1) Don't segregate your capital the €125k you have in a current account is the same euros as the €x you have in a savings account earmarked for your children. It makes no sense to segregate them. And it costs you money.
Think of it like this.
Let's say you have €10k in the children's account.
If you set that off against your mortgage, your mortgage will be €13,100 lower after 10 years.
You should be able to do that mental accounting yourself.
No need to pay the bank €3,100 to do it for you.
2)
are focusing on maxing AVCs each year now, but are considering more payments against mortgage.
Correct to max your AVCs now as a first priority
3) Clear your mortgage fully with any balance
You will probably be clearing most of it over the next 5 years or so anyway. So you are just advancing those repayments.
With your income, you will be saving more money over the next 5 years and might have enough for developing the rear garden.
If you have to borrow then, so be it. You will probably pay off any borrowings fairly quickly.
If you were planning on doing it next year, it would be different. But as you are only thinking about doing it in 5 years, it's not worth paying 2.75% a year in case you might do it in 5 years.
As your kids get older, you might well put a different value on your garden and decide not to develop it.
Brendan