Using (deferred) savings to pay down mortgage

[Mayo1969]

Sorry I know this theme is discussed elsewhere on this forum where I myself have already posted, but I want to be clear and get the most up to date perspective on it.

I've been reviewing my various savings accounts, many of which I set up through incentives and enticement by the various financial institutions which invariably expired after the first year, so now I am earning less than 1% interest (before DIRT) on most of my savings accounts (I'd say on average about .5 of %).

My mortgage is a <50% LTV currently at a rate of about 3.65% (but due to drop again soon) with about €115k left to pay and 21 years remaining. The repayments are very manageable at around €720 p/m and in fact I could afford to pay a good deal more each month if I diverted the money from regular savings.

The prevailing advice in the mortgage forum appears to recommend paying down the mortgage but not reducing the term, but rather the monthly repayment?

If I want to pay down lump sums from my savings (since there is a differential there of more than 3%) and I want to retain my monthly repayments as is (or possibly increase them somewhat) what are my options?

If I say pay €10k of a lump sum to the mortgage account (and similar sums in the future as I get access to them) and increase the monthly repayments, where do those extra payments go? Are they put against the capital sum or are they apportioned between capital and interest like the monthly repayments?

Ultimately, as I understand, by choosing this option it foreshortens my mortgage term below 21 years without actually entering into a direct agreement with the bank to do this? And the advantage of this is that, in the event that I get into unanticipated difficulties with my repayments some time in the future, these additional payments can be credited against my required monthly repayments, is that correct?

I also noticed where another poster had mentioned that they had an arrangement with their institution (KBC?) whereby they could lodge this money against their mortgage with the option to withdraw it again whenever required, and accordingly were effectively getting an APR on their deposit equivilent to the SVR. Is this an option available from all financial institutions?

 

[Connard]

Any extra payments whether they're once off lump sums or regular payments will come off the capital 100%. None of it goes to interest.

 

[Monbretia]

The balance of a mortgage is not a set thing, it's an accumulation of amount borrowed, interest added every month or quarter or whatever and payments paid come off. So say you start borrowing 100k @ 3.8% on 1st January for simplicity-

Capital/Balance outstanding Day 1 100,000
Interest added month 1 (31 days) 323+
January Repayment 516-
Balance outstanding at end of Jan 99,807

Balance outstanding Feb 1 99,807
Interest added month 2 (28 days)
(on now lower balance of 99,807) 291+
February Repayment 516-
Balance outstanding at end of Feb 99,582

And so on for the next 25yrs unless something changes. This is a simplified version as your bank probably calculates interest daily so the interest added will be slightly different as if your payment was due towards the start of a month then the interest will be calculated at a slightly lower balance for more of the month than my example. Also assumes your payments are reasonably set barring rate changes.

Now if you choose to pay off 10k in the above example on the 1st of March then the balance will reduce to 89,582 on that day.

You would need to check with your own bank what the procedure is with overpayments and if they can or cannot be returned. Some banks do allow them back again when they have not been 'officially' used to amend the terms of the mortgage, once that is done they cannot be returned but if the overpayments are just showing on the bank system as a credit or pre payment then some can return them. This does not mean they will not have been an advantage to you, your interest should still be lower as it is calculated on the net outstanding balance (again check with your bank but would be surprised if different) so your overpayments will have been taken into account for calculation purposes. The credit or overpayment column on the bank computer just means you have overpaid your scheduled repayments and really is just an accounting figure.

(Excuse how the table looks, can't figure out why the spaces I can see in the draft don't come up when I post it?)