Money into mortgage or savings account?

[BoscoTalking]

Age: 30
Partner's age: 30
Annual gross income from employment or profession combined: 76K
Type of employment: both work for US multinational
In general are you spending more than you earn or are you saving? Saving - he saves approx €500 (with no pension plan at present) and I save €700 per month (I have a pension through work) into Rabo and Halifax respectively

Rough estimate of value of home: 330K

Amount outstanding on your mortgage: 280K.

What interest rate are you paying? Fixed until December '08, at 4.75%.

Other borrowings: None

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

Savings and investments:Me €12k and he has €10 although that will be lowered as he is changing his car (second hand and required for work)

Do you own any investment or other property? No

Ages of children: None - hope to have them soon as possible though.

Life insurance: minimum required when we got out the mortgage we just kept renewing it.

What specific question do you have or what issues are of concern to you? So I am wondering what to do with regards the mortgage in Dec / Jan when it comes off fixed rate and the increasing interest rates. I was hoping to pay back 10-15k to decrease the amount outstanding and shorten the term or decrease the monthly payment (we did this 2 years ago before fixing the mortgage). However the savings account rates are so high that I am wondering if im better to save in a high interest account instead.
No major changes planned - we are hoping to start a family soon however I get paid full salary while on maternity so we would have about 8 months head start to save like crazy before the arrival...

 

[Flax]

Personally, with the real risk of negative equity around the corner, I'd be trying to pay off that mortgage as soon as possible.

 

[BoscoTalking]

Thanks for the reply
I suppose i don't cry about negative equity. I see it as a bank loan that needs paying and it lasts for 30 years Yikes! But I do think like you - pay it back as soon as possible...

 

[GeneralZod]

However the savings account rates are so high that I am wondering if im better to save in a high interest account instead.

Separately consider what you'd do with a lump sum you already have and what you should do with periodic extra payments that could be going into the mortgage or a regular saver account.

All your interest repayments qualify for TRS at 20% of the interest paid (the married relief limit is €4000). This reduces the effective cost to you of servicing the mortgage. Interest from a regular saver account is subject to DIRT also at 20%.

After December for your lump sums you are unlikely to find an AER greater than the mortgage APR. So the best thing to do is a mortgage prepayment.

You probably will find a regular saver account with an AER greater than your mortgage APR. You'd earn more by putting your monthly income into the regular saver. As soon as the savings AER is less than the mortgage APR you would use the savings as a lump sum repayment on the mortgage.

An advantage is that you'd be building up a contingency fund if you needed it for something else. This is also a disadvantage since you need to ultimately use the regular savings as a lump repayment. Otherwise you don't achieve the gains because you haven't stuck with the original justification for not simply increasing your monthly mortgage repayment. If you think you can do this then what you suggest could work.

Otherwise it's probably best to stick with the instinct to get the mortgage itself paid down as quickly as you can.

 

[L&A]

I have a suggestion on another thread which I think could be quite handy along the same lines as you (see thread: can I afford to give up work?). The idea is that we change our mortgage to an interest only one for a year in case we can't meet the repayments but hopefully putting the capital money into a savings a/c until the end of the year (so we have a back-up, we have no savings at present).
My qs. are-
-since I wouldn't be working would I have to pay DIRT on the savings?
-are there any catches from the bank etc doing this (we are on a tracker variable) would we end up paying more in terms of interest/admin fees?
-this seems like a great idea for us, but why wouldn't more people do this (is the only catch that you need to be disciplined and pay the money in at the end of the year?

Thanks and apologies for highjacking this thread!

 

[ClubMan]

Going interest only to save money in a deposit account doesn't make sense to me. You are simply borrowing to save and the mortgage will cost more in the long run as a result of going interest only for a while. Going interest only on a mortgage in order to clear more expensive debts may make more sense though. Ultimately it's a case of crunching the numbers to see what the best option is for your specific circumstances. Perhaps going interest only and saving in a high c. 7%+ regular saver would work out more advantageous but you need to crunch all of the relevant numbers to determine this. Karl Jeacle's mortgage calculator and this regular saver calculator might come in handy in this context. You need to also take account of owner occupier mortgage interest tax relief, the possibility that you may need alternative/additional mortgage protection life assurance for the altered mortgage repayment schedule, DIRT tax etc. If in doubt get professional advice.

DIRT is separate from income tax and unless you otherwise [broken link removed] for a DIRT refund/exemption you would still pay it. Just because you have no income doesn't necessarily mean that you are exempt from it.