Duke of Marmalade
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Sunday Independent article on repaying mortgage
- Thread starter Duke of Marmalade
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RichInSpirit
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The article is mostly behind a pay wall Mr. Duke. I guess I will have to go out and buy a paper copy of today's Independent.
Duke of Marmalade
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Sorry hidden behind paywall but this is what I wanted to draw attention to.
The Central Bank do not permit a repayment fee on fixed rate mortgages. If the rate is higher than variable (i.e. not cheap) there is a fair formula for a payment of the interest saving in breaking early. This is not applicable for "cheap" fixed rate mortgages.Sindo article said:
Duke of Marmalade
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Sorry, but sure it's always worth a read of Declan Lynch
Brendan Burgess
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It's a poor enough article.
This is the first mention of pensions
By overpaying your mortgage and shrinking that debt, you will have more disposable income.
You could then use that money to fund contributions towards your pension, giving you 40pc tax relief if you’re on the higher rate of income tax, or towards other investments.
But does mention it later
Indeed, overpaying your mortgage comes with an opportunity cost: you may miss out on other investment opportunities that could provide higher returns, including your pension.
This is the first mention of pensions
By overpaying your mortgage and shrinking that debt, you will have more disposable income.
You could then use that money to fund contributions towards your pension, giving you 40pc tax relief if you’re on the higher rate of income tax, or towards other investments.
But does mention it later
Indeed, overpaying your mortgage comes with an opportunity cost: you may miss out on other investment opportunities that could provide higher returns, including your pension.
Brendan Burgess
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I wouldn't bother. There is nothing in it that you don't know already.
Brendan Burgess
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Hi Duke
This would confuse most people the way you put it.
It is clearer to say
There is no early repayment fee/charge/penalty for variable rate loans.
There may be an early repayment fee if you have a fixed rate loan.
The maximum fee is set down by the Central Bank and in many cases, the rate will be zero.
If you want to overpay a fixed rate mortgage, ask your bank what the early repayment fee will be.
Even with an early repayment fee, it is nearly always worth paying it rather than leaving cash sitting on deposit earning very little, and that nothing is taxable!
Brendan
Duke of Marmalade
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I was more interested in highlighting the incorrect information that there might be a redemption fee on exiting a cheap fixed rate mortgage.
Brendan Burgess
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But I would be more interested in highlighting the nonsense that you should have 6 months' expenditure in an emergency fund.
Brendan
Brendan
Dave Vanian
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Thousands in savings, more disposable income and peace of mind – Is 2024 the year to overpay your mortgage?
You could save a packet by diverting your savings towards reducing your mortgage
https://www.independent.ie/business...year-to-overpay-your-mortgage/a457362216.html
Gabrielle Monaghan
Today at 02:30
Weighing up whether to use your extra cash to overpay your mortgage might sound like one of those rich people problems. Like worrying you spent too many days in Ireland last year because you’re a resident of Monaco for tax purposes. Or that your friends are using you because of your trust fund.
But mortgage overpayments are not just a financial dilemma for the wealthy: Central Bank data shows that Irish households have a combined €153bn in savings, most of which is earning little to no interest. Many of those households are hoarding that cash despite being under financial strain because of rising mortgage rates.
Financial advisers say savvy clients are instead throwing their savings at increasing their mortgage repayments as interest rates hit their peak. Analysts and economists are betting that the European Central Bank (ECB), which has imposed the most aggressive interest-rate increases in its 25-year history, will start cutting its rates in the first months of next year, after eurozone inflation slowed more than anticipated last month.
Nigel Green, chief executive of deVere Group, one of the world’s largest independent financial advisory organisations, said: “We now expect that the ECB could be among the first of the major central banks to start cutting interest rates in the first quarter of 2024.”
Nick Charalambous, managing director of Alpha Wealth, said: “We are close to the top of the interest rate-hike cycle. People are putting more money towards their mortgage than they usually would because they are coming off fixed rates, or they are on a variable or tracker rate.
"If you’re paying an interest rate of, say, 5pc on your mortgage, repaying your mortgage gives you a great guaranteed return.”
Stuffing any unused cash you have in your savings or current account into overpaying your mortgage could save you tens of thousands of euro in interest over the long term and help you become mortgage-free sooner rather than later. But you need to consider the following factors before opting for this route.
Pay off short-term debt first
The higher interest rates are, the more sense it makes to repay debt as quickly as possible. But even with painful rate hikes, a mortgage is still the cheapest debt you’ll ever have, so you’ll first need to clear more expensive short-term debts – like credit cards, overdrafts, personal loans, credit union loans, and car finance – before tackling your home loan.
Charalambous is an advocate of the “debt snowball method”, popularised by controversial US personal finance personality Dave Ramsey.
