# 36 years old - should I make extra payments on mortgage?



## Shrugselent (31 Jul 2018)

*Age:* 36
*Status: *Single, no children.

*Annual gross income from employment or profession:* € 60,000

*Monthly take-home pay: *€3,022 (After tax and pension contributions)

*Type of employment:* Private sector employee. 

*In general are you:*
(b) saving?

*Rough estimate of value of home*       €350,000
*Amount outstanding on your mortgage*:   €225,500
*What interest rate are you paying?*   2.95%   (variable - AIB)

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

*Do you pay off your full credit card balance each month?* N/A (no credit card)

*Savings and investments:* Cash: €22,000

*Do you have a pension scheme?* Yes, through employer. Current value approximately €30,000. I recently increased contributions. I now put in 15% of salary, employer puts in 5% so that's €1,000 contributions per month going forward.

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

*Life insurance:* Just the reducing balance policy I had to get when taking out the mortgage. As I am single, and I don't have kids or other dependents this policy is only of benefit to the bank really.

*What specific question do you have or what issues are of concern to you?* Please see below.

Hi I am a long term reader of the Askaboutmoney forums, but this is my first time posting.

I bought a house in 2016. I took out a 31 year mortgage (approximately 29.5 years remaining). When I started the mortgage payment was €1002 per month but it dropped a few months back thanks to the AIB rate change and is currently €961 per month.

My monthly take-home pay is €3,022 (after tax and pension contributions). Of this, I put aside €1,000 to 'pay-myself first' which leaves me €2,022 for monthly expenses (from which the €961 mortgage is paid  etc).

My initial goal (which I have almost reached) was to build up a cash-cushion of €25,000 as rainy-day/emergency fund (representing one year of expenses).

*My question concerns the next step of my plan*. I am thinking that once I have the €25,000 cash cushion that then I should take half of my €1,000 'pay-myself first' money, and start making additional payments of €500 per month against the mortgage. 

*My thinking:*

(1) If I make an additional €500 per month payment then I will pay my mortgage off quicker, i.e. in approximately 16 years (at about age 52) rather than 29 years (at 65 age).
(2) I save on mortgage interest.
(2) The LTV (based on on the value above) should drop below 50% by 2021 which may make it easier for me to re-mortgage at a lower rate sooner / increase my options.
(3) I understand from reading other posts on this forum that when extra payments are made AIB will keep the mortgage term at the original 31 years and simply reduce the monthly payments. So in effect my 'minimum payment' which is currently €961 per month will be recalculated after each extra €500 payment I make. So after about a 13 months or so of those extra payments my 'minimum payment' will be something like €933 per month rather than €961. I like the idea of the minimum payment dropping month by month. I think it would be a good psychological 'win'. Although of course to ensure that I am actual paying an extra €500 per month I will of have to adjust the €500 upward every month to account for the gradual drop in the minimum payment, so that overall I am still paying €1,461 per total month.
(5) I will still be able to save the other half of my 'pay-myself first' money, which should mean that I have €6,000 per annum of additional cash savings to cover unexpected expenses (without touching the emergency fund) and to put towards a sinking fund for car replacement. My car is 12 years old but it is is in very good condition with very low mileage. I bought it used from a family friend so I know the mileage is genuine. I don't anticipate it should give me any trouble in the next few years. As long as the insurance company doesn't refuse to insure it due to age it should easily last me another 5 years.
(6) The cash cushion : €25,000 in total of which €15,000 will be kept in Ulster Bank's Special Interest Deposit Account (0.85%), €4,000 in the Ulster Bank current account (to avoid bank charges I must keep €3,000 minimum, and I use €1,000 as a buffer above that minimum), which leaves €6,000 which I will keep in the AIB current account (from which the mortgage is paid - no AIB fees b/c of the mortgage).
(7) I have large mortgage ebt, and a long repayment term (29 years remaining). While we are paying higher rates in Ireland than other Eurozone countries, the Eurozone rate is still very low. It is very probable that over the next 30 years interest rates will be higher than they are today, and likely sooner than later. It would be best to pay-it down as soon as possible at these lower rates rather than leaving it as a hostage to fortune.
(8) But by the same token, if I don't make the extra payments then I would have extra cash to add to the cash-cushion/emergency fund or to invest.
(9) I can stop making the additional payments if I feel they are squeezing me too much. Howver I won't be able to get them back as cash.

