Invest inheritance or reduce mortgage?

[CPM_81]

Age: 41
Spouse’s/Partner's age: 43

Annual gross income from employment or profession: €65,000
Annual gross income of spouse: €65,000

Monthly take-home pay: ~€7,000

Type of employment: Both private sector

In general are you:
(a) spending more than you earn, or
(b) saving? Saving, 1500 p/m jointly

Rough estimate of value of home: 510k
Amount outstanding on your mortgage: 243k (1168 p/m - 25 yrs remaining)
What interest rate are you paying? 3.2% (5 yr fixed with BOI - coming to an end this July)

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

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 0 balance on both credit cards

Savings and investments: 20,000 in joint savings

Do you have a pension scheme?
Yes, employer DC pension. My employer contributes 10%. At the moment, I contribute 5% - value: 100k
Spouse also has work DC pension currently valued at about 70k. His employer pays 6% and he pays 8%

Do you own any investment or other property? No

Ages of children: None – no plans to have children

Life insurance: 6x annual salary in the event of my death. Spouse has no Life insurance.

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

I will soon come into some inheritance, approx 150k.
Should we use this money to clear down the mortgage by this amount - or invest?

Our mortgage fixed rate is expiring in July and we had planned to switch to Avant.
If clearing down some of the mortgage, should we do this when the current fixed rate expires in July?
When switching, should we keep the same 25 year term? Or go for a reduced term?

Thank you!

 

[Brendan Burgess]

Rough estimate of value of home: 510k
Amount outstanding on your mortgage: 243k (1168 p/m - 25 yrs remaining)

Savings and investments: 20,000 in joint savings

I will soon come into some inheritance, approx 150k.

Saving, 1500 p/m jointly

So you have a €243k mortgage with €170k in savings.
The first decision is should you pay this off the mortgage or invest.
It is always better to pay this off the mortgage as you are guaranteed a tax-free, risk-free, charges-free, guaranteed return on your money.
So you could reduce your mortgage to €73k.

You don't need €20k in savings when you have two good jobs and are saving €1,500 a month.

 

[Brendan Burgess]

However you should consider maxing your pension contributions

Rough estimate of value of home: 510k
Amount outstanding on your mortgage: 243k (1168 p/m - 25 yrs remaining)

Annual gross income from employment or profession: €65,000
Annual gross income of spouse: €65,000

Your current mortgage is less than twice your combined income and less than 50% Loan to Value.
This is a very comfortable mortgage.

If you are planning to trade up, then you should probably pay down your mortgage.
But if you are in your forever home, then you should max your pension contributions.

 

[Brendan Burgess]

Yes, employer DC pension. My employer contributes 10%. At the moment, I contribute 5% - value: 100k
Spouse also has work DC pension currently valued at about 70k. His employer pays 6% and he pays 8%

Age: 41
Spouse’s/Partner's age: 43

Annual gross income from employment or profession: €65,000
Annual gross income of spouse: €65,000

At your ages, you can put 25% of your salary into your pensions.
You are putting in 5% so put in another 20% or €12k
Your partner is putting in 8% , so he should put in 17% or €11k

So gross will be €23k or about €12k after tax.

So max your pension contributions. But you can do this from your current level of savings.

I think you can also backdate a contribution against 2021 income and you should do this as well.

If you knock €170k off your mortgage, your mortgage payments will be greatly reduced, so your monthly savings figure will be increased by about €700 a month.

So in summary
1) Reduce your mortgage by €170k
2) Make AVCs up to 25% a year

Brendan

 

[Peanuts20]

Only thing I would add to the above is that you don't have much in terms of "rainy day" money. So have a look and think about the next 5 years. What must you spend money on? Is there 20 or 30k you need to put into the house, are cars needing to be changed etc.? If so, better to spend a proportion the inheritance on those rather then having to take out a loan in a few years. Also is there anything you want to do over the next few years, holiday of a lifetime etc?. Get the finance for those sorted with the inheritance and then worry about pensions, AVC's and investments

 

[_OkGo_]

Should we use this money to clear down the mortgage by this amount - or invest?

Both, invest in your pension and use the rest to clear down your mortgage. You have no dependents so no major costs in the future

Soon you will have €170k in cash. As outlined by Brendan, you can contribute €23k gross (€12k net) to your pensions. You can do this for 2021 (before 31st October) and for this year also. So set aside €24k to do this and your combined pension pots will be better off by €46k

Retain about €10-15k in cash. This leaves you with ~€130k. What you do with this depends on your property plans

If your property needs major work (eg. extension or refurb) then use this money to do it. If not, make a large lumpsum payment (eg €100k) and consider living a little with the remainder. Don't go mad but you are in a very comfortable place financially so you can well afford to upgrade this years holiday, redecorate your property or upgrade a car if needed. Whatever you fancy really

When switching, should we keep the same 25 year term? Or go for a reduced term?

If you can clear €100k from you mortgage, you are left with €143k. At 1.95% & 25 year term, your monthly repayments are only ~€600. IMO, you should keep the term and use the difference to increase your regular pension contributions. The €568 reduction is equivalent to €946/m gross pension contributions. Or ~€11,360/yr which is about 8.5% increase in both your regular contributions

After that, on a yearly basis you can decide whether you max out your pension contributions or overpay the mortgage further using your regular savings

To put it all in perspective, in a few months you could have:

1. Increased your pensions pots by €46k
2. Reduced your mortgage to ~€143k (LTI of 1.1)
3. Reduced your monthly payment to €600 or 8.5% of your take home pay (very comfortable)
4. Increased your regular pension contributions to 13.5% and 16.5% respectively

All without impacting your standard of living today.