I’d focus on the smallest loan first, which typically has the highest interest rate, and look to pay that off aggressively
It involves paying off debts in order of smallest to largest, thereby gaining momentum as you clear each remaining balance. When the smallest debt is paid in full, you roll the payment you were making on it onto the next-smallest debt.
“I’d focus on the smallest loan first, which typically has the highest interest rate, and look to pay that off aggressively,” Charalambous said.Unmute
“Once it’s cleared, that monthly repayment is focused on the next type of loan, effectively creating a snowball effect.”
Be mindful, too, that you should have an emergency fund first, of at least six months’ expenditure, before overpaying your mortgage.
You should be confident that you won’t need cash or loans again, such for a home energy upgrade or refurbishment, before using excess funds now to pay off your home loan.
“You might have a cash lump sum but there’s no point putting it towards your mortgage if you also have kids going to college in three or four years’ time,” said Shaun O’Connor, a senior wealth management consultant with Insight Private Clients.
Understand how overpaying your mortgage works
Regularly overpaying your mortgage, or putting a lump sum towards it, should reduce the size of your mortgage balance and the term of your mortgage, cut your monthly repayments and even help you switch to a better mortgage deal by reducing your loan-to-value (LTV) ratio.
Mortgage payments are made up of two components; interest on the loan and a principal amount.
“If you owe €100,000 on a mortgage over the next 10 years, you’re paying off both the capital and the interest,” O’Connor said.
“But as time goes by, you’re paying more capital than interest.”
How much you could save
You can figure out how much you’ll save over the lifespan of your home loan by using the mortgage overpayment calculator on the Competition and Consumer Protection Commission’s (CCPC) website, at ccpc.ie.
Each lender has its own calculator to demonstrate the effects of overpaying its different types of mortgages.
The CCPC calculator shows that if you’re on an interest rate of 4pc, with 20 years left on your term and an outstanding mortgage balance of €230,000, you could save a whopping €38,350 in interest and shorten your mortgage term by seven years if you increase your mortgage repayments by €500 a month.
Not only that, the savings dwarf those benefits of putting that €500 into an Irish deposit account every month.
For example, if your mortgage rate is 4pc and you overpay your home loan by €500 a month, or €6,000 a year, you would be almost €8,000 better off in 10 years than if you’d put the same amount in a 2pc deposit account, thanks to the magic of compound interest, according to Charalambous’s calculations.
What are the other benefits?
By overpaying your mortgage and shrinking that debt, you will have more disposable income.
You could then use that money to fund contributions towards your pension, giving you 40pc tax relief if you’re on the higher rate of income tax, or towards other investments.
By repaying your mortgage early, you would have the financial freedom to be less reliant on a regular income should you lose your job or have to retire earlier than planned due to ill health.
But the biggest benefit of becoming mortgage-free cannot be measured by a spreadsheet: the peace of mind that comes with owning your home outright.
Is there any point in overpaying on a low fixed rate?
If you’re on a cheap fixed deal, using some of your savings to pay off a chunk of your mortgage now could ease the shock of being moved to a standard variable rate, when you’d face a sudden jump in monthly repayments.
“In the short term, more than 50,000 mortgage-holders are due to roll out of fixed rates,” said Martina Hennessy, managing director of mortgage brokers Doddl.ie. “The financial strain on home owners is intensifying.”
Charalambous added: “If you were lucky enough to get a fixed rate of 2pc or 3pc for two, three or four years, you haven’t really faced the reality of higher rates. But you will once you come out of it in the next one or two years.”
What are the penalties?
If you’re on a fixed interest rate, you could be charged an early repayment fee for overpaying your mortgage more than you’re allowed. There is usually no limit if you’re on a tracker rate or a standard variable rate (SVR).
Even if you have a fixed rate, you can typically overpay 10pc of your normal monthly repayment without incurring this charge.
For instance, if your mortgage is with Bank of Ireland, you can overpay by 10pc a month, or €65 a month, whichever is greater.
Since October 14, AIB allows all new and existing fixed rate customers to overpay by €5,000 each calendar year for the duration of the mortgage without imposing an early repayment charge.
However, fixed-rate customers on a cheap deal shouldn’t be afraid to call their lender and ask if they’ll waive this charge, Charalambous said.
“If I was a fixed-rate customer whose rate was not expiring for a year or two, I’d ring the bank and say, ‘I want to pay you back x amount’,” he said.
What are the downsides of mortgage overpayments?
The money you spend on paying down your mortgage is illiquid. This means that you can't access those funds without selling the property or taking out a loan using the property – and its increased equity – as collateral.
Once the money is sunk into the family home, it will not generate an income like other investments
So you must ensure you have enough cash in your emergency fund for a rainy day, that you won’t need that money for other purposes, such as funding your children’s education, and that you’re satisfied you don’t want to invest that cash instead.
