Interest only mortgage - I have 13 years to save 200K, how do I do it.

Hi,
I have a tracker, interest only mortgage. I owe 400K on it, and in 13 years the term is over.
I will have a lump sum of 200K between a public pension and an old private pension, and will retire in 13 years. I think I can take 200K lump sum tax free? If so, that means I have to save 200K over the next 13 years in order to be in a position to pay off the interest only mortgage

I have no other debts, pay credit card every month etc. Have a fund set aside for College for the kids. We have a rental property, fully paid off, worth about 400K, which we could sell to cover the mortgage, but would like to keep for retirement income.
I have started to save 1,500 per month, into a bank saving account. If I keep this up for 13 years, I will have saved over 200K. But would I be better off putting some or all of that 1500 a month into an investment fund instead of leaving it in a bank saving account? Any advice appreciated.
Regards,
ANO

13 years of min interest is better then
Nothing.

I presume that this is your family home and not an investment property?

What is the mortgage rate?

What ages are your children?

How much is the property worth?

Maybe provide all this information to get a more meaningful answer


Brendan

Yes, this is my family home
Mortgage rate is 0.5% on top of ECB
Children 14,16,18 - I have a fund for them for college
Property is worth 500K, and mortgage is 400K, interest only, term ends in 13 years.

ANO

Please provide all the information in the link provided if you want some meaningful suggestions.

Income details
Single earner: Net monthly 5K per month after tax, public sector, retiring 13 years time

Amount of child benefit received ( 130 per child, only 2 of the 3 kids (ages 14 and 16) qualify for this now.
Amount of Mortgage Interest Supplement received; N/A

Personal circumstances so we can calculate your reasonable living expenses
Two adult family
Monthly childcare costs: None
Montly spend on special circumstances: None

Home loan
Lender: Bank of Scotland Irl
Amount outstanding: 400K
Value of home: 500K
Interest rate: Tracker, rate = ECB + 0.5%
Monthly repayment Approx 300 per month
Amount in arrears None

Investment property -
1 Property, value 400K, no mortgage, 1K per month rental income

Credit Union - N/A
Other loans and creditors - N/A

Other savings and investments - 60K for college fund for the 3 kids (they will be living at home when they go to college).

Do you expect any lump sums in the medium term future? No

How important is retaining the family home to you? Very important!


Any other relevant information

My question is: I can save 1500 per month, into a bank saving account, over 13 years I will have saved over 200K. Then I retire in 13 years time, and my lump sum on retirement (between public sector and a private sector pension fund) will be 200K. So I can pay the mortgage (400K) off in 13 years. Should I put the 1500 per month into a bank savings account or into an investment fund, or split it between a saving account and an investment fund?
Any advice greatly appreciated.
ANO

I would NOT pay the mortgage off but you can be certain the owner of the mortgage may not extend the facility on those T&Cs. What you must do is have you exit plan clearly mapped out.

Would you tell me more about pension whether DB or DC and what guarantees you have on LS payments.

This is an interesting case study.

Let me summarise it like this.

You have a family home worth €500k which is mortgage-free.
You have a good salary.
You have a good pension scheme
And you have €60k put by to fund your children's education.

Oh, and you have a mortgage of €400k on an investment property worth €400k which generates rent of €12k a year but costs you interest of €300 a month.

You don't have to make any repayments on the mortgage but have to repay it after 13 years.

When you retire in 13 years, you should take advice from a financial advisor as to the best way of retiring. You can't plan that now as the rules will change over the next 13 years.

If you have surplus income in the meantime, where should you invest it? Probably in a diverse portfolio of equities. You can handle the risk of a fall so it's worth the potential long-term return.

You should not make financial sacrifices now in order that you will be able to retain your investment property in 13 years. You may not want to keep it at that stage. It may not be the right thing to do financially.

All you need to do is to keep an eye on the property market to make sure that in 13 years, the sale of the investment property will be sufficient to repay the mortgage on it. And even if it's not, then you will have other cash or investments to repay the shortfall.

So live your life. Don't waste money. But your kids are expensive and make sure not to skimp on them, just because you may want to "buy" an investment property in 13 years.

Brendan

anotheranother said:

Amount outstanding: 400K
Interest rate: Tracker, rate = ECB + 0.5%
Monthly repayment Approx 300 per month

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.5% of €400k is €2,000 a year, so the monthly repayments should be €170 a month, so check these numbers.

anotheranother said:

Investment property -
1 Property, value 400K, no mortgage, 1K per month rental income

Click to expand...

€12k rent on a property worth €400k is only 3%. That seems low.

Put it this way, if you had €400k cash now, would you buy a property which yielded only 3%?

The answer should be no.

Which raises another interesting question. Why are you holding on to a property with such a poor yield?

You might be better off selling it now and buying a portfolio of shares or enhancing your pension.

anotheranother said:

Investment property -
1 Property, value 400K, no mortgage, 1K per month rental income

Click to expand...

The yield is extremely low and a very poor use of your wealth.

If you enjoy being a landlord sell the €400k property and buy two €200k apartments.

You spread the risk and will gross something up to €3k a month depending on location.

Personally, I would sell the rental and pay off the PPR mortgage.

The rental is probably returning around €5,000pa, after all costs and taxes.

The PPR mortgage is probably costing around €2,500pa, in interest and mortgage protection premiums.

I wouldn't regard a differential of €2,500pa as sufficient reward for all the hassle and risks involved with operating a residential letting business.

Most people living in a 400k /500k home are paying between 2k and 3k per month

You're paying between 170 and 300 post month

Sounds fantastic

Small problem arises in 13 years time when the bank comes looking for the capital.

How did you arrive at situation where your investment property is mortgage free?

I suggest you offer to pay the bank additional €1300 per month

That should get you to 200k in 13 years time

Alternatively pay €2600 per month if you want to keep your lump sum when you retire.

Alternatively sell the investment property some time between now and 13 years time and pay off the loan on the residence.

moneymakeover said:

I suggest you offer to pay the bank additional €1300 per month

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I wouldn't offer this at all. If you want to overpay your mortgage, then do so.

But don't agree to do it as you would be committed to it.

Brendan

Sarenco said:

The rental is probably returning around €5,000pa, after all costs and taxes.

Click to expand...

I think this is an issue with the specific rental, not the business model per se.

It is an extremely low yield.

Year of acquisition of the rental (which OP hasn't told us) is also relevant as there may be a CGT payment.