# Is it mad to pay off a cheap tracker?



## Fella (1 Apr 2015)

Have a cheap tracker mortgage ~1%
Owe 200k
Have 290k on deposit earning around the same rate
Don't plan on trading up house
About 180k invested in stock Market

I have pretty much decided to pay off mortgage , feels like a bad move paying off a loan that is costing so little in interest , but Interest rates are so low for deposits and I don't want to juggle money around for an extra 0.5% here or there , i'll ask the bank will they do me a deal for paying off the mortgage early but i'm not holding my breath. 

Any opinions on why I shouldn't pay off are welcome , I have read key posts etc on "should i pay off a mortage " if this was a variable rate I wouldn't be hesitating at all . 

Cheers
Fella


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## Monbretia (1 Apr 2015)

If I had the spare cash I would, lot to be said for being mortgage free and especially if you can't get a higher deposit rate.  

I paid my own off with a redundancy payment down to 5k o/s which I pay off at the rate of €100 p.m., I pay no interest as it is an offset mortgage on tracker, this is just to give me the flexibility of maybe doing a top up if for any reason I needed it.  I don't expect to need it but you never know.  I prefer to know that no matter what else happens with banks/countries going wallop I own the roof over my head.


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## michaelm (1 Apr 2015)

Unless I was planning to buy another house I'd pay off the mortgage; the deposit interest after DIRT can't be much more than the interest you;re paying on the mortgage anyway.


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## Brendan Burgess (1 Apr 2015)

I wrote this Key Post back in 2009 

*Should I overpay my tracker mortgage?*


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## Brendan Burgess (1 Apr 2015)

Let's say you were in the following position 





Now, a lender offers you a loan of €200k @1% over 15 years. 

If I were offered a loan at 1%, I would take it and buy shares. 

There is an element of risk. The stock market could go into a long term decline and I might lose money. 

But over the next 15 years, it is very likely that the return on the stock market will be more than 2%. 

There will be stock market falls and corrections, but they don't worry you. You have experience of them and you will not be forced to sell.

And although I have no plans to trade up, plans change. 

And there is the small kicker that they might do a deal.  Even more unlikely now, but it's a kicker. 

Brendan


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## Monbretia (1 Apr 2015)

Even if I were offered a loan at zero percent I would not take it and buy shares with it.


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## Sarenco (1 Apr 2015)

Brendan Burgess said:


> Let's say you were in the following position
> 
> View attachment 456
> Now, a lender offers you a loan of €200k @1% over 15 years.
> ...




Well, there certainly have been 15-year periods in the past where equities in general would not have produced a total return of more than 2% per annum, on average, after commissions, fees and taxes are taken into account - the last 15 years would be one such example.  And that's before taking inflation into account...

Also, the OP's mortgage rate is not fixed at 1% for the next 15 years and is very likely to rise at some stage over that period.

Deposit rates have now fallen to a point where it actually makes financial sense to pay-off a cheap tracker on a PPR ahead of schedule (assuming MIR is not available), when you take account of the punitive taxes on deposit interest, provided you have no need or desire:-

(a)   to keep the sum involved as a liquid cash reserve; or
(b)   to invest in higher risk assets, such as real estate or equities.​
The OP would still have a substantial cash sum after paying off his mortgage and already has a significant exposure to both equities and real estate.  Whether or not the OP has any further need to invest in risk assets really depends on the OP's strategy for funding his retirement and whether or not he has any dependants or a strong desire to leave a legacy to a favourite charity, etc.

I think there is almost zero chance that the OP's lender will offer him a discount for paying off the tracker ahead of schedule.  The cost of funds of our mortgage lenders is now so low that they have no real incentive to offer such discounts.


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## Fella (1 Apr 2015)

Thanks for the replies , the reason I mentioned equities in my original post was because I suspected sound advice may be to invest it in the stock market , I'm continuing my plan of buying monthly until I reach a 30/70 % split of cash and equities maybe I'm foolish not just dumping all my cash straight into the stock market but I'm happy to stick with this plan for the foreseeable future or until a better plan comes along.

Outside of the stock market there is not much that is attractive property yield by my calculations isn't great at the moment , peer to peer lending doesn't look to be a huge success in Ireland and of course deposit interest is very low.

I suppose the reality is I have no other use for that 200k other than pay off the loan.


