Overpay or save

marzic

Registered User
Messages
14
Age: 45
Spouse’s/Partner's age: 46

Annual gross income from employment or profession: 58000
Annual gross income of spouse: 36000 (4 day week)

Monthly take-home pay €5100

Type of employment: Local Government

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving

Rough estimate of value of home 260,000
Amount outstanding on your mortgage: 115,000
What interest rate are you paying? 0.75% tracker (former BOSI) 15 years left

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month? yes, sometimes I would have surplus money in creditcard say 100/month
If not, what is the balance on your credit card?

Savings and investments: 7,000 saved (had to replace Car from savings 11k in Dec 18), saving about 600/month

Do you have a pension scheme? Yes basic public service pension plus 200/month AVC (me only)

Do you own any investment or other property? No

Ages of children: 12, 10, 8

Life insurance: Mortgage protection only, death in service benefit


What specific question do you have or what issues are of concern to you?
In January I returned to work full time so now would have about €400 /month. We got the notion of overpaying the mortgage to have it payed off by time first child is finished secondary, and spouse would be also be back on 5 day. I thought that was better value than a regular saver rate. It was probably a bit of a kneejerk, but we have only done it for 5 or 6 months at this stage. We are focusing on the fact that we potentially could have two in college at the same time for a few years and could service a loan having no mortgage. As I write this I'm thinking any future loan will higher interest than either current mortgage or current saver rates - but i dont know what to do with that information. Thanks in advance
marzic
 
Hi marzic,

others can advise you better on investing and saving than I can but your mortgage rate is on such a low tracker it is the cheapest money you'll ever borrow - perhaps wiser to save/invest the extra money with a view on college rather than pay off the mortgage early?
 
You will never get money so cheap. It is basically free given inflation about the same rate as your interest rate.

So it is much better to build up cash savings than pay down mortgage.

If you overpay say by €20k over the next 5 years you have a miserable annual saving of €150. You could then need to borrow to put two kids through college, for example €20k at 8%. This would cost you €1600 a year in interest.

There are basically no circumstances where it makes sense to overpay tracker.
 
It depends on your risk profile, but if it were me I'd be building up the rainy day fund to €20-30k. You can keep it in a savings account, or given that the idea of a rainy day fund is that you should not have to use it, stick a good chunk of it in 5 year government savings bonds - you can get your money back out in a matter of days if required.

The rest I would put into the stock market. You have 6+ years until the kids are in college and over that kind of timeline the stockmarket makes the most sense to me. You can use an online provider like DeGiro to put a few hundred a month into something like an S&P500 or MSCI World index ETF, lots of threads here about how what is required.

I would not pay off the mortgage early for the reasons already given. If rates happened to soar in future, you can always take your savings and sell the shares to pay a chunk off at that point.
 
Hi Marzic,
The best financial advice I ever got in my life came from Dave Ramsey's baby steps - It works as long as you do this in order.

If you follow the below you should never have to borrow again, you will be able to self finance.

  • Baby Step 1 – €1,000 to start an Emergency Fund
  • Baby Step 2 – Pay off all debt using the Debt Snowball
  • Baby Step 3 – 3 months of expenses in savings.
  • Baby Step 4 – Invest 15% of household income into retirement
  • Baby Step 5 – College funding for children if applicable
  • Baby Step 6 – Pay off home early
  • Baby Step 7 – Build wealth
Steps 4,5 & 6 can be done at the same time.
 
The rest I would put into the stock market. You have 6+ years until the kids are in college and over that kind of timeline the stockmarket makes the most sense to me.

That's a daft idea for the risk profile of the OP and small amounts involved.

Over that horizon for equities there are exit and entry costs, tax on gains, risk of losses, and fees along the way.

OP will have big expenses of kids in college within a decade and should prioritize having ready cash for that. State savings is a much better idea.
 
The rest I would put into the stock market. You have 6+ years until the kids are in college and over that kind of timeline the stockmarket makes the most sense to me. You can use an online provider like DeGiro to put a few hundred a month into something like an S&P500 or MSCI World index ETF,

A 5/6 year time horizon in the stock market is probably too little. You'll probably lose money. 10 year is the minimum if that was my money.
 
Thanks for your all your replies, I should clearly have sought advice before taking that step. Savings it is!
 
That's a daft idea for the risk profile of the OP and small amounts involved.