*Other Points I have considered, and my thoughts:
*
(i) Inflation. I would be paying off €500 early. Due to inflation €500 at the current time should be worth a lot more in purchasing power terms than €500 in the future. So in a way the value of the debt is being eroded by inflation anyway. Does it make sense then to take the €500 in 2018, 2019 etc and pay it off the mortgage which otherwise would be paid in 2046, 2047? But against this, if I don't pay it off the mortgage then what do I do with it instead. If I just put it in cash deposit account it will definitely get eaten away by inflation. At least if I put it against the mortgage I am saving 2.95% pa on it. I would need a gross return of 6.02% before tax on dividends to get a 2.95% net of tax return (assuming a 51% tax rate) or a gross deposit rate of rate of 5% to get to net 2.95% (assuming DIRT at 37% and 4% PRSI). So it doesn't seem such a bad use of the money even with inflation.
(ii) Opportunity cost: Invest it all in the stock market? But I already have a pension which is investing in the stock market every month so perhaps that would be too much exposure.
(iii) Opportunity cost: Loss of access. Payments to mortgage are locked away. I can't access them again unless I effectively re-mortgage.
(iv) Opportunity cost: If an opportunity arises (say another crash in the value of the stock market) then if I had saved the cash rather than put it into the mortgage then I would have a cash to invest. Against that, human nature being what it is I would probably be just as frightened as everyone else in the market and want to hold on to the cash if there was a crash rather than invest. Or I probably would just not wait and invest it rather than holding out trying to time the market.

*QUESTIONS:*

So that's where my thinking is at. I would welcome a second opinion. What's your view?
(a) Is my cash-cushion/rainy-day/emergency fund of €25,000 reasonable?
(b) Assuming it is, where would you put the €25,000 to earn the best return (on cash)? (Note: the purpose of the €25,000 is an emergency fund so it must be reasonably liquid, and can't be at risk so I don't the stock market is an option).
(c) What would you suggest I do with the other €500 per month which I will be able to save going forward? Just keep it as cash or use it to invest? If invest, in what? (I had originally intended on using the €500 to buy units in an S&P500 ETF through DeGiro, no fees, CGT treatment, a buy-and-hold strategy. Unfortunately I can't do that now because of that change in EU regulations. I don't like UCITS funds because the tax treatment seems too unfavourable to make the market risk worthwhile.)
(d) Do you think I am doing the right thing in making extra payments against the mortgage? The current 2.95% is a relatively low rate of interest on borrowings. Should I just save/invest the full €1,000 of 'pay-myself' monies elsewhere and hope I get a better return?  The advantage would be that I should still have access to those funds if they were (say) invested in the stock market, and the return should/could be higher. The disadvantages is that returns could be negative , and even if they were positive I would have to pay tax on the returns (lowering the effective rate of return).
(e) Am I being silly? Life is short and the future is promised to no man. Should I just spend the extra €500 a month on having fun and live it up a little?
(f) Any other thoughts?

Thoughts and suggestions please. Thanks for your time.

Shrugselent


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## RedOnion (31 Jul 2018)

I think you've very comprehensively answered most of your own questions.

You're maxing your pension contributions, so overpayments to mortgage are the right thing to do with excess cash.

25k sounds more than adequate as an emergency fund. If you think about it that's 8 months take home pay - for a single person that's loads. I wouldn't be bothering saving much more. Live a little.

Don't be thinking about investing. Your pension should be heavily weighted to equities. Outside a pension it's not tax efficient, and you'd need a high return to beat paying off your mortgage instead.

In terms of deposit returns, regular savings accounts might have best rate for demand deposit - something like BoI mortgage saver, but there is a max balance of about 15k that earns the high rate. There are best buys in the deposit forum.

Re car (we've a few old cars in the family) I'd suggest looking at Aviva next renewal. They will insure cars over 15 years old without loading premium, but only for existing customers.

Best of luck.


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## Brendan Burgess (31 Jul 2018)

You have a mortgage of 3.75 times your salary which is huge. This is the greatest source of risk to you. Interest rates will rise at some stage.  Your salary may reduce.  While the LTV is only 65%, I would not be comfortable with this level of debt.

Here is what I would do:

1) Make sure that you don't let savings and money rule your life.  You are single and have a good income. Get the balance right between financial prudence and enjoying yourself.