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## Brendan Burgess (1 Apr 2015)

Sarenco said:


> Well, there certainly have been 15-year periods in the past where equities in general would not have produced a total return of more than 2% per annum, on average, after commissions, fees and taxes are taken into account - the last 15 years would be one such example.



I would say that there have been few such periods, and they have been far outweighed by the much higher number of periods of positive return and sometimes spectacular returns. 

"after commissions" ?  Commissions on buying and selling shares would be 2%. They have almost negligible impact on someone who buys and holds a diverse portfolio of shares. 

"fees"?  There are no fees if he buys shares directly as I am suggesting. 

"taxes"? Yes, as I have pointed out taxes will reduce the return.  While dividends will be taxed, if there is no capital gain, there will be no CGT. 



> And that's before taking inflation into account...


You should ignore inflation. You should compare the nominal return with the nominal interest rate paid.


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## Brendan Burgess (1 Apr 2015)

Fella said:


> I'm continuing my plan of buying monthly until I reach a 30/70 % split of cash and equities



That does not make any sense. I suspect you have fallen victim to the "euro cost averaging" fallacy. 

If you think that you should have 70% of something in the stock market, then do it now.  If you think that the stock market is overvalued, then you should not invest anything in it.


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## Fella (1 Apr 2015)

Brendan Burgess said:


> That does not make any sense. I suspect you have fallen victim to the "euro cost averaging" fallacy.
> 
> If you think that you should have 70% of something in the stock market, then do it now.  If you think that the stock market is overvalued, then you should not invest anything in it.



I agree it doesn't make any financial sense , I'm new to investing in the stock market so was dipping my toe at the start I'm less than a year into it and was nervous about just putting a big lump in every year , I find it hard to alter my mind set on this , hopefully I can, thanks .


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## Brendan Burgess (2 Apr 2015)

Hi Fella

Had you put your chosen allocation into the stock market when you started a year ago, you would be far better off now.

Of course,if you do it in one lump sum now, you could be doing it just before a crash.

So it is hard to understand.

There are some good graphs around that show that those who invested for the long term just before each of the big crashes, have still got a very good return on their money.  Of course, they would have suffered regret for a good few years afterwards and many would have cashed out at a loss, but long term investors should not try to time the market.


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## Sarenco (2 Apr 2015)

Fella said:


> I agree it doesn't make any financial sense , I'm new to investing in the stock market so was dipping my toe at the start I'm less than a year into it and was nervous about just putting a big lump in every year , I find it hard to alter my mind set on this , hopefully I can, thanks .


 
Hi Fella

I am attaching a link to a study Vanguard published a few years ago on lump sum investing (LSI) versus dollar cost averaging (DCA) that you might find interesting.

The key conclusion is that LSI beats DCA two thirds of the time over ten year rolling periods across various markets (although the difference is fairly modest) but that DCA has a role in protecting down-side risk.

The bottom line is that your current approach is perfectly fine and won't have a dramatic impact on your expected returns.  If this approach helps you sleep at night, then you should probably stick with it.

https://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf


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## Fella (2 Apr 2015)

Thanks guys , I try to make perfect value plays all the time , so can't alter this now for the stock market , I am disappointed in myself tbh it was a terrible decision not to invest all my cash last year in one lump, i'll invest 100k at start of next month (max transfer is 5k from bank a day) and then continue investing between 5/10k a month (depending on how much I save) , I'll pay off the mortgage as well , once again thanks for opinions.


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## Sarenco (2 Apr 2015)

Brendan Burgess said:


> "after commissions" ?  Commissions on buying and selling shares would be 2%. They have almost negligible impact on someone who buys and holds a diverse portfolio of shares.
> 
> "fees"?  There are no fees if he buys shares directly as I am suggesting.
> 
> "taxes"? Yes, as I have pointed out taxes will reduce the return.  While dividends will be taxed, if there is no capital gain, there will be no CGT.


 
Hi Brendan

I would just note that costs and taxes have a compounding impact on return that inevitably becomes material over time.


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## 44brendan (2 Apr 2015)

Perhaps you should look at your pension option! If you have the capacity to supplement your pension by means of AVC's/other then it makes far more sense to do this than a straight-forward investment in stocks & shares. Always bear in mind that no investment is without risk. Ensure that you look at downside risk in making any decision.


