# Should we pay lump sum off mortgage/reduce term



## Kool (24 Jan 2010)

*Age:*
32
*Spouse’s age:*
40

*Annual gross income from employment or profession:*
E35,000 (although on 1 yr contract)
*Annual gross income spouse:*
E35,000

*Type of employment:*
Me: teacher, Spouse: Private Sector

*Expenditure pattern:*
Generally good savers

*Rough estimate of value of home*
E150,000
*Mortgage on home*
E75,000 - 13yrs left on mortgage
*Mortgage provider:*
AIB
*Type of mortgage: *
Tracker variable
*Interest rate*
1.95%, paying approx €540 per month.

*Other borrowings – car loans/personal loans etc*
None

*Do you pay off your full credit card balance each month?*
Yes - currently nothing on either of our credit cards. Cards are rarely used.

*Savings and investments:*
E66,000 savings, mostly lying in current/low interest savings accounts.

*Do you have a pension scheme?*
Contributing to public sector
Spouse pays approx E110 monthly, matched by employer.

*Do you own any investment or other property?*
No.

*Ages of children:*
12 weeks

*Life insurance:*
Currently only on spouse, as he had this for mortgage before we married. In process of organising joint insurance.

*What specific question do you have or what issues are of concern to you?*
Obviously we have plenty of savings and little debt other than the mortgage, but since the arrival of the newborn we are now considering the future and the best way to invest our money in case of any unforeseen circumstances. For example, I am off on maternity and I do not have a permanent teaching post, up to now getting all my teaching experience through 1yr contracts. So there is no guarantee of employment when I return to the work force in September.

Also, in the next 2 or 3 years we would like to begin building our own home, plus there is the likelihood of at least 1 more baby (if all goes to plan).

We were trying to work out if there would be any benefit paying a lump sum off the mortgage capital, and try to reduce the remaining term to say 10yrs or less. Or even increase our monthly mortgage spend while the interest rates are so low and we can afford it. Or would we be better to invest it in a few 1yr or 2yr accounts and try to gain a few extra thousand that way?

Any thoughts welcomed.


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## RMCF (24 Jan 2010)

You seem to have your finances well under control.

As for whether or not you should use some of your savings to pay off a portion of your mortgage, perhaps you could use one of the mortgage interest calculators to see how much it would save you?

Some would recommend not using savings to pay off a mortgage - for some reason many do not consider a mortgage 'debt' in the usual form. 

Perhaps increasing your monthly payments for a while will have that desired effect, and you would not notice it too much out of your monthly incomes? Think its easy enough to make additional payments if you have a variable mortgage - check with your provider.


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## twofor1 (24 Jan 2010)

Kool said:


> Any thoughts welcomed.


 
You appear to manage your money well.

Even allowing for DIRT you can get a higher rate on your savings than you are paying on your mortgage, why not keep saving in a better account and keep all your options open.

Weekends tend to have lower viewings. You will probably get a lot more opinions tomorrow.


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## Kool (24 Jan 2010)

twofor1 said:


> You appear to manage your money well.
> 
> Even allowing for DIRT you can get a higher rate on your savings than you are paying on your mortgage, why not keep saving in a better account and keep all your options open.
> 
> Weekends tend to have lower viewings. You will probably get a lot more opinions tomorrow.



Thanks for that - its not easy to work out which would save more money in the long run, having to consider interest rates, returns, DIRT etc. The rates for savings at present are pretty poor, thats why we were chatting about perhaps making overpayments or paying off a lump sum such as €10k to reduce the capital quicker and try to get the years down a bit. Strike while we are able to, as you never know whats around the corner.

As you say, hopefully I'll get more feedback in the next few days. If not then I might just talk to a financial adviser.


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## chlipps (25 Jan 2010)

Your accounts look very healthy.. just 9k in debt overall? 66-75K=9k.. well done

I think you should list out all your current/savings accounts and see which ones are on very low interest. I think you could put some money against the mortgage but check first with bank so that it does not impact your tracker account.

Also then open maybe a high interest savings account or two and try get as much interest as possible on them. Yes, interest not high at the moment on savings but best to keep say 30-40k anyway as this would come in useful to pay mortgage etc. should one of you lose job. Dont put all money against mortgage until you have more savings that mortgage arrears


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## Kool (26 Jan 2010)

Thanks for that chlipps.

So basically not too clever to put maybe €20k or €30k towards the mortgage capital at this stage? Just keep paying the standard amount and perhaps throw a grand or two at the capital amount every year?


