Gain interest @3.05% or pay down mortgage @2.79%?

Gain interest @3.55% or pay down mortgage @2.79%?

Evening all, could I just check with the more accountancy-minded of you whether or not my hunch is right about the following bit of maths?

• Currently have a €210K mortgage at 2.79% (NIB tracker, LTV <60%)
• Will soon be in a position to clear €100k or so off it. ()
• Paying income tax at top rate, and am obviously well over the ceiling for maximum tax relief (non-FTB)
• Also have a NR Demand Online a/c, currently yielding 3.55% before DIRT (I got their 6-month "introductory" bonus of 0.5% extra for the first 6 months, which was maintained when they moved the basic rate to 3.05% to beat RaboDirect's offering)

When the €100K comes through, am I right in assuming that - all things being equal* - it would make sense to stick it in the NR account for as long as the 3.55% rate lasts, and only pay it off the mortgage when the NR rate drops back to 3.05%?

[* I've no other debts at the moment, and our mortgage protection assurance is in two separate policies, one for €110K (to be left in place for the life of the loan) and one for €100K (paid up to Jan 2006; to be let lapse once the loan amount is reduced to <€110K).]

I know it's not going to make a huge difference interest-wise, over 6 months. But if I were to walk under the proverbial bus between now and then, I'd rather my insurance paid off a €210K loan and left my wife with an extra €100K on deposit than have the bank and the insurance company save €100K... (I hasten to add that I'm not planning to walk under any buses, proverbial or otherwise! )

...so is my thinking more or less right?

Thanks in advance,

Re: Gain interest @3.55% or pay down mortgage @2.79%?

Seems very marginal to me judging by these rough calculations:

Interest on deposit

• 3.55% CAR gross
• 2.84% net of DIRT
• c. 1.42% over 6 months
• i.e. €142 on €10K over 6 months

Interest saved on loan if €10K paid off

• 2.79% APR
• €10K @ 2.79% = €279
• i.e. €279 / 2 = €139 over 6 months

Do you stand to gain c. €3 by putting the money on deposit rather than paying it off your mortgage. By paying it off your mortgage you also cut down on your interest bill going forward. You could use Karl Jeacle's mortgage calculator to figure out by how much.

DrMoriarty said:

But if I were to walk under the proverbial bus between now and then, I'd rather my insurance paid off a €210K loan and left my wife with an extra €100K on deposit than have the bank and the insurance company save €100K...

Click to expand...

Is your mortgage protection life assurance decreasing term or level/convertible term? If it's the latter then it will pay out the full amount initially borrowed and any surplus over and above what's outstanding on the mortgage will go to your next of kin.

Thanks, ClubMan, I figured it was much of a muchness from the point of view of NR interest earned vs NIB interest saved - but was just worried I might be missing something...

The assurance policies are both decreasing term - not that it matters particularly, since I'd have been making this move 6 months hence, if not now. But from what you say, there's little to be saved in the meantime by putting off paying down as much as possible of the mortgage - especially from the point of view of the interest bill going forward... (don't think I need to crunch the numbers to find out whether that saving would be greater than €30!)

I still don't think there was any need for you to be quite so about it, though...

Cheers again,

DrMoriarty said:

The assurance policies are both decreasing term

Click to expand...

What do you mean by "both"? Do you not have a single joint policy for you and the missus linked to the mortgage rather than two separate policies? Perhaps the latter would be cheaper?

since I'd have been making this move 6 months hence, if not now.

Click to expand...

You mean making the capital repayment?

But from what you say, there's little to be saved in the meantime by putting off paying down as much as possible of the mortgage - especially from the point of view of the interest bill going forward...

Click to expand...

That's the way it looks to me alright but I could be missing something!

What do you mean by "both"?

Click to expand...

Tsk, tsk, read the small print, Clubman...! I knew when we moved the loan from BoS to NIB last January that around about now I'd be encashing a 10-year with-profits investment that would allow me to pay down €100k or so of the loan, so - with the cunning advice of Liam Ferguson (to whom much thanks again, if he happens to read this!) - I set up two joint life policies, one for €100k and one for €110k. Now I can let one of them lapse, the first year's premiums having cost me nothing by virtue of having been absorbed by Liam's refund of commission accruing from th'other...

You mean making the capital repayment?

Click to expand...

Yup. And I stress capital repayment; I made sure first that NIB wouldn't hit me with any charges for a part-redemption (as you'd expect, with any decent tracker...) and that the sum would be repaid against the capital, not the capital & interest combined.

Incidentally, I've since read over the small print of the (Friends First) policies and it transpires that the cover provided will remain in place until Jan. 2006 anyway (but minus NIB's interest, once I reduce the loan amount sufficiently), so apparently I'm free to walk under that bus any time in the next 6 months and still have my widow and orphans enjoy the benefits - not to mention the spectacle!

(Mrs Moriarty has already put my name down for a charity bungee-jumping event... It's the only logical response, when you think about it!)

Fair enough - thanks for the clarification.

Hi DrM

I agree. It's an absolute disgrace that Clubman cannot restrict himself to his role of answering questions without abusing the questioner. I will see can I get him reprogrammed to remove this bug.

It appears to make no difference, so you might as well leave the money on deposit. In that way, if you need the money at some stage in the future, it will be available to you without the need to go through remortgaging.

Brendan

With this amount of cash available, have you considered an offset mortgage as provided by NIB and others ?

It may not be the absolute optimum in terms of savings but has lots of flexibility.

Hi Brendan, hi euroDilbert,

No, I think you should keep ClubMan just as he is. "The Divil you know", and all that...

Thanks for the suggestions, but I think I'm going to go the route of a capital repayment. Truth is, since I remortgaged in January (topping up by an additional €65k to fund another venture, of which more some day...), I've only been managing to cover the higher repayments by dipping into other resources. Repayments on €110k would fit a lot better within my overall monthly income/expenditure pattern. If I find I've spare, I can always increase the payments again and bring down the term a bit. But of course I will leave a small 'rainy-day' amount (no pun!) on deposit with NR until our SSIAs mature...

I'm in secure employment, so flexibility/fallback options are less important to me than perhaps they would be for others. My own priority, 'going forward', as they say (yecch!) — is to get the best long-term value I can in order to stretch my fixed (and 'ceilinged-out') public sector salary for when the kids get older... 5 of 'em!

Is the €100K an unexpected windfall (e.g. inheritance) or something? Because if it's not and was, in fact, anticipated and you remortgaged to get €65K as recently as January I just wonder if you have a clear picture/plan in relation to your overall finances? Maybe if you posted more details about your overall plans and situation people could make constructive comments?

Is the €100K an unexpected windfall (e.g. inheritance) or something?

Click to expand...

Not quite — it's the proceeds of a 10-year with-profits policy (which was itself bought with the proceeds of an unexpected inheritance, back then...) I knew it would be maturing around now, but took the opportunity to 'top-up' in January because I wanted to start work on the other project, and knew I could reduce the mortgage amount back down within a few months...

The other project (for which the €65K was needed) was/is the building of a property in Spain. We bought a beachside plot in rural Andalucia a couple of years ago, and it took until now to get planning permission, given the sensitive location and the usual mañana factors...

But now a nice gentleman is building us a three-bed bungalow there for €55K (not bad, by comparison with Irish building costs...) We paid about €80K for the 1/3-acre plot two years ago, so the whole thing will have cost us under €140K, which again is not too shabby for a house + garden right on the most beautiful beach in the [broken link removed]...


Looking forward to conducting a 'site inspection' later this summer...