# Pay bits of mortgage or Save



## suzyann (15 Feb 2008)

My partner and I have a 185K mortgage, house is values @500k. We are both in our early thirties with no children. 
We pay 2,500 per month off the mortgage which is more than we are supposed to and means the mortgage should be paid off in 7/8 years time.
We have a surplus of 1K per month - but no savings - Should we use this money to pay of lump sums off our mortgage or would a longer term savings account be a better idea.( if so what would be the best account with no risk)
Thanks


----------



## ClubMan (15 Feb 2008)

suzyann said:


> ( if so what would be the best account with no risk)


See the _Financial Best Buys_ lists of the best term and demand lump sum and regular saver deposit accounts and rates on offer.


----------



## Nodser (15 Feb 2008)

suzyann said:


> My partner and I have a 185K mortgage, house is values @500k. We are both in our early thirties with no children.
> We pay 2,500 per month off the mortgage which is more than we are supposed to and means the mortgage should be paid off in 7/8 years time.
> We have a surplus of 1K per month - but no savings - Should we use this money to pay of lump sums off our mortgage or would a longer term savings account be a better idea.( if so what would be the best account with no risk)
> Thanks


 
In terms of whether you should pay off mortgage or not depends on how much you can earn on your money elsewhere. If we assume you are paying 4.75% interest on your mortgage then paying it off earlier means you are getting an effective rate on your savings of 4.75% with little access to your funds. A savings account would have to pay 6% a year to better this (6% less 20% DIRT = 4.8%) You will probably find it difficult to find a savings account offering this kind of guarenteed return. However with the stock market low at the moment and if you are feeling brave (you will definitely have to be brave) investing in a fund linked to the Irish (or European) stockmarket may do very well. The fact that you would be investing regular amounts will help smooth out some of the probable ups and downs of the market expected over next 12 months. You should ideally plan to invest in such a fund for about 10 years. Almost certainly over such a timeframe you will do substantially better than paying off your mortgage early.


----------



## ClubMan (15 Feb 2008)

Nodser said:


> A savings account would have to pay 6% a year to better this (6% less 20% DIRT = 4.8%) You will probably find it difficult to find a savings account offering this kind of guarenteed return.


There are c. 7% regular saver accounts on offer at the moment but the rates are variable and could change at some point. You also need to read the terms & conditions to make sure that they suit your specific needs.


----------



## Nodser (15 Feb 2008)

ClubMan said:


> There are c. 7% regular saver accounts on offer at the moment but the rates are variable and could change at some point. You also need to read the terms & conditions to make sure that they suit your specific needs.


 
The only one suitable in this case is the First Active one and you can be pretty sure the rate will not last


----------



## ClubMan (15 Feb 2008)

Why is that the only suitable one? Why not avail of it/them while you can?


----------



## Nodser (15 Feb 2008)

ClubMan said:


> Why is that the only suitable one? Why not avail of it/them while you can?


sorry the anglo Irish suits aswell


----------



## Nodser (15 Feb 2008)

Nodser said:


> sorry the anglo Irish suits aswell


 
Actually scrap that. Just read the small print they only guarentee 4.5% (and probably will only give 4.5%) over the entire term and you have to sign up for the entire term at start so that does not suit.


----------



## suzyann (15 Feb 2008)

Thanks for replies  like the idea of having some savings if I need for rainy day so don't have to take out loan - I might be brave enough to buy shares but would probably not risk the full 1000 and maybe do 500 aswell as 500 extra off the mortgage or high interest savings acc.


----------



## Ceist Beag (15 Feb 2008)

Nodser said:


> In terms of whether you should pay off mortgage or not depends on how much you can earn on your money elsewhere.


I wouldn't necessarily agree with that reasoning alone. I'd add in that you should also consider if you might need the money in the short to mid term, say for buying a car, house renovations, and so on. It would be cheaper to save this money in advance rather than pay lumps off a low interest loan (which is essentially what a mortgage is) and take out a high interest loan later for these things. Obviously if you won't have any reason to spend the money in the short to mid term then the advice from Nodser holds true.


----------



## PMU (15 Feb 2008)

suzyann said:


> We pay 2,500 per month off the mortgage which is more than we are supposed to and means the mortgage should be paid off in 7/8 years time.



Congratulations - this means you will have free cash of 30,000 pa to spend on yourselves in 7 – 8 years time.



suzyann said:


> We have a surplus of 1K per month - but no savings - Should we use this money to pay of lump sums off our mortgage or would a longer term savings account be a better idea.




  Paying the mortgage off earlier will reduce the time period at which you can spend the cash you are currently spending on your mortgage on yourselves. [It's also a risk free investment at your mortgage rate.] So it all depends on your time value of money.
   Have you pensions? If so, you could consider making AVCs to avail of tax relief, or can you take out PRSAs, which allow for tax deductible contributions.?   If not, you should consider regular investments in equity funds.


