Have been hammering away at the mortgage. Is this the right thing to do?

D

Deano

Registered User
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123
Age: 48
Spouse’s age: 47

Annual gross income from employment or profession: €80k
Annual gross income of spouse: €100k

Monthly take-home pay
Probably around €5k after payments

Type of employment: e.g. Civil Servant, self-employed
I'm with a private company, wife is public servant

In general are you:
Definitely a squirrel.

Rough estimate of value of home €900k
Amount outstanding on your mortgage: €110k. €790 p/m
What interest rate are you paying?
2.75% (AIB variable <50%)
Am open to changing but would prefer to keep it variable because I want to get it paid off

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
Yes, absolutely.

Savings and investments:
Not much. Around €10k in shares and $10k cash (which will be put off the mortgage shortly)
Whenever cash builds up in account to €15k, I pay €10k of the mortgage. This leaves a little buffer


Do you have a pension scheme? Yes
I think we are solid here.
I have €310k spread across 4 schemes (the joys of moving employers over the years). Contributions: Employer 8%, Me 12%. Approx. 1k per month.
My wife will have full service at 60 which will give 50% pay. No state pension.
I'm aiming to be done at 60 as well, but may finish sooner depending on our circumstances


Do you own any investment or other property? No

Ages of children: 10 and 7

Life insurance: via employer


What specific question do you have or what issues are of concern to you?
We moved home 5 years ago and took out a mortgage of €310k for 20 years. Initial payments were €1700 p/m and this would have been paid off in 2036 (we'd be 63/62).

Since then I've been lucky (with hindsight) to have been made redundant a couple of times and had an above average year last year with commission. Because of this the mortgage is now down to €110k. I kept the term the same (after guidance on AAM) and reduced the monthly repayments, allowing us to keep flexibility and save more, which inevitably will be used to knock more off the mortgage. I'm ready to pay another €10k off it which will bring it down to €100k (around €720 per month).

I guess my problem is that I have developed tunnel vision about becoming 'mortgage free' and need to ask if I am doing the right thing. Should I be doing something else with our surplus money every month? We live pretty frugally (e.g. our cars are 10 and 13 years old) and do not waste money. Happy to spend it wherever necessary though, which is why I kept the mortgage repayments flexible. But I have been looking into paying more into my pension monthly but I'd love to get some external advice!!

Thanks.
 
Deano said:
I have €310k spread across 4 schemes (the joys of moving employers over the years). Contributions: Employer 8%, Me 12%. Approx. 1k per month.
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I don't see this as enough to retire for good in 12 years' time at 60 or sooner with kids not yet through college :)

At this point your mortgage is a very manageable share of your income. You should try to take advantage of tax-relieved pension contributions instead with any spare income.

Deano said:
My wife will have full service at 60 which will give 50% pay. No state pension.
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That would make her a public servant recruited before April 1995. with 40 years uninterrupted service by 60. Are you sure of this? Not unheard of but would be unusual for a 47 year old.
 
NoRegretsCoyote said:
I don't see this as enough to retire for good in 12 years' time at 60 or sooner with kids not yet through college :)

At this point your mortgage is a very manageable share of your income. You should try to take advantage of tax-relieved pension contributions instead with any spare income.


That would make her a public servant recruited before April 1995. with 40 years uninterrupted service by 60. Are you sure of this? Not unheard of but would be unusual for a 47 year old.
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Yes, it's correct alright. At 60 she will have 40 years done which will give a 1.5x lump and .5 pension. I think she was one of the last into that scheme.

So I've always reckoned that this kind of takes the pressure of mine. €310k at the moment but was going to increase payments. You think I should up this a lot?
 
Using compounding calculator

Starting 310,000
Monthly contribution 1000
6% growth

In 12 years time you should be up to 845,882

Seems good
 
Deano said:
So I've always reckoned that this kind of takes the pressure of mine. €310k at the moment but was going to increase payments. You think I should up this a lot?
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Massively.

€310k plus €12k a year for 11 more years plus investment returns is something like €500k to €900k. At 60 an Irish man has a mean life expectancy of about 22. If you are at the lower end you will see a real reduction in lifestyle as it had to last for over 2 decades, especially if starting at 60.

By not maxing out tax-relieved contributions when you can afford to right now you are kind of leaving money on the table.
 
