# Mortgage nearly cleared - next steps



## boatman (14 Oct 2019)

Age:       44
Spouse’s/Partner's age:    44

Annual gross income from employment:  E 100K
Annual gross income spouse: E 6K (part time)
Rental income:     E  20K

Type of employment:     Private sector (me)

Expenditure pattern:    More savers than spenders.

Rough estimate of value of home:   E 450K
Mortgage on home: E 3K
Mortgage provider:    AIB Tracker (ECB + 0.6%)

Other borrowings – car loans, etc  None

Do you pay off your full credit card balance each month? Yes

Savings and investments:
E 30K cash (in best available 30 day deposit account)
E 450K in DC pension fund (Current fund value - mostly equities. Spread across 2 schemes - former & current employer)

Do you have a pension scheme?
Me: yes, employer contribution (9%) + my contribution (5%).
Spouse: will qualify for state pension. (Investment property bought as pension for spouse)

Do you own any investment or other property? Yes
Rough estimate of value of property: E 230,000
Mortgage on property: E 110,000
(Rate approx 5%, with approx 20 years to go. Currently fixed, will revert to variable in the coming months. Will be cleared around retirement)

Ages of children:    13 & 10

Life insurance:
1. Joint mortgage protection policy (reducing balance on PPR mortgage - policy will be finished next year).
2. Me: Death in service benefit - 4 times salary (approx).
3. Spouse: none, apart from joint mortgage policy.

What's good:
- Very low tracker rate on mortgage, and mortgage will be cleared in the next few months, both in mid 40's.
- Pension is reasonably well funded - funds currently valued at 450K with 20 years to retirement, plus another 20 years of contributions to come.

What's bad:
- Savings are not massive - 30K liquid assets.
- No specific savings fund (e.g. education), but can increase savings in the coming months when mortgage is cleared
- Currently not maximising tax relief by making AVCs (although 14% of salary is going into pension, between mine & employer's contribution. I made AVCs in the past - early/mid 30's)

Questions:
- Do we have enough life assurance cover?
- Mortgage will be cleared in a few months - currently paying E 650 per month. What's the best use of this amount when mortgage is cleared?
* Divert current mortgage payment to savings account and increase cash savings (but returns on deposits close to 0%)
* Divert current mortgage payment to investment fund (e.g. 5 year term and access funds when kids starting college)
* Make AVCs getting instant tax relief (but money is tied up for next 20 years). Could increase AVCs now and decrease in 5 years when kids starting college
* Overpay investment mortgage (but mortgage interest relief is going to 100% from 2019, so may be best to leave investment mortgage as is to maximise tax relief on interest)
* Save for deposit on another investment property
* Other?

- Any other comments / suggestions?


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## RedOnion (15 Oct 2019)

askaam said:


> but mortgage interest relief is going to 100% from 2019, so may be best to leave investment mortgage as is to maximise tax relief on interest


Yes, the aim is to make as little profit as possible, so you pay less tax...
Where else are you going to get a guaranteed (taxable) 5% return?


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## moneymakeover (15 Oct 2019)

It is swings and roundabouts

Tax at 40% but could be more with USC


*Owe 100,000*
Say interest would be 5000
That will save you .4 X 5000=2000 in tax

Cost bank 5000 -tax saving 2000=3000

*Owe zero*
If you pay down the loan, don't owe the interest, you have extra profit 5000
Tax man looks tax on the full amount including the 5000 =2000

Net cost 2000

Above could be incorrect. In particular due to USC

Over the course of paying down the 100k you're getting your tax relief. 

And in retirement hopefully your tax rate will drop to 20%

So I would suggest you just keep paying down the capital.


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## RedOnion (15 Oct 2019)

@moneymakeover 
I've read your post twice, and can't understand it.
What's the net return in paying off investment mortgage, based on your numbers?


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## moneymakeover (16 Oct 2019)

*Owe 100k*
Imagine 12k rental profit, no expenses but 5k interest, tax rate 40%
Bank 5k
Tax man: .4 x (12 - 5) = 2.8k
Profit: 4.2k

*Owe zero*
Again 12k rental profit, no expenses or interest, tax rate 40%
Then tax man gets 4.8k
Profit: 7.2k

Clearly better to owe zero


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## Cameo (16 Oct 2019)

askaam said:


> Age:       44
> Spouse’s/Partner's age:    44
> 
> Annual gross income from employment:  E 100K
> ...