Over that horizon for equities there are exit and entry costs, tax on gains, risk of losses, and fees along the way.
I did caveat my point by saying that it depends on the OP's risk profile, which they have not provided. Obviously if they are risk averse then it would not make sense for them, however if they are even somewhat risk tolerant I would still put my money in the stock market every day of the week.

Entry/exit/fees are very tight on ETFs these days (0% commission fees with DeGiro on ETFs, no stamp duty) and they'll pay similar tax on gains in a bank account as they will in the market. Putting even a small amount of money in the stock market introduces people to the concepts of it and builds investor acumen. We don't know their circumstances, but over time it's likely their salaries will increase, they may have inheritances etc, and they're unlikely to spend all those savings on day one of the first child hitting college - so the time in the market will be at minimum 6 years, much likely far longer (the last child will not leave college for 14 years for example).

Anyway isn't this the beauty of AAM; you'll get a mix of recommendations from conservative to aggressive and can take your pick to match your personality.
 
@Zenith63

I looked up annual inflation-adjusted returns for the S&P 500.

Over a five-year horizon the maximum annual return was +33% and minimum was -13%. Median return was 7% with a SD of 8%.

If you have cash to play with and plenty of time then equities have historically made you a lot of money.

But with the OP's time horizon, limited funds, and circumstances I would say it is far too risky.
 
@Zenith63

I looked up annual inflation-adjusted returns for the S&P 500.

Over a five-year horizon the maximum annual return was +33% and minimum was -13%. Median return was 7% with a SD of 8%.

If you have cash to play with and plenty of time then equities have historically made you a lot of money.

But with the OP's time horizon, limited funds, and circumstances I would say it is far too risky.
But their horizon isn't 5 years. They will continue to build savings, salaries will increase, maybe they get some windfalls along the way. Their first child hits college in 6 years, they'll want to spend a portion of their savings at this point on college fees, rent etc but there are three kids who will be in college for say 4 years each, so they shouldn't be spending more than say 9% of the college costs in that year, another 9% at 7 years from now, then 18% the next as two of them will be in college etc. Their time horizon for a very small portion of their savings is 6 years, for a good portion it's >10 years. If they were saving to buy a house in 5 years so would be taking all the money out in one go then you'd be bang on, but in their case they're looking to draw down savings over an 8 year period that doesn't start for 6 years.

Anyway look I don't think we're going to do the OP favours going very deep into this, I would put my savings in the stock market after building a rainy day fund with some in cash some in government bonds but I'd have a certain amount of risk tolerance.
 
@Zenith63


The minimum historical inflation-adjusted return for both a 10- and 20-year horizon is also negative (although not as much). This is presumably before fees, which will make it more negative.

For the OP, state savings and perhaps a PRSA makes sense to me.

We are all agreed that there is no hurry to pay down mortgage.
 
The minimum historical inflation-adjusted return for both a 10- and 20-year horizon is also negative (although not as much). This is presumably before fees, which will make it more negative.
Out of interest, what is the inflation adjusted return on say the 5-year government savings bonds? If inflation is eating away the average 4/5/6/7/8% growth of the S&P500, then presumably the 0.98% return from the savings bonds must virtually guarantee you'll lose money when adjusted for inflation?
 
Out of interest, what is the inflation adjusted return on say the 5-year government savings bonds? If inflation is eating away the average 4/5/6/7/8% growth of the S&P500, then presumably the 0.98% return from the savings bonds must virtually guarantee you'll lose money when adjusted for inflation?

I don't have access to a Bloomberg terminal.

This FT story from February says that the implied inflation from German inflation-protected bonds is about 1%.

So essentially you're treading water with state savings.
 
Out of interest, what is the inflation adjusted return on say the 5-year government savings bonds? If inflation is eating away the average 4/5/6/7/8% growth of the S&P500, then presumably the 0.98% return from the savings bonds must virtually guarantee you'll lose money when adjusted for inflation?
I think this was my rationalle in using the additional funds for overpay vs saving
 
I think this was my rationalle in using the additional funds for overpay vs saving
Yeah quite a reasonable conclusion. I think what you have to factor in is that if you over-pay the mortgage, you cannot get that money back out if you need it. So with such a low lending rate, you may as well maintain your flexibility by holding onto the cash. If rates stay low then you'll have 20 years with a nice safety cushion of cash that might even earn you a few shekels, if rates go up then you can choose to pay off a chunk of the mortgage there and then. Going through a similar debate myself at the moment...
 
Back
Top