“It’s important to sit down with an independent professional before you do this,” O’Connor said. “Once the money is sunk into the family home, it will not generate an income like other investments.”
Indeed, overpaying your mortgage comes with an opportunity cost: you may miss out on other investment opportunities that could provide higher returns, including your pension.
Still, with the average rate on a new mortgage now at 4.3pc, that other investment would need to command a return of almost 7pc before it would be worth it, Charalambous and O’Connor said.
While repaying your mortgage is a tax-free investment, other non-pension investments attract taxes and management fees. For instance, you’ll pay capital gains tax of 33pc on the profit from the sale of individual stocks and a 41pc exit tax on the sale of funds (or after eight years of holding that fund). Management fees typically range from 1pc to 1.5pc.
In addition, while investing may generate higher returns than a loan's interest cost, markets also come with the risk of losses.
“The higher the risk, the higher the return, but markets have been volatile the last two years so the returns are not what you’d normally expect,” O’Connor says.
There is, however, a compromise, if you can afford it: you can split the difference by overpaying your mortgage and putting more money into your investments – ideally via a pension – at the same time.
“You can do both: increase your mortgage repayments and your pension pot,” O’Connor said. “It doesn’t always have to be one or the other.”
You could save a packet by diverting your savings towards reducing your mortgage
https://www.independent.ie/business...year-to-overpay-your-mortgage/a457362216.html
Gabrielle Monaghan
Today at 02:30
Weighing up whether to use your extra cash to overpay your mortgage might sound like one of those rich people problems. Like worrying you spent too many days in Ireland last year because you’re a resident of Monaco for tax purposes. Or that your friends are using you because of your trust fund.
But mortgage overpayments are not just a financial dilemma for the wealthy: Central Bank data shows that Irish households have a combined €153bn in savings, most of which is earning little to no interest. Many of those households are hoarding that cash despite being under financial strain because of rising mortgage rates.
Financial advisers say savvy clients are instead throwing their savings at increasing their mortgage repayments as interest rates hit their peak. Analysts and economists are betting that the European Central Bank (ECB), which has imposed the most aggressive interest-rate increases in its 25-year history, will start cutting its rates in the first months of next year, after eurozone inflation slowed more than anticipated last month.
Nigel Green, chief executive of deVere Group, one of the world’s largest independent financial advisory organisations, said: “We now expect that the ECB could be among the first of the major central banks to start cutting interest rates in the first quarter of 2024.”
Nick Charalambous, managing director of Alpha Wealth, said: “We are close to the top of the interest rate-hike cycle. People are putting more money towards their mortgage than they usually would because they are coming off fixed rates, or they are on a variable or tracker rate.
"If you’re paying an interest rate of, say, 5pc on your mortgage, repaying your mortgage gives you a great guaranteed return.”
Stuffing any unused cash you have in your savings or current account into overpaying your mortgage could save you tens of thousands of euro in interest over the long term and help you become mortgage-free sooner rather than later. But you need to consider the following factors before opting for this route.
Pay off short-term debt first
The higher interest rates are, the more sense it makes to repay debt as quickly as possible. But even with painful rate hikes, a mortgage is still the cheapest debt you’ll ever have, so you’ll first need to clear more expensive short-term debts – like credit cards, overdrafts, personal loans, credit union loans, and car finance – before tackling your home loan.
Charalambous is an advocate of the “debt snowball method”, popularised by controversial US personal finance personality Dave Ramsey.
I’d focus on the smallest loan first, which typically has the highest interest rate, and look to pay that off aggressively
It involves paying off debts in order of smallest to largest, thereby gaining momentum as you clear each remaining balance. When the smallest debt is paid in full, you roll the payment you were making on it onto the next-smallest debt.
“I’d focus on the smallest loan first, which typically has the highest interest rate, and look to pay that off aggressively,” Charalambous said.Unmute
“Once it’s cleared, that monthly repayment is focused on the next type of loan, effectively creating a snowball effect.”
Be mindful, too, that you should have an emergency fund first, of at least six months’ expenditure, before overpaying your mortgage.
You should be confident that you won’t need cash or loans again, such for a home energy upgrade or refurbishment, before using excess funds now to pay off your home loan.
“You might have a cash lump sum but there’s no point putting it towards your mortgage if you also have kids going to college in three or four years’ time,” said Shaun O’Connor, a senior wealth management consultant with Insight Private Clients.
Understand how overpaying your mortgage works
Regularly overpaying your mortgage, or putting a lump sum towards it, should reduce the size of your mortgage balance and the term of your mortgage, cut your monthly repayments and even help you switch to a better mortgage deal by reducing your loan-to-value (LTV) ratio.
Mortgage payments are made up of two components; interest on the loan and a principal amount.