2) Switch lender. Probably to Ulster Bank. Why pay 2.95% when you could be paying 2.3%. Check out the Best Buys

3) Stop contributing to your pension until you get the mortgage down to a very comfortable level. Or make the minimum required to maximise your employer contribution.  When you get the mortgage down to that level, you can then resume your pension payments. 

4) Unless there is a risk to your employment, your cash buffer is too high. €10k should be absolutely plenty, but increase it when you know that you will need a new car.  Don't worry if your car suddenly dies on you and you can't buy it for cash. The bank or Credit Union will  lend you the money and you can pay it off fairly quickly.

5) Shop around for your mortgage protection insurance.  People often take it out when they get their mortgage and never look at it again. It might well be cheaper through one of the discount brokers like LABrokers.

6) Definitely forget about investing. You should not borrow money at 2.95% to invest in equities.  You will not be able to get a risk-free, tax-free return of 2.95% anywhere.


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## Brendan Burgess (31 Jul 2018)

I don't think that inflation at the current levels is relevant to any decision you make.  It will happen anyway, irrespective of where you put your money. 

You can get a guaranteed tax-free return of 2.95%, so that is the best place to "invest" your money.  That is a real return over the rate of inflation which is what you want. 

If you have paid off your mortgage and have unborrowed cash to invest, then inflation might be a consideration. 

But the key question facing you then will be: Where can I get the best return on my money? 

If the following set of circumstances arise, then you _might _review your strategy: 

Interest rates remain low or fall and this is expected to continue 

Inflation is expected to far exceed your mortgage rate 

The rate of returns on the stockmarket are expected to exceed the mortgage rate 
I don't think that this will happen as the first two are related. 

Brendan


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## Bronte (31 Jul 2018)

I think a 25K buffer is excellent. As is contributing to a pension. And overpaying the mortgage is good.  Only thing missing is living a little.  I don't think you're over exposed on your mortgage as the equity is 35%.

And I wouldn't be worrying about what inflation might be like in the 2040's !  Instead think about what will keep you employed for the next couple of decades.  More education or retraining perhaps.


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## Gordon Gekko (31 Jul 2018)

Hi Brendan,

I’m not convinced that it’s better to pay down one’s mortgage at the expense of pension funding.

Take the example of a 39 year old who puts €23,000 into his pension fund during 2018. Instead, he could pay €13,800 off his mortgage (i.e. 60% of €23,000).

Assuming an average annual return of 4.5% to retirement at age 65, that €23,000 will have grown to €73,140.

The problem with personal pension contributions / AVCs is that it’s very much a case of “use it or lose it”; one can’t back-fund for missed years.

Gordon


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## Brendan Burgess (31 Jul 2018)

Hi Gordon 

The OP is facing a high level of risk with such a high mortgage. He gets certainty and flexibility by paying it down now. 

If we make a lot of assumptions about the next 50 years, the pension might be  better.  But he is 36. When he retires in 30 years, so many things may have changed. For example, it's very likely that anyone with a private pension will not get the contributory pension as it will be means tested.  The private pension may well be taxed heavily at that stage.  And, of course, the return may not be 4.5% net of charges. 

Don't get me wrong. I am a great believer in pensions.  But I would prefer a more comfortable mortgage first. 

Brendan


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## Sarenco (31 Jul 2018)

Brendan Burgess said:


> it's very likely that anyone with a private pension will not get the contributory pension as it will be means tested


That's certainly a possibility but I disagree that it's "very likely".  Also, I disagree that an LTI of 3.75% is "huge" for a single person with an above average income and no dependants.  It's a bit on the high side alright but not dramatically so.

Using any after-tax cash flow that is not required to fund lifestyle expenses to pay down the mortgage is absolutely the right approach.  But not, in my opinion, at the expense of maximising tax relieved pension contributions.


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## Bronte (31 Jul 2018)

Gordon Gekko said:


> The problem with personal pension contributions / AVCs is that it’s very much a case of “use it or lose it”; one can’t back-fund for missed years.



Spot on, it's a regret of mine that my OH did not have a pension for his earlier working life.  Losing many valuable years and the money gone.


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## Bronte (31 Jul 2018)

Brendan Burgess said:


> The OP is facing a high level of risk with such a high mortgage. He gets certainty and flexibility by paying it down now.



