What to do with spare take home pay - Mortgage Vs Invest Vs AVC's

[scomposto]

Hi all,

I would appreciate some feedback on our situation, this forum is very helpful and have found some great advice in the past. My specific questions are at the end.

Thanks!


Age:
32
Spouse’s/Partner's age:
41

Annual gross income from employment or profession:
€45,000
Annual gross income spouse:
€50,000


Take home pay combined:
Around €4,000 (after such things as loan repayments, VHI, Travel Ticket, CU Savings, AVC's)

Type of employment:
Private sector for me
Public sector for my partner

Expenditure pattern:
We tend to be savers more than spenders, spare cash sometimes builds up in our current accounts.

From our take home monthly;
We generally put €800 away for bills and living expenses.
We pay mortgage repayment of €970
Probably spend another €600 on 'things'
This leaves about €1600!

We are getting married this year, expecting to spend another €8k between now and then on that!

Rough estimate of value of home
€360,000

Mortgage on home
€185,000 - 24 years remaining

Mortgage provider:
KBC

Type of mortgage: Tracker, interest only, fixed rate
Variable Rate

Interest rate
Currently at 3.25%

Other borrowings – car loans/personal loans etc
Car Loan - €8900 remaining @ 5.6% APR.
€201 monthly, usually over pay by €100 monthly also.

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

Savings and investments:
€28,000 in CU savings
Adding to that by around €800 monthly between both of us.

Do you have a pension scheme?
Yes, I pay €190 monthly into pension fund , employer pays €300 (5% + 8% salary)
My pension fund is only worth 11k at the moment, as I was a late starter to the pension.
Partner has DB pension and is also paying €450 monthly to AVC's

Do you own any investment or other property?
No.

Ages of children:
None.

Life insurance:
No life insurance policy, but have mortgage protection!
We both have death in service benefit (8x salary for me, not sure about partner, but similar)

What specific question do you have or what issues are of concern to you?
We are wondering what to do with the spare cash left over each month from our take home figure. It can be as much as €1600 monthly. We are thinking of going hell for leather paying off the mortgage as soon as possible. It would be nice to get it wiped out or at least a huge chunk knocked off over the next few years. We already have some savings so will have access to cash if something comes up!

Or

Am I at a point where I need to start AVC's also, or can I worry about that when the mortgage is not hanging over us - which could be in less than 10 years or so if we make regular monthly overpayments of €1000+ (We can probably afford both). I am also contemplating starting some investments, but would need to seek advice on this first.

Also, regarding our savings, I know the CU is not the best place to be keeping them. Should we move a portion of that into a deposit account/investment?

 

[RedOnion]

First off, why do you have a loan at 5.6% when you've savings timpay it off? You'd need to earn over 11% interest on your savings to earn that after tax. So step 1 repay that if you can.

Next, get onto a better interest rate in your mortgage. You've 50% LTV so can reduce that rate. Might require a valuation if sticking with KBC, but look at what else is available if you switch.

After that you've scope to both increase AVC and overpay mortgage. There's much debate on the topic here.
Personally I'm in my late 30's, and mortgage free, but my pension contributions suffered to get there. Having a low mortgage does give a lot of financial freedom, so I'm glad we did it, but I now need to give pension some TLC.

What are your overall long term plans? Do you plan to retire at the same time as your partner? Any plans for children? Do you envisage having large salary growth in the medium term?

 

[RedOnion]

As for investment question - the best risk free return you can get is by repaying your mortgage. I wouldn't look at anything else while you still have a mortgage. If you want to invest in equities, do it through your pension.

 

[scomposto]

First off, why do you have a loan at 5.6% when you've savings timpay it off? You'd need to earn over 11% interest on your savings to earn that after tax. So step 1 repay that if you can.

Next, get onto a better interest rate in your mortgage. You've 50% LTV so can reduce that rate. Might require a valuation if sticking with KBC, but look at what else is available if you switch.

After that you've scope to both increase AVC and overpay mortgage. There's much debate on the topic here.
Personally I'm in my late 30's, and mortgage free, but my pension contributions suffered to get there. Having a low mortgage does give a lot of financial freedom, so I'm glad we did it, but I now need to give pension some TLC.

What are your overall long term plans? Do you plan to retire at the same time as your partner? Any plans for children? Do you envisage having large salary growth in the medium term?

I took out the loan so I could hang on to savings....I intend to pay it back fast, but wasnt intending on paying it off in one go. Is that a stupid thing to do?

Well done on being mortgage free yourself - do you have any worries regarding your pension pot after it was neglected or are they just cancelled out by the freedom you have now?

Regarding long term plans, ill probably retire a few years later, but who knows, that will depend on our situation when the time comes I suppose. No plans for children. I would envisage a salary of €60k+ in 5 yrs or so forfor myself. Partner is at top of payscale currently so no scope for increase unless change of job!

As for investment question - the best risk free return you can get is by repaying your mortgage. I wouldn't look at anything else while you still have a mortgage. If you want to invest in equities, do it through your pension.

Thanks for that, that is what I was thinking, just looking for advice from the people in the know!

 

[Sarenco]

I took out the loan so I could hang on to savings....I intend to pay it back fast, but wasnt intending on paying it off in one go. Is that a stupid thing to do?

Hi @scomposto

It's a very common way of thinking but, and I hope you will forgive me if this sounds overly harsh, yes, it is stupid.

Think of it this way - you wouldn't borrow money at 5.6% just to put it on deposit earning 0.5% (or whatever derisory rate your credit union is paying you on your savings). Right?

But that's exactly what you are doing by maintaining savings while carrying a high-interest loan.