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## Fella (2 Apr 2015)

I don't really consider AVC's an option I think they benefit high earners , my job salary I only work limited hours so pay very little if any tax. 
This is going to be my pension just amass as much wealth as possible in the next few years and stick around 70% in the stock market and pray ! I understand the risks , the main risk is the government and tax on funds , ill keep going till the 8 year deemed disposal and rethink the strategy then , paying the government 40% tax will hurt a lot but meh 8 years is a long time lots can/will change.


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## Fella (21 Apr 2015)

Had a reply from ptsb re paying off tracker they are not doing any deals


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## Brendan Burgess (11 Jul 2015)

Fella said:


> ...I only work limited hours so pay very little if any tax.
> 
> .... ill keep going till the 8 year deemed disposal and rethink the strategy then , paying the government 40% tax will hurt a lot but meh 8 years is a long time lots can/will change.



I have just seen this now. 

If you are paying very little tax, you should be investing directly in shares and not in funds as there will be little tax to pay on the dividend income - presumably 20% vs. 40%.

When you hit 40% tax,you should be looking at pensions if you still have pensionable income. 

Brendan


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## Fella (11 Jul 2015)

Brendan Burgess said:


> I have just seen this now.
> 
> If you are paying very little tax, you should be investing directly in shares and not in funds as there will be little tax to pay on the dividend income - presumably 20% vs. 40%.
> 
> ...




I think you are correct , the problem is for me getting the diversification needed I would want more than 10 more than 20 companies and the transaction cost of buying these would add up , the funds reinvest the dividends so there is no tax due until 8 year deemed disposal which is similar to paying CGT on disposal , theres not that much in it 33% CGT v 41% exit tax , I keep meaning to do a spreadsheet to work it out , but with the dividends reinvested you are not paying tax on this yearly so you are gaining this dividend compounding tax free till 8 years so it has to be worth something .


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## Brendan Burgess (11 Jul 2015)

You are quite happy to "gamble" on the other thread, but you need more than 20 companies to invest  in????? 

You would be paying only 20% income tax + USC/PRSI on the dividends so it should be a lot less than the 41% exit tax.

Brendan


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## Fella (11 Jul 2015)

Brendan Burgess said:


> You are quite happy to "gamble" on the other thread, but you need more than 20 companies to invest  in?????
> 
> You would be paying only 20% income tax + USC/PRSI on the dividends so it should be a lot less than the 41% exit tax.
> 
> Brendan



My gambling is very considered ,  I bet a % of my bank roll depending on the expected value of the bet.There are times I have can bet an unlimited amount of money on 20% expected value , I have to take a view on how much I want to bet, obviously you can bet the max float you have but if it losses you are done and opportuinity cost of not been able to take more bets in future. I take the same view with the stock market there was a link posted here showing I think it was that only 40% of companies make up the net gains of the stock market , I don't want to chance my luck that I pick one of them companies , I can't find the link but after reading that link that was posted in a thread I decided that it was too risky to just invest in 10 or 20 companies. 

 I know from your posting that you post a lot of factually correct things but it neglects the variance , I have lower variance investing in an index tracker as compared to investing in 10 or 20 shares but I am happy with that compromise.

When you sell individual shares eventually to realise a gain you will pay Capital gains tax at 33% 
When I sell  my accumulating fund eventually that had dividends reinvested i will pay 41% exit tax ,there is not that much in it , given the fact that I have the benefit of accumulating dividends for 8 years without paying tax on them.

The sucker punch with funds is no loss relief


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## ClubMan (11 Jul 2015)

Fella said:


> theres not that much in it 33% CGT v 41% exit tax ... but with the dividends reinvested you are not paying tax on this yearly so you are gaining this dividend compounding tax free till 8 years so it has to be worth something .


41% versus 33% is 8% which is hardly peanuts!
Plus the first €1270 of a capital gain is exempt and previously incurred losses can also be offset.
Also I don't think you avoid tax by reinvesting dividends - you still need to declare and pay tax on them as far as I know.
You have twice talked about reinvesting dividends tax free - this is wrong as far as I know.


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## Fella (11 Jul 2015)

ClubMan said:


> 41% versus 33% is 8% which is hardly peanuts!
> Plus the first €1270 of a capital gain is exempt and previously incurred losses can also be offset.
> Also I don't think you avoid tax by reinvesting dividends - you still need to declare and pay tax on them as far as I know.
> You have twice talked about reinvesting dividends tax free - this is wrong as far as I know.