What risk is he facing?


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## RedOnion (31 Jul 2018)

Brendan Burgess said:


> 2) Switch lender. Probably to Ulster Bank. Why pay 2.95% when you could be paying 2.3%.


Absolutely. Not sure how strict they are, but UB have a max 3.5 times LTI for switching. OP has enough funds available to reduce balance to this level, so should switch.


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## Brendan Burgess (31 Jul 2018)

RedOnion said:


> Not sure how strict they are, but UB have a max 3.5 times LTI for switching.



Which is another reason for prioritising the paying down of your mortgage. 

€225,500 is 3.75 times your income 

€210,000 is 3.5 times your income 

So knocking €15k off your mortgage could result in a significant saving on your whole mortgage. 

Brendan


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## Brendan Burgess (31 Jul 2018)

Brendan Burgess said:


> The OP is facing a high level of risk with such a high mortgage. He gets certainty and flexibility by paying it down now.





Bronte said:


> What risk is he facing?



Hi Bronte

1) A rise in interest rates which would make the mortgage unaffordable
2) A fall in his income which would make the mortgage unaffordable 
3) A fall in house prices which would increase his LTV which would constrain his ability to move 

Brendan


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## Bronte (31 Jul 2018)

He's not only single but he has no children. He didn't say he needed to move. He'd need to lose his job, interest rates to go crazy and be forced to move all at the same time.  Plus his house would have to go down in value by 125K.  If all that happened he might, just might lose the house. How realisic is such a scenario.  And even if it did happen, he's single and has no dependants. 

If you think this is a likely scenario I'm very glad to hear it.  I'll be able to purchase property at rock bottom and get fantastic interest on my savings. Can't wait.


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## Brendan Burgess (31 Jul 2018)

Hi Bronte 




Bronte said:


> He'd need to lose his job, interest rates to go crazy



If either or both of these happens, he might find it difficult to meet his repayments. 

High risk does not mean being wiped out.  It does not even mean losing the house. 

It could mean falling into arrears and having his credit record compromised. 




Bronte said:


> He's not only single but he has no children.



That is a risk I had forgotten about.  

Brendan


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## cremeegg (31 Jul 2018)

I think Brendan is over doing the risk associated with this mortgage, with a repayment capacity of €1,900 (while maxing his pension contributions), interest rates would have to go over 10% before he would have to reduce his living expenses to pay his mortgage.


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## Sarenco (31 Jul 2018)

Brendan Burgess said:


> So knocking €15k off your mortgage could result in a significant saving on your whole mortgage.


As it happens, the OP could (and probably should) pay €15k off his mortgage today, without scaling back his pension contributions.

The likelihood of seeing dramatic interest rate increases without accompanying wage inflation is pretty much zero.


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## RMGC11 (31 Jul 2018)

Sarenco said:


> The likelihood of seeing dramatic interest rate increases without accompanying wage inflation is pretty much zero.


I'm quite interested in this bit as it has great relevance on how risk is assessed here. Sarenco - do you have any data backing this up in Ireland and across global markets historically?


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## Brendan Burgess (31 Jul 2018)

Sarenco said:


> The likelihood of seeing dramatic interest rate increases without accompanying wage inflation is pretty much zero.



Yes, if you are looking at the national figures.

But what happens to the OP could well be different to what happens nationally. 

There may well be a cut in his salary. He may lose his job. He might get sick. 

I think we, as a nation, have forgotten about risk.  But we are in a very dangerous economic environment.  We now have €200 bn of national debt. We are facing Brexit. We are facing trade wars. We are facing attacks on our tax regime. And no one knows what will happen when QE is reversed. 

The OP thinks it's necessary to have €25k as a cash buffer and others seem to agree with this.  So he does see some risk. 

In order to buy a house, one must take on a lot of risk. And 3.75 times one's salary is very high risk. Having bought the house, the right strategy is to reduce that risk.  For me, that would take priority over excessive pension contributions.  I have seen plenty of people in recent years who were in real financial trouble and would love to have had access to their pension funds. 

