# Savings- Invest or Pay Off Morgage



## JP101 (20 Sep 2005)

Is it best to pay off your mortgage as quickly as you can


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## CCOVICH (20 Sep 2005)

I'd say it's unlikely that you're earning as much off your savings as what you are paying on your mortgage, so in theory, yes.

There's quite a bit of discussion about this sort of thing on AAM, and some contributors have actually done this, so they will be able to give you better advice than I can.

For what it's worth, if I was in your position, I would use a fair chunk of my savings to pay off some/most of the mortgage, _invest _(as opposed to _save_) some of the money to see if you can earn returns over and above what you are paying in mortgage interest, and _save_ a few thousand for a 'rainy day'/unforseen circumstances in Rabo/NR/AIB.


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## PMU (20 Sep 2005)

If your ‘savings’ are sitting in a bank account earning toss all you are better off paying your mortgage early (but first check out for fees, early redemption premia, etc.). If your savings are in a unit fund it might make sense to do as CCOVICH says. But you really need to set up a spreadsheet and crunch the numbers, depending on how long your mortgage has to run, etc.   If you pay off your mortgage early (as I have) for real long term benefit you need to continue to contribute the amount of your monthly mortgage payment into an investment product (e.g. a PRSA on which you can claim tax relief, or a  no load low cost index tracker).


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## asdfg (20 Sep 2005)

Have you a pension set up. You can pay into a pension plan and recover up to 48% from the revenue subject to certain guidelines. 
Heard this morning that we need to have build up a fund of 10 times salary to provide a salary in retirement of 50% of salary prior to retirement.


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## angie (23 Sep 2005)

Hi would you not put the saving into one of the current account mortgages. As the balance on the account is offset against the mortgage balance when calculating interest.  Therefore you are in effect earning the mortgage rate on your savings and the money is there should you need it or change your mind.  Your mortgage payment is then paying off the capital at a much faster rate.  Or would that work ?


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## oysterman (24 Sep 2005)

angie said:
			
		

> Hi would you not put the saving into one of the current account mortgages. As the balance on the account is offset against the mortgage balance when calculating interest. Therefore you are in effect earning the mortgage rate on your savings and the money is there should you need it or change your mind. Your mortgage payment is then paying off the capital at a much faster rate. Or would that work ?


Weakness of that strategy is that it results in leaving a large capital sum over a protracted period of time earning a very undramatic rate of interest which barely keeps pace with inflation - this is the downside of a low interest rate era.

JP's current investment/savings portfolio of shares and SSIAs has the potential to give wealth creating returns.

IF JP feels that now is the time to liquidate his/her share portfolio, then discharging any CGT liability is effectively the price to be paid for banking his/her profit. The portion of the mortgage redeemed in consequence does in fact deliver a return equal to the rate on the mortgage (less the tax relief foregone).

If being mortgage free gives JP the confidence to invest (as opposed to save) the future mortgage payments that will not now have to be made, this gives a chance of creating some real wealth in the medium to long term. It's a strategy not without risk but negative or neutral real interest rates make risk an essential element of any scheme to generate a meaningful return for oneself.


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## kibby (8 Jun 2007)

I have about €110k outstanding on my mortgage: if I were to put €30k into it would it make a significant dent in my repayments? Or should I stick that money away in a notice account?


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## CCOVICH (8 Jun 2007)

Check out the mortgage calculator at www.jeacle.ie to see the effect of reducing the amount outstanding on your mortgage.

The after tax return on savings is unlikely to be higher than the interest payable on your mortgage.


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## Guest126 (8 Jun 2007)

Not too sure that there is much evidence to back-up the previous statement, particularly when one factors in mortgage interest relief on the mortgage repayments.


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## CCOVICH (8 Jun 2007)

CapitalCCC said:
			
		

> Not too sure that there is much evidence to back-up the previous statement, particularly when one factors in mortgage interest relief on the mortgage repayments.


 
Say €400,000 mortgage with an interest rate of 5%.  Interest for the year (after €16,000 TRS @ 20%) is €16,800.

Pay €30,000 off the mortgage to reduce the balance to €370,000.  Interest for the year is €15,300.  That's a saving of €1,500.

The interest earned on €30,000 for one year at 5% is €1,200 (after tax).

The above analysis is fairly simplified (assumes savings rates are the same as mortgage rates, no compunding, highest rate of TRS etc.), but perhaps you could present alternative calculations to show that you could earn more by puttting the money on deposit?


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## Guest126 (8 Jun 2007)

The poster's mortgage is not 400k, so they will be losing some of the mortgage interest relief.

In the example you showed, the person does not lose any mortgage interest relief so it is an inappropriate comparison.

Have a look at the numbers for a 110k mortgage (as in this case)...the situation will exactly match...same interest rate and tax rate identical.

So if the rate returned > 5% they will do better going for the return (in your example).


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## Sherman (8 Jun 2007)

Don't forget the impact of inflation on deposit savings. With inflation running at close to 5% the real return on deposit savings is effectively nil.


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## CCOVICH (8 Jun 2007)

I was giving a general example, hence why I used the term 



> The after tax return on savings is unlikely to be higher than the interest payable on your mortgage.


 
With an mortgage rate of 4.75% and a savings rate of 5%, I make the additional return on savings (in the OP's circumstances) to be €60 for a year.  And that assumes that all interest on the mortgage qualifies for TRS.

This also ignores that fact that making a capital repayment on your mortgage can allow you to reduce them term of the mortage-which could result in more savings, and allow for the type of scenario outlined above



			
				oysterman said:
			
		

> If being mortgage free gives JP the confidence to invest (as opposed to save) the future mortgage payments that will not now have to be made, this gives a chance of creating some real wealth in the medium to long term. It's a strategy not without risk but negative or neutral real interest rates make risk an essential element of any scheme to generate a meaningful return for oneself.


 
I would take the view that the excess return (if any) on a deposit will be marginal.

Of course if you have a small mortgage and a capital sum to invest (as opposed to save), the advice may be different-but that depends on appetite for risk and investment timeframe.


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## Guest126 (8 Jun 2007)

The example was not correct for the poster's situation.

If the person has an appetite for risk (as intimated in your quote from oysterman) then they would definitely look to earn > 5% return on savings and they would then be inclined to shy away from the mortgage reduction proposition.

However, each to their own, but there are clearly two sides to this coin and the example was skewed to one side.


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## CCOVICH (8 Jun 2007)

CapitalCCC said:


> If the person has an appetite for risk (as intimated in your quote from oysterman) then they would definitely look to earn > 5% return on savings and they would then be inclined to shy away from the mortgage reduction proposition.


 

There aren't too many places in Ireland that I am aware of offering greater than 5% on lump sum savings- (see here-yet to be updated for latest ECB hike)if you are referring to investments than yes, returns greater than 5% are certainly achievable-but at a higher risk.

For the record, I take the statement



			
				kibby said:
			
		

> Or should I stick that money away in a notice account?


 
to mean that they were not referring to any kind of equity/bond/property based instrument.


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## Guest126 (8 Jun 2007)

I presumed you were talking in the general (especially given your motgage example being so far removed from the poster's situation)...maybe they have not considered other possibilities yet.

Please note that people often put their SAVINGS into INVESTMENTS.


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