----------



## suzyann (15 Feb 2008)

We both have pensions through work - We think we would be comfortable for the moment putting 400 each month on shares and the other 600 in a high interest deposit account that can be accessible if needed.
Think will leave the mortgage as is for the time being Thanks for all responses


----------



## sunnyside (16 Feb 2008)

Hi all,..a very interesting thread.
This is something I have tusstled with over the past month. I have a very similar set of circumstances to the OP.

For what its worth heres some thoughts.


I spoke with my bank manager who was adamant that over paying the mortgage was the wrong way to go. His reasoning was that cash is king and its imperative to have a fund of money that you have relative free access to.  I do wonder was he trying to protect the length of the mortgage as long term this works out best for the bank, but felt I had to take his advice at face value.

I have gone down the route of putting money in the risk free high interest deposit a/cs,..First actives e-saver, aibs 7 day notice.

And 2 rabo funds which of course are being mangled at the moment but thats obviously a longer term play.

I do think if you are thinking of trading up house in the short to medium term that its best to overpay the mortgage by as much as possible as this would help you borrow less for the 'new' house. Also the bank would look favourably on this which would help you secure a possible bigger mortgage for the 'new' house.


----------



## ClubMan (16 Feb 2008)

sunnyside said:


> I spoke with my bank manager who was adamant that over paying the mortgage was the wrong way to go.


How many times do people have to say this ... don't expect independent professional advice from tied agents of a bank. If you want advice go to a proper/independent advisor. Your bank manager has a vested interest in you not clearing your mortgage quicker than the agreed term and thus making potentially significant savings on interest costs. He's unlikely to ever recommend that you cut into the bank's revenue stream/margins.


----------



## sunnyside (17 Feb 2008)

Clubman.
I am well aware that the bank manager had / has his own agenda. But I do feel it is okay to talk to them too, you get nowhere from not listening,...

I find it interesting the advice from this thread seemed to be the same that he gave to me though,..there is merit in not putting all spare cash against a mortgage.


----------



## Nodser (17 Feb 2008)

sunnyside said:


> Hi all,..a very interesting thread.
> 
> I do think if you are thinking of trading up house in the short to medium term that its best to overpay the mortgage by as much as possible as this would help you borrow less for the 'new' house. Also the bank would look favourably on this which would help you secure a possible bigger mortgage for the 'new' house.


 
I disagree here. Overpaying the mortgage does not mean you borrow less for the new house as long as you saved the money elsewhere. 
Also while a history of missed payments makes you a poor risk to the banks, the opposite is not true. Indeed there is some evidence that banks dislike people who make extra payments as this reduces the banks profits and adds extra work on them.


----------



## sunnyside (18 Feb 2008)

Nodser said:


> I disagree here. Overpaying the mortgage does not mean you borrow less for the new house as long as you saved the money elsewhere.
> 
> I'd take this point of course.
> 
> ...



This seems very strange to me, may I ask what evidence you refer to?


----------



## Darando (18 Feb 2008)

If you don't want to spend all of the 1K then have you had a look at how much time you could speed up payment of the mortgage if you used a small fraction such as €100 p.m. Use Karl's calc. leaves €900 for savings etc.. which means still most cash at hand.


----------



## PMU (18 Feb 2008)

sunnyside said:


> I spoke with my bank manager who was adamant that over paying the mortgage was the wrong way to go. His reasoning was that cash is king and its imperative to have a fund of money that you have relative free access to.


 It’s imperative to have a cash stash of say 3 months earnings to cope with emergencies.  Otherwise, for most people, there’s little point in holding large cash deposits, as all you are doing is exposing your cash to the risk of inflation.

Sure, cash if king if you want to buy something, like a car or a house, or e.g. you have a high risk of unemployment, or you have a sick child or elderly relative that may need care, but if you don’t it’s difficult to see why, except as a precautionary hedge against personal risk, you would want to hold large amounts of cash.   

What does your bank manager propose that will hedge your cash holdings against inflation?


----------



## sunnyside (19 Feb 2008)

PMU said:


> It’s imperative to have a cash stash of say 3 months earnings to cope with emergencies.  Otherwise, for most people, there’s little point in holding large cash deposits, as all you are doing is exposing your cash to the risk of inflation.
> 
> Sure, cash if king if you want to buy something, like a car or a house, or e.g. you have a high risk of unemployment, or you have a sick child or elderly relative that may need care, but if you don’t it’s difficult to see why, except as a precautionary hedge against personal risk, you would want to hold large amounts of cash.
> 
> What does your bank manager propose that will hedge your cash holdings against inflation?




Hi PMU, we talked generally about the topic, but he did not have any great insights.
As he knows I want to trade up my house in the next 2/3 years, his advice (and  I know he is not impartial) was to put it into high interest rate accounts until that time. It means (a) I have a stash of cash in which to buy the new house and (b) if anything did happen to me income wise, theres my hedge. All be it too large an amount really.

If there is a better way at the moment with these turbulent markets I am all ears,..I certainly don't feel getting 5% or thereabouts will help me trade up anytime soon,..

Maybe I should gamble and pick 5 stocks, throw 10k into each of them and hope they'll have gone up 30/40% in 2 years time


----------

