding it (insurance, maintenance, utilities etc)

You are paying 3.7% interest on the mortgage. You will not get this on savings. Pay down what you can on the mortgage.
As far as the calculations go it is that simple.

Agree 100% with above on the numbers, but there are bigger questions at play here as well regarding the short term future


Finally, would you consider leveraging the rent a room scheme in the short term while there is only the two of you and use it to pay down the mortgage? Depending on location you may have the option of a 5 day letting agreement for example that may work well for both sides. I know lots who done this in London over the years. You can earn up to 14k odd tax free on the spare room(s), which equates to the annual savings. This will become much harder if you decide to have kids and will want your space even more !

 

[Seabass]

This line did catch my eye - kids are very expensive so do factor this into your discussions. Extended maternity leave may also need to be planned in. A single child in creche is around 1000 euro a month, and ECCE is around a 250 euro a month discount on that when they reach 3. You could easily end up spending in excess of 40k on putting a single child through creche before they start primary school !


Can I ask why if it is just the two of you?


Given your high mortgage level, is it a good idea to hold a holiday home? Do you get sufficient use from it to justify it, and the associated costs of holding it (insurance, maintenance, utilities etc)


Agree 100% with above on the numbers, but there are bigger questions at play here as well regarding the short term future


Finally, would you consider leveraging the rent a room scheme in the short term while there is only the two of you and use it to pay down the mortgage? Depending on location you may have the option of a 5 day letting agreement for example that may work well for both sides. I know lots who done this in London over the years. You can earn up to 14k odd tax free on the spare room(s), which equates to the annual savings. This will become much harder if you decide to have kids and will want your space even more !

Thanks for your reply.

• Noted on the Kids thing. It is "imminent" so to speak and will affect what we can borrow in the future I know, I hadn't really considered it before but acknowledge it will affect borrowing power over the next few years
• "Bigger" in my description relates to having a family as above but is also a placeholder for "better aspect, bigger garden, having an en-suite, less overlooked, an area with more young families etc etc. Without getting too into the historical detail this house was originally an investment but circumstances meant it became a family home. Despite some shortcomings its not a bad house.
• Again not a typical holiday home. Strong connection with it and plan to retire here. But fully open to doing long term rental for a few years here. Its not in a high rent area but should get a respectable rental income. Obviously no mortgage interest to put against rental but it would still be extra income and no utilities to pay there for a few years. Sale not an option.
• Rent a room....based on point 1 above that won't really be an option pretty soon.

I guess the following would be a logical approach right?

• Rent holiday home and steer net profit after income tax and running costs into overpayment of mortgage
• Steer chunk of current monthly savings into mortgage overpayment
• Try to keep growing salaries over next 5 years

Thanks!

 

[gnf_ireland]

@Seabass Firstly, congratulations and welcome to a very interesting journey where you life and priorities will evolve over the next while ! I will let someone else tell you about the sleepless nights and how a single smile makes them all worth while ;-)

I do think this news does change things quite a bit. I think once the baby goes into childcare the 'savings' will drop considerably and it is something you need to factor into any of your budgets.
I would also think about maternity cover, what is available and how you would fund the additional 16 weeks unpaid leave if you choose to avail of it. I would also think about how you plan to purchase the initial outlays for the child and what you would be looking to purchase in terms of travel systems (easily spend over a grand on one of those) as well as everything else.

If it was me, I would not overpay the mortgage just yet - or if I was cap it at maybe 300 a month. I would save the remaining money and draw it down based on needs until your financial situation normalises - once the baby is in childcare and maternity/paternity leave is finished. At this stage it will allow you to budget on an ongoing basis.
I appreciate this may be 18 months away, but anything extra you save in the interim can be overpaid in a lump sum at this stage.

I would be just nervous about things like affordability of the unpaid maternity leave period and extra costs with childcare you may not think about now. No one knows whether they want to take that unpaid leave yet, but its nice to have the security to have the option.


Regarding the house, I assume its an old family home or has some link to family. Would you use it during the maternity leave period to be closer to family? If yes, then don't rent it out just yet. If not, then rent it out and use the money to pay off the mortgage.
Please note, that if you rent it for 2017, the October 2018 tax return will require you to pay the tax on the 2017 profits + 100% of the 2017 profits OR 90% of the 2018 amount. So in effect you will not really be cashflow positive the first year but will be after that. You may not be in a position to overpay the mortgage until mid-2018 to ensure you can cover that full tax bill when due.