There is very little in the difference I found a spreadsheet from 3cc posted here , he has accumulating ETF's been more tax advantageous than holding shares directly , I've played around with the figures and adjusted the tax as its changed on Exit tax since his sheet , it is very close now  , like 100k invested in shares after 16 years compared to an accumulating ETF is 250,*** v 250,*** so your looking at a few 100 difference over 16 years , there are many things not taken into consideration like the actual cost of reinvesting the dividends manually , transactions fees and the 1% stamp duty on Irish shares , and the lack of diversification I would say it is not conclusive that holding shares directly is advantageous over holding an ETF , you can't just look at the tax 33 v 41 as you are neglecting the fact you are allowed to let the dividends compound before paying tax , I am not saying you are avoiding tax on dividends but you get the compounding effect of delaying the tax payment.

There is so great wealth of knowledge on this forum this spreadsheet by 3CC is brillaint and saved me making my own
https://docs.google.com/spreadsheets/d/1fmQL4a4MoaKXEQPi_lCrJVcaWqeEZ_3deGnr94QoSq4/edit#gid=2


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## Sarenco (11 Jul 2015)

Fella said:


> There is so great wealth of knowledge on this forum this spreadsheet by 3CC is brillaint and saved me making my own
> https://docs.google.com/spreadsheets/d/1fmQL4a4MoaKXEQPi_lCrJVcaWqeEZ_3deGnr94QoSq4/edit#gid=2



Hi Fella

3CC's spreadsheet is excellent but I think the calculations are based off an exit tax of 36% (it's now 41%) and a marginal income tax rate of 52% (on the basis of what you have written elsewhere, I suspect you have a significantly lower marginal income tax rate).  If you adjust these rates (but otherwise make the same assumptions), you will arrive at a materially different result over a 16-year holding period.

My preference for equity investment outside a pension wrapper is a widely diversified investment trust (or, ideally, a dozen or so different ITs).  That seems to me to be the best compromise between achieving a significant degree of diversification at a reasonable cost and (relative) tax efficiency. 

I agree that investing in a concentrated portfolio of 10-20 individual stocks makes no sense unless you are prepared to put in a very significant amount of research to arrive at a conviction that your portfolio will beat (or even match) the return of the wider market - and even then you have to accept that you could be wrong.

Incidentally, if I was in your position I would still prioritise paying off your mortgage, notwithstanding the fact that you are on a cheap tracker, before investing anything in equities outside a tax-deferred pension wrapper.  Totally risk-free return with zero tax complications or investment costs.

Edit: apologies, I've re-read your post and I see that you have re-run the calculations to allow for the change to the exit tax rate.  Did you adjust the "dividend tax" rate for your own circumstances?


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## ClubMan (11 Jul 2015)

Fella said:


> let the dividends compound before paying tax , I am not saying you are avoiding tax on dividends but you get the compounding effect of delaying the tax payment.


I don't understand.
You have to pay tax on dividends when they are paid - even if they are reinvested as far as I know.


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## Sarenco (11 Jul 2015)

ClubMan said:


> I don't understand.
> You have to pay tax on dividends when they are paid - even if they are reinvested as far as I know.



Dividends can roll-up tax free within a fund until a chargeable event occurs.


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## Fella (11 Jul 2015)

Sarenco said:


> Hi Fella
> 
> 3CC's spreadsheet is excellent but I think the calculations are based off an exit tax of 36% (it's now 41%) and a marginal income tax rate of 52% (on the basis of what you have written elsewhere, I suspect you have a significantly lower marginal income tax rate).  If you adjust these rates (but otherwise make the same assumptions), you will arrive at a materially different result over a 16-year holding period.
> 
> ...




Hi Sarenco 

Thanks for your reply you have been a wealth of knowledge on this forum and I have learned a lot from you. 

The reply I made was to this post 

_*41% versus 33% is 8% which is hardly peanuts!............. 
*_
So i was saying it more or less is peanuts,  i used the higher tax rate in my calculations , It is often stated categorically on this site that "investing directly in a basket shares is the most tax efficient way to invest" I don't think its clear cut as I feel people don't take into consideration the fact that your dividends are allowed to grow before you pay tax. 

Practically though to reinvest the dividends manually would be expensive most people would not receive a huge amount of dividends and to pay the fees to reinvest and the cost of the spread each time would add up to a lot over time which isin't factored in , lets say you get 100 dividend reinvesting is pointless , you could save it up and do it in one batch but your missing time in the market.

Re paying off the mortgage , I am going to try save for and pay that off in a defined period of like 2 years I have to contact the bank and find out what way to go about it , but it will motivate me to work hard and pay it off .