There is no right answer here, as there are three competing objectives:

1) Building an adequate pension fund for yourself - €310k is not "solid".
2) Providing for your kids' education
3) Clearing your mortgage

It would go against the grain to put money on deposit at 0% now to build up an education fund while paying 2.75% interest on a mortgage. So clearing the mortgage is better than building up an education fund. If you continue as you are, you will have cleared your mortgage by the time you need to pay College Fees.

So the question is whether maxing your pension contributions takes priority over clearing the mortgage.

You are contributing 12% of €80k or €10k a year now. You could contribute another €10k gross and it will cost you only €6k.

But in your 50s you will still be able to contribute 30% assuming you are still working and paying 40% tax. It's very unlikely that you will be able to use the full 30% as that would be €24k a year gross as you will then be running into college costs.

You are going to clear the bulk of the mortgage anyway over the next 10 years.

I think it's a close enough call. As long as you do one or the other, you won't be far wrong.

My gut feeling is just get the mortgage paid off. You get a risk-free, charges-free , tax-free return of 2.75%.

This will leave you mortgage-free in your mid-50s. You will then be able to put the mortgage payments you would have made into your pension fund.

Risks and downsides in paying off your mortgage now
  • tax rules might change so that tax relief is reduced to 20% on pension contributions
  • You might lose your job and have less income at 40% to claim tax relief on
Risks and downsides in maxing your pension now
  • The stock markets are in a very funny place now, and stock markets might well crash. You might be able to buy a lot more shares through your pension fund in 5 years. Whereas paying off your mortgage is risk-free.
  • You can't access the money if you need it for the kids' education or to buy a car - you can't get your mortgage overpayments back either, but at least your ongoing payments would be lower.
As I say, it's a very close call. For the flexibility involved, I think you should clear your mortgage first, while contributing €16k a year into your pension fund through your own and your employer's contributions. But if you choose to max your pension instead, you are not far wrong.
 
An afterthought - but @Deano might be a bit over-housed. €900k is a very big house nearly everywhere in Ireland for two adults and two children.

There is always the option to sell and downsize when the time comes. But in practice few people ever do this.
 
NoRegretsCoyote said:
There is always the option to sell and downsize when the time comes.
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This is important when looking at one's financial future, which we tend to forget.

If it turns out that a Defined Contribution pension fund bombs out at age 80 , but you are living in a €900k house, you can always supplement your OAP with a Life Loan.

Brendan
 
NoRegretsCoyote said:
An afterthought - but @Deano might be a bit over-housed. €900k is a very big house nearly everywhere in Ireland for two adults and two children.

There is always the option to sell and downsize when the time comes. But in practice few people ever do this.
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Really depends on where it is. It wouldn't be a very big house in South county Dublin!

But if they are in Dublin, their children will be able to go to 3rd level education and live at home. This is the big expense that they need to plan for. If their children need accommodation for 3rd level, the costs are going to be a lot higher, between €10k - €15k a year depending on how much you fund them. There will be pension lump sums in there too to fund some of it but provision has to be put in place for the eldest child's 3rd level.

That is not to say stop hammering at your mortgage. As with most things in life, a bit of both is a good solution.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks for the feedback everyone - I really appreciate the different points of view.

And yes @NoRegretsCoyote, just to confirm - it's not a big house, it's just in an expensive location! We've been lucky over the years, buying young and (in hindsight) moving at good times. So we've ended up in a nice spot. Fair enough, I appreciate that I'd get a nice view over the Atlantic if we were to move over to the west ;)

Yes, the plan\hope is to have the kids to to college in Dublin.

@Brendan Burgess - thanks for such an excellent post, it really laid things out clearly. I was simply going to add a few % onto the pension payment without working out exactly what it would give but I've done the maths and to get to €16k per year, this would only require an additional €313 before tax so frankly it's a no brainer. I was slightly wrong above - it was 10% p/m paid by me (18% combined) giving €1020 per month. I'm going to up by contributions to 15% and this will bring the total monthly combined to €1394, just shy of €16k p/a. But my takeaway from this is to continue to increase the pension contributions as I hopefully continue to reduce the amount outstanding on the mortgage.

I'm just grateful that nobody told me to start looking into savings or investments!!!
 
Deano said:
I'm just grateful that nobody told me to start looking into savings or investments!!!
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Your pension, with the current tax relief arrangements, is almost certainly the best long-term investment you could make.

Having said that, EIIS is worth looking into. You are being hammered on tax, and the EIIS allows you to get some relief. But, it's more a nice add-on rather than the core of your financial strategy.
 
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