Hi Kathy
This is a very difficult question with a huge number of variables to consider.
1) If you are on fixed rate of 5.35%, there will be quite a penalty on paying anything off this. Have you checked this with AIB?
2) Just to be sure, check your mortgage contract to see if you are entitled to a tracker on expiry of the fixed rate. It's unlikely, but possible. If so, paying down the mortgage is unlikely to be wrong.
3) I am not sure you will find it easy to get a second mortgage when you have €120k of negative equity, so it seems to me that getting a negative equity mortgage from AIB is the most likely option.
4) The Central Bank restrictions do not apply to negative equity mortgages - in other words, the 3.5 times income or the need for a 20% deposit don't apply to you. The lenders will have their own restrictions.
5) When do you want to buy the new property? If it's within the next 12 months, you should definitely hold onto your cash rather than pay down your mortgage, as this will give you a lot more flexibility.
6) If you are not going to trade up for at least 2 years, then maybe paying down the mortgage now is the right idea - if the penalty for doing so is not too high. That is assuming that you will continue to accumulate enough savings to trade up or to buy a separate house.
7) If you are buying a second house you will need at least a 20% deposit. That means that you will need at least €60k. But again, I don't really think it will be easy to get such a mortgage while you keep your existing mortgage.
Check out the terms and conditions of the NE mortgage. I did a Key Post here over a year ago. It relates to tracker mortgages, but the principles are the same.
http://www.askaboutmoney.com/thread...en-tracker-mover-product.187831/#post-1390885
Brendan