I decided to just make a lump sum investment in  ETF's the price they where lately was not far off the prices i bought at last year so I invested a bit more to leave it at a nice round lump sum  as they are not a good dollar cost averaging mechanism IMO . I am going to forget about these for 8 years minimum.

I am not going to do any more investing for the moment when/if I pay off the mortgage (assuming life runs smoothly)  I plan to revisit the stockmarket , I will probably just buy Investment trusts every month or so with whatever I earn as I believe they are the best for me outside a pension wrapper.


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## RichInSpirit (11 Jul 2015)

Hi Fella, I haven't read the complete thread but here's an angle that mightn't have been brought up.
Your were talking about buying shares and holding them for a period of time maybe 16 years.
Why sell them at all in 16 years time?  Sell a few if you need the money at the time but you could just hang on to the shares indefinitely and you wouldn't have to pay capital gains tax.


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## Sarenco (12 Jul 2015)

Fella said:


> Hi Sarenco
> 
> It is often stated categorically on this site that "investing directly in a basket shares is the most tax efficient way to invest" I don't think its clear cut as I feel people don't take into consideration the fact that your dividends are allowed to grow before you pay tax.
> 
> Practically though to reinvest the dividends manually would be expensive most people would not receive a huge amount of dividends and to pay the fees to reinvest and the cost of the spread each time would add up to a lot over time which isin't factored in , lets say you get 100 dividend reinvesting is pointless , you could save it up and do it in one batch but your missing time in the market.



Absolutely agree but the calculation is very sensitive to the assumptions used and, in particular, to the applicable marginal tax rate, which can be anywhere from 0% to 55% depending on an individual's personal circumstances.

It is certainly true that investment costs (broker commissions, spreads, stamp duty, currency conversion costs) represent a significant drag on performance over time.  To be fair, collectives also have portfolio trading costs (in addition to management fees) but these are likely to benefit from economies of scale.

It sounds like you have a very solid medium term financial plan - best of luck.


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## ClubMan (13 Jul 2015)

Sorry - my mistake earlier about dividend reinvestment.
I thought that you were talking about direct share investment and receiving dividends (albeit reinvested) directly and not within a fund.


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## Buddyboy (1 Dec 2015)

Just had a conversation with SWMBO regarding paying off the mortgage next year.  I was thinking of this thread, and comparing the rate on deposit V our low (.75%) tracker. Then I realised I had forgotten the cost of life (mortgage) insurance.  So if I take that into account, and owe 100k on a mortgage, current mortgage rate of .75%, rate of 1.24% on State 5 yr bond, cost of life assurance is €450 pa

Cost of mortgage = 100,000 * ((1.24 - .75)/100)) - 450 = 40.  So we are saving 40 PA by not paying off the mortgage.  Looks like it makes sense to pay it off next year.  This also frees up the mortgage payments to invest/squander.


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## Sarenco (1 Dec 2015)

It's not really appropriate to compare a floating rate (such as the rate on a tracker mortgage) with a fixed rate (such as the annual coupon on a five year bond).

The apples-to-apples comparison is your tracker rate (less any available MIR) and the rate on the best available instantly accessible deposit account (less DIRT and PRSI, if applicable) for the same sum.

You should also leave mortgage protection premiums out of the equation as many would argue that it makes sense to maintain the relatively cheap life cover provided by the policy, even if you are no longer required to do so.


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## Fella (15 Dec 2016)

Still haven't paid this mortgage off I'm unsure if it's the right move or not. I put the money into an account earning nothing and the mortgage just comes out of this money each month. 

Currently 
Mortgage -188k tracker 1.1% above ecb
Savings not even in savings account - 200k
Investments - 240k 

Every couple of months I transfer out some savings into saxobank and buy more investment trusts. 

I get mortgage interest relief of 57€ a month and I've 23 years left on mortgage.

One thing that struck me in this thread is  
Brendan's comment if I got a loan of 200k at 1% I'd take it and buy shares , that's the only other option for the money I feel , my own opinion is even if I got a loan at 0% now I wouldn't take it , am I wrong and missing out on the value of free money ? A guy I know who buys buy to lets in Northern Ireland says I'm mad and I'm not understanding the power to leveraging your money , his opinion is I should more mortgages and leverage up to the max.


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## michaelm (15 Dec 2016)

If it was me I'd pay off the mortgage straight away.


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