Brendan


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## BigBoots82 (31 Jul 2018)

Interesting thread. In my view, paying off your mortgage early gives you certainty. Certainty that your debt exposure will reduce. It's important to me for example that I am debt free as young as possible. Paying into a pension might give you an after tax return in excess of what you will save on interest costs on your mortgage over time but it is not certain. Also you can only access your pension fund at a time when your cash needs should be at their lowest. If I have an unencumbered property when I retire I can rent out a room or two tax free based on today's rules to assist with additional cash needs I might have. If i am debt free at this time that money will not be reduced by interest costs.


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## Gordon Gekko (31 Jul 2018)

I’ve been thinking about this and I remain unconvinced regarding the merits of paying down one’s mortgage at the expense of pension funding.

Also, in an emergency, surely it’s preferable to have (say) €50k in cash and to owe (say) €450k on one’s mortgage rather than having €25k in cash and owing €425k? Having surplus cash is one of the best ways to mitigate risk.

Going back to the mortgage/pension point, if not getting the State Pension is a risk, then that’s an argument for focussing on pension funding. Also, if paying a lump sum off my mortgage today takes one year off it in 30 years time, is that really that attractive? Would I not prefer having €23,000 compounding in my fund for the 30 years? Especially when I’d expect to have more rather than less money then.

And is it that big a deal to have “free” accomodation; the interest cost (or even the interest plus capital cost) of most mortgages is quite a bit less than the equivalent rental cost.


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## LS400 (31 Jul 2018)

There is a burning light within the original question, which trumps all other thoughts imo.. You are in the private sector, and weather you like it or not, your exposed to a heck of a lot more difficulties... Pay down that Mortgage if at all possible and release yourself as early as possible from that debt.

I would answer that question completely differently, were you in the Public sector.
Pump up you pension where possible and live wilder, for there is a lower risk of you facing the risk of you loosing you job which pays your Mortgage.

This is not Private Vs Public, but you cant stick you head in the sand and say it doesn't have a bearing on the above question. It makes a fundamental difference on what strategy you would employ, and the thinking behind it..


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## Brendan Burgess (31 Jul 2018)

Gordon Gekko said:


> if not getting the State Pension is a risk, then that’s an argument for focussing on pension funding.



This really is a conundrum. 

There is no way that the state can continue to pay the very generous contributory pensions at the current level. 

So they will have to means test them. 

If you have a comfortable pension, or other income, you probably won't get the contributory pension. 

It's just a risk worth pointing out. 

Again, I would stress that I am a big fan of pensions. But I am a bigger fan of paying down very risky, very high levels of debt today.

Brendan


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## Brendan Burgess (31 Jul 2018)

Gordon Gekko said:


> Also, in an emergency, surely it’s preferable to have (say) €50k in cash and to owe (say) €450k on one’s mortgage rather than having €25k in cash and owing €425k? Having surplus cash is one of the best ways to mitigate risk.



Yet another conundrum. 

The best way to reduce risk is to reduce borrowing, or more correctly, net borrowing. 

If I had a mortgage of €450k and cash of €50k and I have just lost my job, I would not pay it off the mortgage. I would use it to fund my mortgage repayments until I get another job. 

But the danger of losing his job is not imminent. So the savings from paying down most of the cash reserve are worthwhile, but it's not a clear decision. 

If there were a real risk of losing his job in the near future, then he should start accumulating cash.

The cash accumulated + the redundancy payments should sort him out while looking for a job.

I would think that around €5k would be plenty under current circumstances and he should increase this if the risk of a loss of income increases. 

Brendan


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## Sarenco (31 Jul 2018)

Brendan Burgess said:


> So they will have to means test them.


There are plenty of other options available to a future Government to deal with this issue.

For example, they could simply cut the old age pension to UK levels.  Or they they make it more difficult to qualify for a full contributory pension.  Or they could push up the age at which the pension becomes payable.  Or they introduce incentives to encourage retirees to defer taking their pensions to a later age.

Or they could introduce some combination of any of the above.

Trying to means-test what by then will be a very significant proportion of the population would be a political and administrative nightmare.


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## Shrugselent (1 Aug 2018)

*Thanks !*

Thank you all for taking the time to read my very very long and rambling post and then share your thoughts. This has been a valuable exercise. You've given me a lot to think about. It's an odd experience to read familiar names commenting on the OP's facts and then realise - that's me! Positive, but a little jarring at the same time! 

I think I will need to take some time over the next few weeks to really chew over your thoughts. Particularly those which challenge my own preconceived views.

