Monthly Savings or Top up my Mortgage payments

[rumblefish]

I have 500 euro available every month - is it better to put this into a regular savings account which attracts at the moment 7% gross (with 20% DIRT =5.6% net), or to instead pay 500 extra into my mortgage repayments.

I'm 5 years into a 20 year mortgage at the Perm TSB standard rate of 5.35%.

How do I work out which is the better strategy?

thanks, rumblefish

 

[ClubMan]

I have 500 euro available every month - is it better to put this into a regular savings account which attracts at the moment 7% gross (with 20% DIRT =5.6% net)

Bear in mind that 500 x 12 months = €6K will not yield €6K @ 7% = €420 gross or €336 net of DIRT but rather €225.14 gross or €180.11 net. See here.

You don't say how much your mortgage is but you can estimate the possible savings attributable to making accelerated regular or lump sum capital repayments using Karl Jeacle's mortgage calculator. If, for example, your mortgage was €250K starting now then without an additional monthly capital repayment of €500 it would be:

Year      Interest          Capital           Balance
2008      €13,200.58        €7,182.74         €242,817.26
2009      €12,806.73        €7,576.59         €235,240.67
2010      €12,391.28        €7,992.04         €227,248.63
2011      €11,953.06        €8,430.26         €218,818.37
2012      €11,490.82        €8,892.50         €209,925.87
2013      €11,003.26        €9,380.06         €200,545.81
2014      €10,488.91        €9,894.41         €190,651.40
2015      €9,946.38         €10,436.94        €180,214.46
2016      €9,374.13         €11,009.19        €169,205.27
2017      €8,770.47         €11,612.85        €157,592.42
2018      €8,133.73         €12,249.59        €145,342.83
2019      €7,462.07         €12,921.25        €132,421.58
2020      €6,753.56         €13,629.76        €118,791.82
2021      €6,006.22         €14,377.10        €104,414.72
2022      €5,217.91         €15,165.41        €89,249.31
2023      €4,386.35         €15,996.97        €73,252.34
2024      €3,509.22         €16,874.10        €56,378.24
2025      €2,583.98         €17,799.34        €38,578.90
2026      €1,608.01         €18,775.31        €19,803.59
2027      €578.53           €19,803.59        €0.00

Total interest: €253K

and with the additional repayment going off the capital it would be:

2008      €13,051.23        €13,332.09        €236,667.91
2009      €12,320.23        €14,063.09        €222,604.82
2010      €11,549.13        €14,834.19        €207,770.63
2011      €10,735.76        €15,647.56        €192,123.07
2012      €9,877.76         €16,505.56        €175,617.51
2013      €8,972.74         €17,410.58        €158,206.93
2014      €8,018.07         €18,365.25        €139,841.68
2015      €7,011.08         €19,372.24        €120,469.44
2016      €5,948.86         €20,434.46        €100,034.98
2017      €4,828.43         €21,554.89        €78,480.09
2018      €3,646.52         €22,736.80        €55,743.29
2019      €2,399.83         €23,983.49        €31,759.80
2020      €1,084.78         €25,298.54        €6,461.26
2021      €57.36            €6,461.26         €0.00

Total interest: €99.5K

 

[LDFerguson]

As an aside, 5.35% is a poor value Standard Variable rate. You should either check out the Best Home Loan Deals thread and consider switching or at the very least contact Permanent TSB and ask them to improve your rate. Takes one phone call and a threat that you're considering moving, but should save you €€€.

 

[rumblefish]

thanks - the Mortgage was for only 40,000 so I can't actually move as the switcher offers from other lenders will not take anything below 50k.

if the savings to be had on mortgage tops i can't understand why anyone with something to put away in savings would not pay off the mortgage instead - unless they needed a short term or rainy day fund..

 

[ClubMan]

Judging by some of the posts on AAM a lot of people mistakenly maintain lump sum or regular savings when they would be better off reducing debts that they have. A lot of people can't bear the thought of "losing" their savings when, in fact, they would save in the long run by reducing or clearing debts.

As a general rule it makes sense to use spare cash to reduce debts before building savings/investments other than an "emergency" fund. This certainly applies to high cost unsecured debts (e.g. CC, overdraft, personal loans etc.) but even allowing for owner occupier mortgage interest relief may also apply to mortgages. Accelerated lump sum or regular capital repayments on mortgages can yield significant savings. Another very efficient long term way to save is to contribute to a pension which benefits from significant tax/PRSI relief advantages.

 

[rumblefish]

thanks, I called PTSB today - to clear the mortgage I would have to pay the lump sum of 33,5000.

Still can't see why its not a simple comparison of the loan rate (5.25% gross) vs the savings rate (7% gross) - since both are eroded by the future value of money to make the decision.

So am i better

a) hanging on to the 33,500 as savings for the next 15 years and continuing to pay 235 euro a month on the mortgage or

b) clearing the mortgage with 33,5000 lump sum and putting the 235 euro a month into savings for the next 15 years.

thanks

 

[ClubMan]

You need to crunch the numbers and compare the two alternatives. I have done some of the work above on the mortgage front although clearing it in one go now will yield even higher savings than my examples I presume. You need to then compare those savings against what you stand to earn in compounded (net of DIRT) interest on deposits. Note that Karl's calculator does not take into account mortgage interest relief so the savings he returns are slightly inflated. Basically do the math and pick the best option. I'm pretty sure that reducing/clearing the mortgage will be the better option assuming that you have no higher cost debts that should be prioritised and you don't need the money for something specific in the short/medium term.

Another possible option might be to put some money into a pension due to the tax relief available. These different options are not all mutually exclusive of course - i.e. you could do a bit of all three.