# To pay off a (relatively small) lump sum off mortgage or not?



## Anonn (10 May 2009)

*But - this forum is widely read. If you provide very specific information, your friends might identify you. *

Hi all, long time reader, first time poster. 

Age: 31
Spouse’s/Partner's age: 30

Annual gross income from employment or profession: 50K
Annual gross income of spouse: 42K

Type of employment: 1 Civil Servant, 1 Public

In general are you:
(a) spending more than you earn, or
(b) saving - we're saving more than we earn

Rough estimate of value of home: 260K (in current climate)
Amount outstanding on your mortgage: 310K
*What interest rate are you paying? *AIB ECB Tracker - so it fluctuates

Other borrowings – car loans/personal loans etc No other borrowings

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 

Savings and investments: Various sums on deposit in various institutions - 100 K all in

Do you have a pension scheme? Yes - both in 'state' pension scheme

Do you own any investment or other property? No

Ages of children: None (yet)

Life insurance: About 300 per year (basic Mortgage Prot cover)


*What specific question do you have or what issues are of concern to you? *

I realise that we are in a relatively good financial situation, apart from being in negative equity with our home. We've worked extremely hard and lived modest lifestyles to get to where we are. I'm not looking for a medal - I know 1000's of others have done similar!!

I have a question;

I am keen to pay 10,000 off the capital of the mortgage. I suppose it's purely psychological but I would like to see it getting under the 300K mark. 

Am I daft - given that interest rates are so low at the moment?

Should I be considering paying more than 10K? Or to try and pay 10K per year going forward ?

With such a large outstanding mortgage I'm keen to reduce the interest repayments as much as I can. My logic is that now is the time to do it... we've a few (hard earned) euro in the bank and we've no dependents - although that will (hopefully) change in the coming years.

I think I just don't like having such a large mortgage looming over me for the next 30 odd years ? 

Or should I just suck it up and get used to it - as suggested by Mrs Annon ?


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## AriesWoman (12 May 2009)

I would say try to reduce the mortgage while you have the money. Now is probably the time when you don't have kids.

Also if ou do have kids would you need to move to a bigger house or closer to schools when they come along? If so you might want to clear the negative equity - you could use some of the 100k in savings and investments to reduce or clear it.


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## pebbledash (12 May 2009)

I'm in a similar situation to you, except that one of us is currently out of work. I had considered paying off a lump sum but I'm holding off for the following reasons:

1. Decided to try and put lumpsum in high interest savings account instead in case we suddenly both found ourselves out of work.
2. The penalty to lodge extra against our fixed rate mortgage is too high.
3. Our property is in negative equity too and in the future we might want to trade up. I would prefer to have lumpsum for deposit in case we can't sell our property (even if negative equity is cleared). At least then we'd have the option of renting out our current place and would still have a good deposit for future purchase.

I don't know if these are wise decisions or not as I'm not brilliant with finance. But that's what I've decided at the moment.


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## Macstuff (12 May 2009)

This is a decision that only you can take. There is no right and wrong answer, the decision you take should be based upon your current personal circumstances and your plans for the future. 

I did read an interesting article recently that got me thinking though.. it basically went along the following lines.... given that international govts and institutions are investing heavily in their economies and that some are engaging in quantitive easing, we are likely to experience high inflation in the near future - of course, we are a long way from this currently. 

If this does happen, and is a prelonged phenomenon, then the relative value of your outstanding mortgage debt will be reduced. Thus paying off 100K might not deliver such great fianancial benefit.
Of course you would need to protect your lump sum from any inflation that may occur, in such a scenario. 
Not sure if this helps, but it did give me food for thought.


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## Fooz (12 May 2009)

How does one protect savings from inflation?


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## Askar (12 May 2009)

If there is inflation then possibility that ECB rates and hence mortgage interest rates will also rise, resulting in higher mortgage repayments.  If, like me, you take the view that property prices are in for long term correction, I would pay down the high mortgage you have so as to give you more options later on.


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## Deas (13 May 2009)

Have you actually spoken to your mortgage provider?  They should be able to give you a comprehensive response re reducing your current payments or reducing the term of your mortgage. Also, you mention that you might try and pay off €10k per year.  I would suggest that you would be better placed to increase your monthly mortgage payments by the monthly amount of €833 making up the €10k.  This way you will continuously reduce the capital balance and the interest will reduce monthly (based on rate at the time) rather than once annually.


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## Anonn (14 May 2009)

AriesWoman said:


> I would say try to reduce the mortgage while you have the money. Now is probably the time when you don't have kids.
> 
> Also if ou do have kids would you need to move to a bigger house or closer to schools when they come along? If so you might want to clear the negative equity - you could use some of the 100k in savings and investments to reduce or clear it.



We don't need a bigger house. We might like to move to a different location but if push comes to shove we can stay where we are for the next 20 years! We (and by 'we' I mean 'I') are just keen to start chipping away more forcibly at this big loan.



pebbledash said:


> I'm in a similar situation to you, except that one of us is currently out of work. I had considered paying off a lump sum but I'm holding off for the following reasons:
> 
> 1. Decided to try and put lumpsum in high interest savings account instead in case we suddenly both found ourselves out of work.
> 2. The penalty to lodge extra against our fixed rate mortgage is too high...



Sorry to hear about the job loss. I don't know of any attractive high interest accounts. I'm very adverse to risk so cash on deposit would be all that I would be keen on... don't think I'll get much more than 5% anywhere...



Macstuff said:


> I did read an interesting article recently that got me thinking though.. it basically went along the following lines.... given that international govts and institutions are investing heavily in their economies and that some are engaging in quantitive easing, we are likely to experience high inflation in the near future - of course, we are a long way from this currently.
> 
> If this does happen, and is a prelonged phenomenon, then the relative value of your outstanding mortgage debt will be reduced. Thus paying off 100K might not deliver such great fianancial benefit.
> Of course you would need to protect your lump sum from any inflation that may occur, in such a scenario.
> Not sure if this helps, but it did give me food for thought.



That is interesting... although the only catch, as you say, is to protect savings... Gold ? Picassos? 



Askar said:


> If there is inflation then possibility that ECB rates and hence mortgage interest rates will also rise, resulting in higher mortgage repayments.  If, like me, you take the view that property prices are in for long term correction, I would pay down the high mortgage you have so as to give you more options later on.



This is kind of how I'm thinking too...



Deas said:


> Also, you mention that you might try and pay off €10k per year.  I would suggest that you would be better placed to increase your monthly mortgage payments by the monthly amount of €833 making up the €10k.  This way you will continuously reduce the capital balance and the interest will reduce monthly (based on rate at the time) rather than once annually.



Would the monthly amount be any better ? I'm guessing that interest rates won't go much lower (although Trichet did hint at another 0.25%), would it not be better to increase capital payments as much as possible, in one fell swoop, while interest repayments are low ? 

Thanks all for your input, much appreciated.


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## paddyd (18 May 2009)

As you have a tracker mortgage, another view of your situation is that you will most likely never again in you lifetime borrow money so cheaply. trackers are aboub 2.1% and even below. 
I know the negative equity is a milestone but the borrowed money is being borrowed very cheaply. Save the money and then hold. In a few years rates may well be back up again, and then it'll make more sense to pay off the capital, and your financial position will undoubtably have improved. Meanwhile you will have sandbagged some protection against the unknown elements of a recession


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## brendan09 (22 May 2009)

well said paddyd


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