Thanks for all the ideas, and apologies for not acknowledging/replying to individual comments and suggestions. I have instead shared my initial thoughts on the general themes emerging:

*(1) Pension:*

I must pay in 5%, and my employer matches that 5%. My additional 10% AVC is not matched. The employer covers the costs of running the pension scheme so 100% of the contributions are invested. The investments (from recollection) are in low cost index-tracking funds (so these should be low fees - but I don't exactly recall if I checked that). I get 40% tax relief on the contribution. If I was to stop the 10% AVC reduce my contributions to just the 5% required by the scheme and matched by my employer than my net take home pay would be €3,323 per month (i.e. €300 more cash per month, €3,600 more cash per annum). However my pension asset would be €6,000 less per annum.

My initial reaction: I would be reluctant to reduce my pension contributions. I will consider this further over the weeks to come, but my gut says no.

*(2) Switch:*

This is something which I have not really looked into. One of the points that attracted me to AIB was that they seem to be competing on the basis of the lowest variable rate. My concern with switching to a fixed rate with another bank is what would happen after the initial 2 year fixed period ends. I assume I would then go on their standard variable rate at that point unless I fixed again. I'm concerned I could get stuck with a higher rate after the 2 years, and (since I may still have a high loan to income multiple) I might find it difficult at that time to switch back / elsewhere. As such my inclination is to stick with AIB on the basis that it is the devil I know.

Perhaps I have a blindspot here?

*(3) Extra Payments:*

The consensus seems to be that paying the extra €500 is a good idea. I am going to proceed with that.

I will have to chew over whether to also use the remaining €500 of my €1,000 'pay myself first' money to make extra mortgage payments. I agree that it doesn't make sense to invest it, and that I should have enough of a cash cushion with the €25,000. Also it doesn't seem to make much sense using it for a sinking fund for possible car replacement etc when I already have an emergency fund (it seems improbable that I would need both at the same time).

That just leaves the 'live a little' point. I might make a soft commitment to pay the second €500 against the mortgage but allow myself to use it for fun stuff every 2 or 3 months if the notion strikes me.

*(4) Amount and use of emergency fund monies:*

I agree that holding €25,000 in cash earning little to nothing in interest (which is then subject to DIRT) while having €225,000 in mortgage debt is inefficient.

Yes, paying €13,000 down against the debt would save on interest and reduce the term (and the minimum compulsory monthly payments would also be reduced which increases security to a degree).

However I draw comfort from the notion of 12 months of expenses. Perhaps I'm still a little traumatised from the last recession. It was a difficult time, and we're at the 10 year anniversary, so it has been fresh in my thoughts.

While I will think on it further, my gut is telling me to hold on to the full €25,000 (at least for the next few years until Brexit plays out). The extra €13,000 in cash (if used just for mortgage) is equivalent to 13.5 months of payments of €961, and there is a lot of security in that.

Perhaps its overkill, but I will sleep easier with the extra cash and there is value in that.

*Exercise:*

Since Brendan's views are the most challenging, I have set them out below to force me to really consider them.

My understanding of his view is that I should consider:
(1) Using the full €1,000 per month of my 'pay myself first' money against the mortgage.  [ + 1,000 pm cash to mortgage] #
(2) Reducing pension contributions to the amount the employer will match (5%) and pay it to mortgage [ + 300 pm cash to mortgage]
(3) Reducing emergency fund to €12,000. [ + 13,000 cash once off to mortgage * ]#
(4) Re-mortgage at lower fixed rate with Ulster Bank. **

#[I reread the forum posts after preparing the calculations below, and I now see Brendan actually suggested I use some of the money to live a little/worklife balance, and suggested 10k buffer rather than 12k but I'm not redoing the calculations now!]

* For the sake of argument I am going to assume my emergency fund is already at 25k (as that is what I will be comparing it against). Not perfectly accurate, but close enough.
** As it is not certain whether I can re-mortgage with UB, nor what would happen after the 2 year fixed period expires, I am going to exclude this option from the calculations below. It's something I need to explore further.