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## Bronte (26 Jan 2010)

In your case I would not pay anything extra towards the mortgage.  You are only paying 1.95%, your lump sum even with Dirt will earn more than that, you also receive I presume TRS, your equity is good, your mortgage very reasonable and you have a big chunk of savings should interest rates go sky high (unlikely).

I would concentrate on saving towards the house build.  Maybe buy a site outright with no loan, this year should get you good value in a site and then wait a while and build when you can afford it.  

Children cost money, so you need to factor that into the equation.  Also is there anything you can do about getting permanent or increasing earning power.  In case one of you lose your job, do you have a back up plan for that.    

You are doing well.


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## Kool (26 Jan 2010)

Bronte said:


> In your case I would not pay anything extra towards the mortgage.  You are only paying 1.95%, your lump sum even with Dirt will earn more than that, *you also receive I presume TRS*, your equity is good, your mortgage very reasonable and you have a big chunk of savings should interest rates go sky high (unlikely).
> 
> I would concentrate on saving towards the house build.  *Maybe buy a site outright with no loan*, this year should get you good value in a site and then wait a while and build when you can afford it.
> 
> ...



Thanks for the feedback.

To answer your points:

- No longer get TRS. My OH bought the house back in 2000 and so was past his 7yrs, with the Gov abolishing it for those >7yrs on one of the recent Budgets.

- Already have a site through my parents. Afaik it has been legally signed over to me/us for the future build. Not sure if there is any tax or inheritence concerns with this?

- Would love to get permanent after coming back from maternity, but permanent teaching jobs are like gold dust at present.


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## Peadar (26 Jan 2010)

Hi Kool, 

If you are thinking of building a house in the next year or two and if you have to borrow money for the build then you would be mad to pay off any of your current mortgage now. 

Your on a tracker rate of .95% above ECB. If you pay off that money now you may have to borrow at a much higher rate in the future. Banks are not giving out tracker mortgages any more and they are charging margins of 2-3% on new variable loans. So you will be paying off cheap debt and then taking out more expensive debt again. 

Keep paying off your mortgage every month and look for high interest saving accounts. If you can keep your money tied up for 3, 6 or 12 month periods you might be able to get a higher return.

You look to be in a good financial position from the info in your post, keep doing what you have been doing all along.

Peadar


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## annR (26 Jan 2010)

Kool
We are in a similar position ourselves except we will be trading up rather than building.  We are on a tracker mortgage as well. I realised while looking at houses that any mortgage we get in the future will be a) bigger than our current one and b) at a higher interest rate.  Also we may need to spend money on the new house.  We will probably need all the cash we can possibly save up instead of paying off a very cheap mortgage now.  
A


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## Kool (26 Jan 2010)

Again thanks for the replies.

I was under the belief that if I threw the odd €1k at the capital on the mortgage then this might be a good idea. I hate to look at the statements I get and see that for every 3 payments I make, 1 goes back on in interest. This 1 interest is now less than one monthly payment due to the low interest rates, whereas this time last year it was a good bit higher than one monethly payment.

I appreciate that this has to happen with mortgages, interest being unavoidable, but I would love to see the capital amount chipped away at/or even the amount of years reduced to under the magical 10 - perhaps its just physcological?


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## Kool (29 Jan 2010)

Sorry to hark back to this, but I did mention that I found making 3 payments to see one of them go on interest a bit painful, and I Was thinking about the maths.

If I was to put €50k away for 1year at the current best rate of 3.5% (2.76% after DIRT) then I would get €1375 approx.

If I pay my mortgage as normal for the next year then I will put in €540 every month, with one payment of €540 approx going as interest each quarter.

So I will pay approx €2160 in interest, against earning €1375.

Sorry if this is a stupid question, but people saying that 'mortgage is cheap debt' is slightly confusing me here. And the fact that we are being prepared for interest rate rises in the future, the amount of interest I will be paying will go up as well.


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## landmarkjohn (29 Jan 2010)

as long as you are earning a higher percentage on your savings after DIRT than the percentage on your mortgage then you are ahead. Even if it was on par or slightly below I would definately keep the cash for rainy day money, circumstances can change and you have a nice buffer to ride the rough for a couple of years.


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## Kool (29 Jan 2010)

landmarkjohn said:


> as long as you are earning a higher percentage on your savings after DIRT than the percentage on your mortgage then you are ahead. Even if it was on par or slightly below I would definately keep the cash for rainy day money, circumstances can change and you have a nice buffer to ride the rough for a couple of years.



Thanks for the reply.

I hear what you're saying about rainy day money, but would there be no merit at all in putting say €10k or €15k off the capital now, which would still leave me with enough rainy day money?

Would reducing the capital from €75k to €60k not save me enough on yearly interest to justify it? (any calculators out there which will show this in € amounts?).