You can normally access pension cash at age 50, 25% tax free and put the rest in an ARF.m so you are only locking money up for 5 or 6 years. Imo maxing pension contributions is the way to go


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## RedOnion (16 Oct 2019)

moneymakeover said:


> *Owe 100k*
> Imagine 12k rental profit, no expenses or 5k interest, tax rate 40%
> Bank 5k
> Tax man: .4 x (12 - 5) = 2.8k
> ...


Or, in other words:


RedOnion said:


> a guaranteed (taxable) 5% return?



Many people seem to have this misunderstanding that it's best to keep debt against rental property, 'as a tax shelter'. But often it makes far more financial sense to repay it.

Your 'swings and roundabouts' comment suggested there might be no benefit to the OP in paying down the debt.


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## Brendan Burgess (16 Oct 2019)

Return on deposits: 0% 

Return by paying off buy to let mortgage  5% gross less 50% tax = 2.5% net return.

In other words, if you pay down your mortgage you get a guaranteed, net return after tax of 2.5%. 

That is what you should do. And you should do it with your €30k cash as well. 

Assuming your job is reasonably safe, then you don't need a cash fund of €30k or anything like it. 

Get yourself a guaranteed, after-tax return of 2.5% by paying down your investment mortgage. 

With a few years to go to college, you should start saving for the kids' education. 

Brendan


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## boatman (16 Oct 2019)

Thanks for the input so far. A couple of comments / queries:

@Brendan Burgess
We will likely need to change a car or may want to take a big holiday in a couple of years, so it may make sense to hold on to some cash rather than borrowing at a higher rate down the line (if needed).

I'd say job is reasonably safe - what would you see as an appropriate rainy day fund?

If the current PPR mortgage payment of €650 was diverted to AVCs, then that's €1,100 going into my pension fund monthly allowing for 41% tax relief, so would it not be better to put €1,100 into pension rather than pay €650 off investment mortgage.
I'd see risks associated with the AVC option:
- Value of pension fund may drop negating the tax relief benefits
- Pension funds may be heavily taxed upon exit

@Cameo
If I'm putting money into a pension, it's more for retirement, than for accessing from the age of 50. Also from my reading, there seems to be a lot of conditions around accessing pension at 50.

@RedOnion: "the aim is to make as little profit as possible" : The other side of that is paying investment mortgage early may mean being debt-free at 60 rather than 65. (Although I'm comfortable with the investment debt in that it's washing its face)


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## RedOnion (16 Oct 2019)

boatman said:


> @RedOnion: "the aim is to make as little profit as possible" : The other side of that is paying investment mortgage early may mean being debt-free at 60 rather than 65. (Although I'm comfortable with the investment debt in that it's washing its face)


Sorry, my sarcasm wasn't picked up. 

And I apologise, we ended up going down a route of the net cost of your mortgage, after tax, rather than focusing on your overall questions.

Do you have any idea what college expenses lie ahead? E.g will children stay at home? If you've a rough idea of costs in 5 years for 7 years or so might help with your planning.


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## Brendan Burgess (17 Oct 2019)

boatman said:


> We will likely need to change a car or may want to take a big holiday in a couple of years, so it may make sense to hold on to some cash rather than borrowing at a higher rate down the line (if needed).



Absolutely correct. You should save up just enough for anticipated expenditure.   
So if you expect to spend €20k on a car in 2 years, then you should target your savings to reach €20k in two years time. 
That will double as your emergency fund. 
After buying the car, you can build up your emergency fund again. 
But with a reliable job, you don't really need an emergency fund. If the emergency happens, it will be very easy for you to borrow money and you can repay it quickly from earnings.

Brendan


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## Cameo (18 Oct 2019)

deleted as statement was incorrect


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## RedOnion (18 Oct 2019)

Cameo said:


> As far as I know there is no restriction on taking cash at age 50 from a PRSA AVC pension


I'm almost certain you have to have left the employment to access at 50?


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## Cameo (18 Oct 2019)

My post above is incorrect....so I’ve deleted it

I was confusing some specific advice I’ve received in relation to an occupational pot from a previous employment...


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## Cameo (18 Oct 2019)

RedOnion said:


> I'm almost certain you have to have left the employment to access at 50?


i am pretty sure you are correct


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