Abbreviations used:
T: Time remaining to fully payoff of the mortgage at this rate of overpaying (currently 29 years if I do nothing).
S: Amount of interest which would be Saved.
EMCR36: Estimated Minimum Compulsory Repayment after 3 years (36 months) of this plan.  (i.e. if in 3 years time I can no longer afford/wish to make extra payments, what should my minimum monthly payment with AIB then be (assuming no change in rate).​
Note on calculations. I calculated TR and IS using the Karl's mortgage calculator app. I have confidence in those figures. However I calculated the figures for EMPR36 by fudging the figures in an excel amortization spreadsheet I found online so its possible the EMPR figures may not be entirely correct. For the purpose of the calculations I have assumed there would be no change in interest rates.

*Results:*

'No Action' [961 + no extra payments per month]

T:29y            S:€0             EMPR36: 961pm

'My initial proposal' [€961 + extra €500 per month.]

T:16y3m     S:€51,099    EMCR36: 949 pm

'My revised proposal' [€961 + extra €1,000 per month.]

T:11y5m    S:€69,178     EMCR36: 866 pm

'Brendan Max' (1) + (2) + (3) above: [€961 + extra €1,300 per month + once off €13,000]

T:9y1m      S:€79,357     EMCR36: 757 pm

'Brendan Reduced-Pension' (1) + (2) above: [€961 + extra €1,300 per month]

T:9y9m     S:€75,367     EMCR36: 817 pm

'Brendan Reduced-Cushion' (1) + (3) above: [€961 + extra €1,000 per month + once off €13,000]

T:10y8m    S:€74,009     EMCR36: 807 pm


*Conclusion:*

I shall have to ponder on the above. A ten year term is attractive.

However right now my gut is telling me to keep the larger cash sum of €25,000; keep pension as is; pay extra €1,000 into mortgage (perhaps with a break or two for fun); then re-evaluate in a year. The interest expense on €13,000 a year at 2.95% is €383 but I think that's a small price for a little extra peace of mind in the immediate term.

Please share your thoughts or point out if I've blundered. Thanks.


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## Brendan Burgess (1 Aug 2018)

Shrugselent said:


> I get 40% tax relief on the contribution.



But don't forget that when you draw down your pension, you will pay tax on 75% of it. 



Shrugselent said:


> One of the points that attracted me to AIB was that they seem to be competing on the basis of the lowest variable rate.



A valid point. It's quite likely that AIB will reduce variable rates to compete. They are unique among the lenders in that they pass on rate cuts to existing customers. 

But there are some very good deals out there and the likes of Ulster is committed to allowing existing customers avail of the best deals on offer to new customers.


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## Brendan Burgess (1 Aug 2018)

Shrugselent said:


> The interest expense on €13,000 a year at 2.95% is €383 but I think that's a small price for a little extra peace of mind in the immediate term.



And I would have no problem at all with paying this small premium for a short amount of time in a period of uncertainty. 


But it won't be for just a year or so, it will probably be for a few years. 

The €13,000 will probably rise. 

The interest rate will probably rise. 
So, by all means, borrow €25,000 at 2.95% to put it on deposit at 0%, but keep it under review. 

Brendan


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## Sarenco (1 Aug 2018)

Brendan Burgess said:


> But don't forget that when you draw down your pension, you will pay tax on 75% of it.


Let's project forward 30 years and say that @Shrugselent retires with a pension pot of €600k.

He withdraws a lump sum of €150k and uses the balance to buy an annuity of €18k per annum.  Under current rules, he won't pay any tax at all on those amounts. 

Sure the rules could change in the future but we can only play the game in front of us…


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## Bronte (1 Aug 2018)

I'm confused about the 75% tax on the pension?

Is this correct:

Take 150K in cash
Remainder of 450K buys a life long annuity of 18K
Plus state pension of ? 10K or so?


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## Sarenco (1 Aug 2018)

Bronte said:


> I'm confused about the 75% tax on the pension?


Under current rules you can take 25% of a pension pot as a tax-free lump sum, subject to a cap of €200k.

The first €18k of income is exempt from income tax for an individual aged 65+ (€32 for a married couple once one spouse is 65+).


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## Brendan Burgess (1 Aug 2018)

Sarenco said:


> Sure the rules could change in the future but we can only play the game in front of us…



Hi Sarenco 

He is earning €60k at age 36. 
There is a fair chance that he will have other income on retirement.
If he gets the state pension and a private pension - which I admit is unlikely - it will be taxable. 

But my overall point is that people say "I get 40% tax relief on my pension contributions." as if it's free money.  They must remember that they may pay tax on the way out.

