28 year old with mortgage and lump sum

Christy2020

New Member
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Hi all . I’m 28 years old .In my 2nd year of my first property mortgage .starting pension next pay check €250 monthly (+company contributes). I am Looking to invest lump sum of money aswell as adding 750 to 1000 monthly all going well . any ideas folks on where and how to invest long term medium risk ? I was thinking of dealing with Zurich !!
Thanks in advance
 

Boyd

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1,589
was thinking of dealing with Zurich !!
Forget dealing with Zurich! As above overpay your mortgage to get tax free guaranteed return of 3 percent (if your on 3 percent mortgage rate). Getting that by investing with net pay requires almost 7 percent return. I know you might think investing is exciting but IMO it's not the way to go here. What is your mortgage balance, what is the rate, with what back and what is the product? Also hired much is the lump sum? With this info it's possible to demonstrate the tangible benefit of paying it off your mortgage (it will be tens of thousands of euro in interest saved I imagine).
 

Live Well

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Should he not pay more into his pension rather than paying off the Mortgage early or at least do a combination of both?
 

Boyd

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That's a matter of opinion that's been discussed at length on here. Main point is that post tax investing is not a good idea at OPs stage.
 

Brendan Burgess

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We don't have much information.

But he is 28.
He took out a mortgage a year ago.

Based on that he probably has a high mortgage in relation to his income and in relation to the value of his house.
Based on that, he will probably want to trade up in about 5 to 10 years.

So the clear thing for him to do is to pay down his mortgage. This has huge advantages.
  1. If he reduces his LTV, he should be able to avail of the lowest mortgage rates. (The market is funny at the moment and this might not apply, but over time, this rule should come back into play.)
  2. It's risk-free.
  3. If he is paying 3% mortgage interest, it is the equivalent of getting a tax-free, risk-free return of 3% on his investment.
The alternative is a fund of some sort.
  1. He will face the risk of a fall in value
  2. It will be subject to tax - so he would need a return after charges of 5% to 6% to yield a net return of 3%. This is possible but unlikely.
A pension is a possibility, but at 28, paying down the mortgage should be his highest priority - not locking away money until retirement.

Brendan
 

NoRegretsCoyote

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Yes but you only get the benefit of paying off your mortgage early once, while pension fund returns are re-invested.


Anyway, OP has an investment horizon of 50 years. Even a mere 3% annual return for a pension fund means a more-than-fourfold increase.
 

Brendan Burgess

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The benefit of paying off a mortgage is permanent.

Let's say you have a mortgage of €300k and you pay off €€1,600 a month over 20 years.

Now think of it as two mortgages one is a €100k mortgage at 3% with no repayments and the other is a €200k mortgage where you pay €1,600 a month.

You should be able to see that the €100k mortgage rises to €180k over 20 years.
But if he pays it off now, he saves himself €180k over 20 years.

The same logic applies to the pension fund.

Leaving aside the tax issues, paying off a loan at 3% gets the exact same return as investing in an investment at 3%.

Brendan
 

NoRegretsCoyote

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Yes but when you own the house outright the return is the enjoyment from living in it. You can't re-invest this.

With a pension fund returns are actually re-invested.
 

Brendan Burgess

Founder
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You own the house in both scenarios - that is not a factor in the decision.

Who do you think is better off

Christy with a mortgage of €200k @3% per annum.

Or Coyote with a mortgage of €300k @3% and investments of €100k @1.5% after tax?

Brendan
 

NoRegretsCoyote

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@Brendan Burgess

It depends on your time horizon. Over a 25-year mortgage term Coyote pays €40k more interest. But €100k over 50 years at 1.5% more than doubles!

I am not claiming that 3% equals 1.5%. What I am saying is that the OP has a very long time horizon, and putting some of his wealth into equities early makes sense. It also establishes good habits, as once the mortgage is paid off human nature is what it is, and he is unlikely to suddenly invest in other products.

Compound interest is a very powerful force.
 

Brendan Burgess

Founder
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Compound interest is a very powerful force.
It is, but it works on investments and on mortgages.

His mortgage is compounding at 3% a year. By paying it off he gets the benefit of that powerful force.

Let me try again.

Assume that your mortgage is paid off in full.

AIB comes along and offers to lend you €100,000 at 3% over 20 years. They will roll up the interest so you do not have to make any repayments until the end of the 20 years. Would you avail of this?

Brendan
 

Gordon Gekko

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Say I’m paying 3% on a 30 year mortgage and I get a €100k bonus. Throwing the €100k against the mortgage is the equivalent of getting a guaranteed pre-tax return of around 5% a year, perhaps even 6% if there’s a management fee involved.

So guaranteed 5/6% vs the hope of earning a return from an investment.

The ‘use it or lose it’ nature of AVCs can colour the analysis somewhat, but on a standalone basis it’s difficult to argue against mortgage overpayment.
 
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