Whether you pay down your mortgage ahead of schedule or make additional AVCs is a relatively marginal decision - paying off high-interest debt while maintaining deposits at a low interest isn't.

The first thing you should do is pay off the car loan. That's absolutely clearcut - it's a "no brainer".

After paying off the car loan, you should definitely look at reducing your mortgage rate.

After that you get into shades of grey. I am firmly of the view that it makes more sense to prioritise maximising pension contributions ahead of paying down a mortgage ahead of schedule. I think that, on balance, that is likely to work out to be better call financially over the long term.

But it's marginal. And it's not guaranteed.

If you would feel more comfortable getting mortgage-free before maximising your tax advantaged retirement savings then that's the right thing for you. After all, we are talking about personal finance.

Either way, I strongly agree with @RedOnion that you should definitely prioritise paying off the mortgage and/or increasing your AVCs over making after-tax investments.

Incidentally, congratulations on your upcoming nuptials - there's a lot more to life than money.

Hope that helps.

 

[RedOnion]

do you have any worries regarding your pension pot after it was neglected or are they just cancelled out by the freedom you have now?

I'm not necessarily worried about it, as I've still time to build a decent pension. My goal a few years ago was to agressively pay down mortgage to give us freedom to make choices. For example when we had children, we could afford for my wife not to work because the mortgage was managable.

My pension wasn't completely neglected, but was underfunded. The one regret that I have in hindsight is that there were a few years I didn't take advantage of employer matched AVC's. Also, I'm in a situation now where I'll max out my tax relief, and have spare cash that will be invested 'after tax' outside a pension. I've lots of flexibility, but I should have switched focus to pension once the mortgage was at a very comfortable level. If I had done things differently, I'd have about 100k extra in my pension, that would only have 'cost' me about 35k, factoring in missed employer contributions and tax relief.

I should point out, in my situation, there were a few years where I didn't have secure employment, so so the 'guaranteed' return of paying down mortgage was very important in my decision making at the time.

 

[gnf_ireland]

If you would feel more comfortable getting mortgage-free before maximising your tax advantaged retirement savings then that's the right thing for you. After all, we are talking about personal finance.
Either way, I strongly agree with @RedOnion that you should definitely prioritise paying off the mortgage and/or increasing your AVCs over making after-tax investments.

Absolutely agree with above - outside a decent security blanket (rainy day fund), and cover for any immediate expected expenses such as car replacement or the likes, the best use of money is to pay down the mortgage or increase pension contributions.

Personally, I believe that it depends on the level of the mortgage versus level of pension funding. I would target the mortgage until its gets to about 45% LTV and/or 1.5 times LTI - so roughly half the CB lending rules. After that the mortgage is definitely in the "easily manageable" category and therefore the focus should move to increasing pension contributions.
Obviously all of this is personal choice, and being debt free does offer considerable flexibility. That said so does a large pension pot in terms of early retirement etc.

Having experienced the full impact of taxes on investments outside of a pension fund, I have to say it should be a last resort to people once they hit a certain age bracket. I still believe Ireland needs something aligned to an ISA for this purpose... but will it ever happen !

 

[Gordon Gekko]

It would only cost you €338 a month after tax to max out your AVCs; you can contribute 20% of €45,000 and are already doing 5%.

As others have suggested, clear the car loan; having that with so much cash on the side is madness.

Then get a better mortgage rate. Then start paying it down aggressively (i.e. overpaying at least €1,000 a month).

You could be in great financial shape if you stick to the plan.

 

[scomposto]

Thanks to all for the advice, it is much appreciated and very helpful!


I am making arrangements to get the car loan sorted out. Deep down I kind of knew that it was a silly idea, but I liked the comfort of not having to dip into the savings for it. But as pointed out, there’s no point having a loan balance outstanding with the savings just sitting there! (I cleared my last car loan for this very reason, although it was a much smaller balance)


The advice on the after tax investments makes perfect sense also, I never really thought of it that way. They are not for me at this point in time I suppose.


From the ‘personal’ finance point of view, I think we are happier to wipe the mortgage out as quickly as possible. We are going to aim for €1000 - €1200 per month. Should have it done in less than 10 years, which would be amazing! As my salary increases, I will siphon some of that additional gross pay into AVC’s -probably starting from next year. I think that should give us a fair spread across pension pots and becoming debt free. I intend on keeping tabs on things and reviewing every 6 to 12 months to see where we stand and whether we can increase funds into one thing or the other.


Finally, a couple of people mentioned getting a better mortgage rate. I have heard recently that KBC might be reducing their rates over the next few months, so I will see what they offer before going down that road. Otherwise there does seem to be some slightly better rates available elsewhere, which we did a quick bit of research on.


Does anyone have an idea of what costs would be involved in switching. I see that Haven mortgages have a variable rate of 2.75% (2.8% APRC) for an LTV of 50% or less, which would be our bracket shortly. They are offering €2000 to cover switching costs also – would the costs be much more than that typically?

 

[gnf_ireland]

Does anyone have an idea of what costs would be involved in switching. I see that Haven mortgages have a variable rate of 2.75% (2.8% APRC) for an LTV of 50% or less, which would be our bracket shortly. They are offering €2000 to cover switching costs also – would the costs be much more than that typically?

Ballpark it would be less than 1500 euro to switch. You will need to pay a valuation fee of 130 euro and the solicitor fees of around 1000-1200 depending on your solicitor. If you go to your original one they may do it at a discount for you. Alternatively they might throw in writing a will or something as a sweetener for you !
2000 euro will easily cover the cost of switching, and have a nice weekend away for your trouble !