The game in front of us is an uncomfortably high mortgage.  I would play that game rather than start training now for a game which I would be playing in 30 years. There will be plenty of time to train for that game after I finish the current game.

Brendan


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## Gordon Gekko (1 Aug 2018)

Hi Brendan,

For people with wealth, the game isn’t the 40% tax relief because, as you rightly point out, it’s taxable on the way out (albeit on a diluted basis, with the lump sum taxed favourably and no PRSI from age 66).

The game is the gross roll up and tax-free compounding. I fully expect the €23k I lob in this year to be worth somewhere between €70k and €140k in 30 years’ time.

I could pay €13,800 off my mortgage instead, but I’m convinced that pension funding is more advantageous.

Gordon


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## Sarenco (1 Aug 2018)

Brendan Burgess said:


> There will be plenty of time to train for that game after I finish the current game.


I think that's the key problem with your argument Brendan.

Fundamentally your argument ignores (or at least downplays):

the "use it or lose it" nature of the tax relief on pension contributions; and
the very significant dispersion of equity returns over shorter holding periods.
There are logical reasons to expect the net return on a well constructed equity portfolio to significantly exceed the weighted average interest rate on a mortgage over the long-term (say, 30 years).  Over the shorter term, who knows?


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## Shrugselent (1 Aug 2018)

Well I'm going to keep this brief today, as I stayed up far too late the last couple of nights and I haven't slept well.

It's been interesting reading all your comments again today. Thanks.

Drum-roll...... I have an announcement! I have just struck a small blow against my mortgage. I have made the first (hopefully of many) extra payment of €1,000 and set up a standing order for that amount going forward. I will continue to also transfer the existing payment level of €961 to the feeder account and then manually sweep the excess across against the mortgage as the minimum payment drops over time with the extra payments.

Brendan has made some thought provoking points about the level of my emergency fund, much of which I must agree with on a rational level (although I'm not quite there emotionally). I will need to reflect on that, and my security/comfort needs. For the moment I have decided to just maintain it at its current level (neither increase nor decrease).

I tend to agree with the other posters on the pension. I think I will be better off in the long run to keep it. So I intend to keep my current rate of contributions. I would go down the rent-a-room route before cutting back on pension. Considering AIB are living in my spare bedroom anyway I may as well give them some company and then I can move 'em both out sooner! Additional monthly rent-a-room income would also make me more relaxed about reducing the emergency fund... so perhaps that may be best way for me to proceed.

Switching is something I will also have to consider a little further. I will probably spend the long weekend playing around with calculators and reading other posts on this forum.

I highly recommend the Karl's Mortgage Calculator app (I have an android phone). Playing around with it has really motivated me to make extra payments. It's also far more versatile then I initially thought and can also calculate how much monthly payments will be reduced by making an extra payment (you have to click on settings to open a menu). While I found it a little cumbersome at first because of all the options, it is worth the effort. It's possible to change how the interest is calculated (i.e. change it to 360 days), and when it compounds (i.e quarterly) so I think I have been able to model the details of my AIB mortgage quite closely. *The projection....* based on an extra payment of €1,000 a month, (i.e. to make a total of €1,961 per month) I should be clear of my mortgage in just over 11 years, in or about October 2029.

I don't think I would have started making the extra payments so soon if I hadn't posted on the forum and received all your reassuring feedback. So thanks everyone for your comments and support!


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## LS400 (1 Aug 2018)

A very well balanced reply, fair play to you. And while one size does not fit all for everyone, Im heartened to see you are aiming for an 11-year plan to clear your mortgage. The headspace that it will give you really can't be emphasised.

Its precisely for that reason, I would put a finger to keyboard to encourage mortgage holders to look at making such moves where possible, and in fairness to BB, he tends to simplify the rationale behind it.


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## RedOnion (1 Aug 2018)

Shrugselent said:


> It's possible to change how the interest is calculated (i.e. change it to 360 days), and when it compounds (i.e quarterly)


The calculator is brilliant, but you're getting into far too much detail if you're looking at settings like that! It's nice to understand it fully, but don't be get caught up in getting it 'penny perfect'.  If you're comfortable with Excel, you'll be able to make up a very quick model, just assume interest is capitalising every month and use the 'PMT' function to recalculate your repayments for the remaining term.  It's not perfect, but it's accurate enough for what you're doing, and gives lot's more flexibility for scenario inputs.


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