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## chlipps (29 Jan 2010)

do a search for a karl jeacle calculator and that gives estimates as to term reduction in the event of lodging lump sum

not sure how you came up with the 2160 total interest per year on your mortgage? I think you will pay 1462 int next year on mortgage of 75k versus 1380 int received on 50k saving..  If you did throw across the full 50k, you will still have interest to pay on the 25k remaining

landmarkjohn is correct in that as along as interest on savings is higher than mortgage int rate then you will make money..Best always to have cash as impossible to get a loan again if you need it at the moment. Maybe proceed to reduce the amount by say 25k but hold 50k in savings for rainy day


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## kopq (30 Jan 2010)

The jeacle calculator is great: www.jeacle.ie. Putting your figures into it, by paying €16k off your capital, you would reduce your term by 3 years and save approximately €4k in interest. That would still leave you with €50k in savings. 

You've got some good advice here, but it seems having debt, even mortgage debt is something that weighs heavily on your mind. I'm the very same and want to do everything to pay mine off as soon as possible. 

While there are savings accounts with interest rates half a percent or so higher than your mortgage rate, paying a lump sum off your mortgage is not going to cause you to lose anything significant in "lost" savings interest. As getting your mortgage term under 10 years is important to you and won't cause you any major financial adverse affects, I say go for it. 

Pay €16k off your capital. That leaves you with 10 years on your mortgage and a very nice nest egg of €50k. Quite an enviable position if I say so myself!


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## Kool (31 Jan 2010)

Thanks for the last few replies - some more food for thought.

I may have been overestimating the amount of interest going on my mortgage over a year - I was just using one months mortgage payment as a guide as to what might go back on in interest each quarter, but in theory it is not as high as this.

Having said that, it looks like we are in for a rise in mortgage interest rates in the very near future, now that PTSB have tested the water.

As for paying off the €16k, well yes I do think I have a phsycological issue with debt and my mortgage, and would like to get it down as quickly as possible. The returns on savings is pretty poor at present, so I would love to see my mortage under 10yrs to be honest. Even if I did pay off that amount, then I would liek to think I would be able to get my savings back up quickly over the next couple of yrs, jobs permitting !

Thanks again all.


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## Bonzo (1 Feb 2010)

Another thing you can look at which I did a couple of years ago was to pay my morgage weekly I kept the same payments but obviously because my interest would be less I cut approx three years off the life time of my morgage.  Bank didn't want to do it but there is no law that stops you, they will also tell you what you'll save.


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## Kool (1 Feb 2010)

Bonzo said:


> Another thing you can look at which I did a couple of years ago was to pay my morgage weekly I kept the same payments but obviously because my interest would be less I cut approx three years off the life time of my morgage.  Bank didn't want to do it but there is no law that stops you, they will also tell you what you'll save.



Thanks for that. 

On the subject of the CALCULATOR, whereabouts would you put in a one-off payment?


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## annR (1 Feb 2010)

Jeacle's calculator does have a box for one off payments, play around with it for a bit and you will get the hang of it.  It sounds like you are already reducing the capital but you will see the exact figures if you use the calculator.

>>Sorry if this is a stupid question, but people saying that 'mortgage is cheap debt' is slightly confusing me here. <<

I can see that you have a problem with paying interest on the mortgage at all and I can understand that, but if you are earning more interest by saving the cash, you are ahead as the other posters have said.

>>And the fact that we are being prepared for interest rate rises in the future, the amount of interest I will be paying will go up as well. <<

All the more reason to save up your cash now, and throw it at the mortgage later when the interest rates do go up.


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## Kool (1 Feb 2010)

Some great advice on this site. Well done folks.


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## kopq (1 Feb 2010)

Kool said:


> Thanks for that.
> 
> On the subject of the CALCULATOR, whereabouts would you put in a one-off payment?


 
At the bottom of the screen, there's a button called Extra Payments. Click on that. For Extra Payment #1 enter the amount you will be paying off. For Start Month # enter the month you would be paying this off, ie, if you're paying it off in March, enter 2. For End Month # do the same, enter the same number you had for Start Month #. Otherwise it will assume you're making the same extra payment every month.


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## japester (1 Feb 2010)

I get what you're saying about the psychological side of things and paying a chunk off the mortgage in order to make it more pleasing to the eye. I was having a similar vein of thought recently about my own mortgage but when I crunched the numbers, it would have been financial suicide to pay off early since I am getting 21% net from An Post over 5.5 years and my SVR mortgage is just 2.85% APR. When you see the tens of thousands involved, it makes you realise that in some circumstances, paying the mortgage off early is foolish


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