# Sensible strategy around paying off loan vs savings and further plans



## dmurray (22 Oct 2012)

*Age:*35
*Spouse’s/Partner's age:* 30

*
Annual gross income from employment or profession:*
E70,000


*Annual gross income spouse:*
None currently; stay at home Mum, as we have a very young baby


*Type of employment:*
Private sector employee


*Expenditure pattern:*
Generally sensible. I usually take a "live below my means" attitude.


*Rough estimate of value of home*
None; currently renting. Paying €900 a month rent.


*Other borrowings – car loans/personal loans etc*
A student loan. Currently €25,000 of a principle left, with an aprox 7.5 years term left, at an interest rate of 6.5%.


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


*Savings and investments:*
€150,000 in a deposit savings account, paying 2.5% interest. Also a further €50,000 or so in a mix of investments (with expected only mediocre returns in the next couple of years)


*Do you have a pension scheme?*
Yes, a company DB scheme


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


*Ages of children:*
One 6 months


*Life insurance:*
Nothing I contribute into, only a company plan which pays out to my spouse if I die in service.


*What specific question do you have or what issues are of concern to you?*
We hope within a period of 2 to 4 years to purchase a house (we're in no rush). I would estimate something in a region of €400,000 if we can afford it. This would therefore mean we can put up a deposit of €200k from our savings, and then get a further €200k mortgage, to pay back over a period of 30 yrs.


Having a student load of €25k outstanding bothers me (with an interest rate of 6.5%, which is fixed), as we have the means to pay it off right now from our savings. I hate having debt. However, if I was to clear this now with a lump sum from our savings, that would be €25k less to put towards a house in 2-4 yrs. If we were still to look for a house of a value of around, say, €400k, then we would need a mortgage of €225k instead of €200k, to make up the lump sum gap used to pay off the loan. Given that we would be clearing the mortgage over 30 yrs, the €25k would actually cost a lot more in interest over 30 yrs as part of the mortgage, rather than over the 7.5 years as part of the student loan.



It makes intuitive sense to me to pay off the student loan right now with a lump sum from our savings, given the loan interest rate is far greater than the savings deposit rate (6.5% vs 2.5%). However, doing this would mean we would have less to put towards a house in the future, and would end up paying a lot more mortgage interest.



I also expect to continue saving what we can in the meantime, through putting aside company bonuses etc, and put in the deposit account. However, I wouldn't expect to be able to make up anything close to the €25k in savings between now and buying a house. Also, servicing the student loan from salary income going forward would limit savings opportunities.


I realise we are lucky to be in such a healthy financial state in these times, am I am grateful. However, if we pick the wrong strategy here, we could end up wasting money in the long term.


*What's the best thing to do?*


A - pay off the student loan right now with our savings, and get a bigger mortgage in the future when we go to buy
B - pay off the student loan over the original schedule of the next 7.5 years, at the 6.5% interest, and keep our savings intact in the deposit account
C - pay off the student loan right now with our savings, and try to save as much as we can in the next 2-4 years to make up the shortfall in our savings, even if we would be lucky to save €10-€12k in the meantime
D - another option I'm missing?


Thank you for your advice!


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## Mrs Vimes (22 Oct 2012)

Hi and welcome to AAM.

You are doing very well financially to have so much saved - I'm sure you've noticed by now that dmurray beag takes up quite a lot of money!

You don't say how much the monthly repayments are on your loan or how much you are saving each month - if you paid off the loan from savings then you could increase your savings by this amount each month and then if you do find you need a bigger mortgage than planned when the time comes then you could overpay by the loan amount to get it down to a more comfortable level.

You may find it takes a year or so longer to find the house you want to buy so your savings have increased that bit more too.

Another thing to note - when you say the loan is on a fixed rate, is there a penalty for repaying it early?


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## dmurray (22 Oct 2012)

Mrs Vimes said:


> You don't say how much the monthly repayments are on your loan or how much you are saving each month



Thanks Mrs Vimes. The repayments on the student loan are aprox €300 per month. 



Mrs Vimes said:


> if you paid off the loan from savings then you could increase your savings by this amount each month and then if you do find you need a bigger mortgage than planned when the time comes then you could overpay by the loan amount to get it down to a more comfortable level.



Do you mean that when the time comes, I would pay whatever the required mortgage payment is every month, plus overpay the €300 I have being paying off the student loan? That's not a bad idea. Would lessen the burden of stretching out the student loan sum over 30 yrs.



Mrs Vimes said:


> Another thing to note - when you say the loan is on a fixed rate, is there a penalty for repaying it early?



No penalty for paying off early, as far as I'm aware, though I need to double check.


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## Bronte (23 Oct 2012)

You should pay off the student loan. And you can immediatly increase your monthly savings by 300 (3600K annually). You also save on the interest costs of the loan. 

It also looks better to the bank when you apply for the mortgage that you have no other debt.  

Don't worry about having a larger mortgage, because you can always increase your repayments on that in the future, (with salary rises, or a bonus, ) and reduce the term.


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## Mrs Vimes (23 Oct 2012)

dmurray said:


> Do you mean that when the time comes, I would pay whatever the required mortgage payment is every month, plus overpay the €300 I have being paying off the student loan? That's not a bad idea. Would lessen the burden of stretching out the student loan sum over 30 yrs.




Exactly, you could even decide to keep up the overpayments long term. I would suggest going for the longest mortgage you can get and overpaying - easier to reduce an overpayment than increase a mortgage term if things get tight.


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## Brendan Burgess (23 Oct 2012)

You are paying 4% more on your student loan than you are getting on deposit. So your current strategy is costing you €1,000 a year. 4% of €25,000. 

Pay off that loan immediately, subject to there being no penalty. 

Another factor to consider is that any money on deposit is at risk of a euro break-up or bank collapse, so the safest place for your money is to repay loans. 

Brendan


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## dmurray (24 Oct 2012)

Thanks for the feedback all. It sounds like the consensus is to go ahead and pay off the student loan, which I am comfortable with.

Are banks generally favourable to regular overpayments on mortgages? Do they penalise for this?


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## dmurray (15 Dec 2012)

All,

Thanks for your inputs and thoughts on this. Just to update, we decided to payoff the student loan, and did so this week. We will now try and save what would have been the monthly loan instalments.


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## SarahMc (15 Dec 2012)

Banks do not penalise for overpayments on a variable rate mortgage. I am curious as to why you are not looking to buy a home now, rather than wait a couple of years?

Of course we cannot discuss future house price rises/falls, but at your stage of family formation, I'd prefer to be putting that €900 towards my mortgage than towards my Landlord's.


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## dmurray (28 Jan 2013)

SarahMc said:


> Banks do not penalise for overpayments on a variable rate mortgage. I am curious as to why you are not looking to buy a home now, rather than wait a couple of years?
> 
> Of course we cannot discuss future house price rises/falls, but at your stage of family formation, I'd prefer to be putting that €900 towards my mortgage than towards my Landlord's.



Fair point. I would much rather be paying off a mortgage at the moment, rather than just paying rent. However, we are not sure of our long term plans at the moment. There may be an opportunity to go to live and work in the US in a couple of years, and if we buy a house here in Ireland in the meantime, it could be difficult to sell when the time comes. I'm just afraid to commit to a mortgage at the moment because of this. If we had a little more certainty in our long term plans, I would certainly be buying at the moment.


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