 

[Seabass]

Thanks a million gnf. Great advice above and loads to ponder. I think we've considered all of the above in some shape or form but I take your key point not to to over extend on repaying until everything normalises so to speak.

Having a family will probably negatively affect borrowing power down the line but we'll just keep trying to do the right things financially and see where we are in a few years time.

 

[Steven Barrett]

Congratulations Seabass. Enjoy you lie ins now because they will become a thing of the past for years to come!!

Gnf has given you very good advice. You are saving €1,300 a month at present. If creche is going to be a cost, there's €1,000 of your €1,300 gone. If you want to trade up, you will need a 20% deposit for the new house. With very little equity in your current home, you are going to have to save most of that 20% yourself. So your short term goals require cash liquidity. You will not see a benefit from overpaying your mortgage for decades to come.

I noticed you didn't mention having any income protection benefits. All of your future plans are reliant on your ability to earn an income. If your work doesn't provide this benefit you should look at taking some out yourself. Your wife will have a limited level of sick leave in the public service of 3 months full pay and 3 months half pay.


Steven
www.bluewaterfp.ie

 

[Bronte]

I'd sell the holiday home and current home and buy the forever home now. While there is high earning power and zero kids.

OP - with zero children why the extra life cover?

 

[Seabass]

Congratulations Seabass. Enjoy you lie ins now because they will become a thing of the past for years to come!!

Gnf has given you very good advice. You are saving €1,300 a month at present. If creche is going to be a cost, there's €1,000 of your €1,300 gone. If you want to trade up, you will need a 20% deposit for the new house. With very little equity in your current home, you are going to have to save most of that 20% yourself. So your short term goals require cash liquidity. You will not see a benefit from overpaying your mortgage for decades to come.

Hi SBarrett, Thanks for the congratulations and advice!

Just to get my head around this, in terms of the 20% deposit, if I pay down more mortgage capital won't that build equity for the time of the trade up that will feed into a 20% deposit for the new house? i.e. whether its money saved in a deposit account or more money left over after house 1 is sold and mortgage redemption is complete its equity/cash either way?
Or is there some requirement or advantage for the 20% deposit to be a tangible pre-sale lump sum?

At a simplistic level I'm trying to decide "A.)Pay down more, B.)Save instead or C) Same net effect in the end" if hoping to trade up in a few years.

Thanks

 

[Steven Barrett]

What if there is another property crash and the value of your home falls? You owe less granted but the value of the property may have fallen by more. You are taking an element of investment risk by putting money into a mortgage that you intend to use as savings in the future. It could work out well if values continue to increase. It could be a disaster if there's a crash.


Steven
www.bluewaterfp.ie

 

[Connard]

What if there is another property crash and the value of your home falls? You owe less granted but the value of the property may have fallen by more. You are taking an element of investment risk by putting money into a mortgage that you intend to use as savings in the future. It could work out well if values continue to increase. It could be a disaster if there's a crash.


Steven
www.bluewaterfp.ie

In that scenario he will have a deposit but he'll also have a lot of negative equity. Assuming everything else stays the same (earnings, monthly saving etc), if there is a property crash he'll likely struggle to get a mortgage on a more expensive place either way. At least by overpaying on his mortgage, if they keep paying the same amount per month (or even more) then they'll be putting money against the capital part of the mortgage that would have gone on interest. Overall equity + savings will be better if they use savings to pay off the mortgage. The further away this hypothetical crash is the better off they are paying down the mortgage.

 

[Steven Barrett]

In that scenario he will have a deposit but he'll also have a lot of negative equity. Assuming everything else stays the same (earnings, monthly saving etc), if there is a property crash he'll likely struggle to get a mortgage on a more expensive place either way. At least by overpaying on his mortgage, if they keep paying the same amount per month (or even more) then they'll be putting money against the capital part of the mortgage that would have gone on interest. Overall equity + savings will be better if they use savings to pay off the mortgage. The further away this hypothetical crash is the better off they are paying down the mortgage.

Good point!