“If you owe €100,000 on a mortgage over the next 10 years, you’re paying off both the capital and the interest,” O’Connor said.
“But as time goes by, you’re paying more capital than interest.”
How much you could save
You can figure out how much you’ll save over the lifespan of your home loan by using the mortgage overpayment calculator on the Competition and Consumer Protection Commission’s (CCPC) website, at ccpc.ie.
Each lender has its own calculator to demonstrate the effects of overpaying its different types of mortgages.
The CCPC calculator shows that if you’re on an interest rate of 4pc, with 20 years left on your term and an outstanding mortgage balance of €230,000, you could save a whopping €38,350 in interest and shorten your mortgage term by seven years if you increase your mortgage repayments by €500 a month.
Not only that, the savings dwarf those benefits of putting that €500 into an Irish deposit account every month.
For example, if your mortgage rate is 4pc and you overpay your home loan by €500 a month, or €6,000 a year, you would be almost €8,000 better off in 10 years than if you’d put the same amount in a 2pc deposit account, thanks to the magic of compound interest, according to Charalambous’s calculations.
What are the other benefits?
By overpaying your mortgage and shrinking that debt, you will have more disposable income.
You could then use that money to fund contributions towards your pension, giving you 40pc tax relief if you’re on the higher rate of income tax, or towards other investments.
By repaying your mortgage early, you would have the financial freedom to be less reliant on a regular income should you lose your job or have to retire earlier than planned due to ill health.
But the biggest benefit of becoming mortgage-free cannot be measured by a spreadsheet: the peace of mind that comes with owning your home outright.
Is there any point in overpaying on a low fixed rate?
If you’re on a cheap fixed deal, using some of your savings to pay off a chunk of your mortgage now could ease the shock of being moved to a standard variable rate, when you’d face a sudden jump in monthly repayments.
“In the short term, more than 50,000 mortgage-holders are due to roll out of fixed rates,” said Martina Hennessy, managing director of mortgage brokers Doddl.ie. “The financial strain on home owners is intensifying.”
Charalambous added: “If you were lucky enough to get a fixed rate of 2pc or 3pc for two, three or four years, you haven’t really faced the reality of higher rates. But you will once you come out of it in the next one or two years.”
What are the penalties?
If you’re on a fixed interest rate, you could be charged an early repayment fee for overpaying your mortgage more than you’re allowed. There is usually no limit if you’re on a tracker rate or a standard variable rate (SVR).
Even if you have a fixed rate, you can typically overpay 10pc of your normal monthly repayment without incurring this charge.
For instance, if your mortgage is with Bank of Ireland, you can overpay by 10pc a month, or €65 a month, whichever is greater.
Since October 14, AIB allows all new and existing fixed rate customers to overpay by €5,000 each calendar year for the duration of the mortgage without imposing an early repayment charge.
However, fixed-rate customers on a cheap deal shouldn’t be afraid to call their lender and ask if they’ll waive this charge, Charalambous said.
“If I was a fixed-rate customer whose rate was not expiring for a year or two, I’d ring the bank and say, ‘I want to pay you back x amount’,” he said.
What are the downsides of mortgage overpayments?
The money you spend on paying down your mortgage is illiquid. This means that you can't access those funds without selling the property or taking out a loan using the property – and its increased equity – as collateral.
Once the money is sunk into the family home, it will not generate an income like other investments
So you must ensure you have enough cash in your emergency fund for a rainy day, that you won’t need that money for other purposes, such as funding your children’s education, and that you’re satisfied you don’t want to invest that cash instead.
“It’s important to sit down with an independent professional before you do this,” O’Connor said. “Once the money is sunk into the family home, it will not generate an income like other investments.”
Indeed, overpaying your mortgage comes with an opportunity cost: you may miss out on other investment opportunities that could provide higher returns, including your pension.
Still, with the average rate on a new mortgage now at 4.3pc, that other investment would need to command a return of almost 7pc before it would be worth it, Charalambous and O’Connor said.
While repaying your mortgage is a tax-free investment, other non-pension investments attract taxes and management fees. For instance, you’ll pay capital gains tax of 33pc on the profit from the sale of individual stocks and a 41pc exit tax on the sale of funds (or after eight years of holding that fund). Management fees typically range from 1pc to 1.5pc.
In addition, while investing may generate higher returns than a loan's interest cost, markets also come with the risk of losses.
“The higher the risk, the higher the return, but markets have been volatile the last two years so the returns are not what you’d normally expect,” O’Connor says.
There is, however, a compromise, if you can afford it: you can split the difference by overpaying your mortgage and putting more money into your investments – ideally via a pension – at the same time.
“You can do both: increase your mortgage repayments and your pension pot,” O’Connor said. “It doesn’t always have to be one or the other.”