overpay variable rate or switch to lower rate fixed

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grimfandango

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Currently have 29 years left on a 2.95% variable rate mortgage with AIB with €174,000 remaining on a house worth €300,000 (58% LTV). I have €40k in savings. I currently overpay my mortgage by ~€200 a month and save about €1,000-€2,000. I am thinking of switching to AIB's 2.45% 5yr fixed rate. Which of the following would be the best to do?
  1. Stay on 2.95% and keep overpaying €200 a month while continuing to save to pay off the mortgage early
  2. Stay on 2.95%, stop saving and overpay more to the mortgage
  3. Pay €20k off mortgage now and switch to 2.45% 5yr fixed (I'd like to keep some money as a rainy day fund)
  4. Switch to 2.45% 5yr fixed and save money (as no overpayment allowed on fixed rate)
  5. Switch to 2.45% 5yr fixed and put more money into AVCs
While it seems like a no brainer to switch to the lower rate, I don't like not being able to overpay and wonder in the long term if overpaying the higher rate would be cheaper.
 
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The big question for you is whether to pay down your mortgage or contribute to AVCs.

What age are you?
What is your salary?
How secure is your job?
How much have you in your pension fund at present?
Is your present home your final home or might you trade up in the near future>

What was your reasoning in borrowing €40,000 @ 2.95% to put it on deposit at 0% ?

Brendan
 
What age are you? 36
What is your salary? €65k or €3,500 net per month + €1,000 from rent a room scheme
How secure is your job? I would say fairly secure
How much have you in your pension fund at present? €85k
Is your present home your final home or might you trade up in the near future. Final home

What was your reasoning in borrowing €40,000 @ 2.95% to put it on deposit at 0% ? I didn't borrow the €40k, I saved it
 
I see Ulster Bank have a 2yr 2.3% fixed rate that allows you to pay 10% of outstanding mortgage balance each year without extra charge. I know it's nonsensical but I kind of want to stay with AIB as I like being able to see my balance every time I log in.
 
grimfandango said:
What was your reasoning in borrowing €40,000 @ 2.95% to put it on deposit at 0% ? I didn't borrow the €40k, I saved it
Click to expand...

Hi fandango

I was being a bit cheeky with that question.

But I wanted to make a point.

Would you borrow €40k at 2.95% to put it on deposit at 0%? Of course, you wouldn't.

But that is exactly what you are doing by not paying down your mortgage.

Brendan
 
You have a mortgage of €174k on a salary of €65k , or €77k if you include the rent a room.

That is over 2.2 times your salary. It's too high.

AT 36, with €85k in your pension, you have plenty of time to contribute to a pension fund.

Pay the €40k off your mortgage to bring it down to €134k. That also brings your LTV below 50% which might be useful in the future if you choose to switch. It would also be very useful if we hit rough economic times and you face a reduction in salary or unemployment.

Then fix the mortgage to get the lowest rate.

Brendan
 
Thanks for the feedback Brendan

I realise the 40k is earning me nothing in interest but I suppose I like to have a little bit in the bank in case anything goes wrong. 40k is probably a bit too much though. I don't think I'd feel secure with anything less than €20k in reserve so I might throw €20k at the mortgage.

In relation to the pension, I always thought the more you can put in at an earlier age, the greater the impact (compound interest). Hence wondering if AVCs would be a good route given the tax relief you get on them

I remember watching RTE's How To Be Good With Money and a couple were looking at retiring early and Eoin advised them not to overpay the mortgage but to increase their AVCs. Just wondering if it applies in my instance

How to be good with money - CCPC Consumers

Financial planner Eoin McGee presents the second personal finance series which sets out to make the nation more financially literate.
www.ccpc.ie www.ccpc.ie
4340
 
Brendan Burgess said:
Then fix the mortgage to get the lowest rate.
Click to expand...

Agreed.

Get the best value fixed rate, don't stick with your current lender if you have to pay more than you can pay on a fixed rate elsewhere.

Most banks are offering a contribution towards the cost of legal fees, so moving to a cheaper lender shouldn't cost you anything in legal fees.
 
grimfandango said:
I always thought the more you can put in at an earlier age, the greater the impact (compound interest).
Click to expand...

Hi fandango

Compound interest works both on loans and on investments.

If you pay €40k off your mortgage, it is like investing €40k at a guaranteed 2.45% tax-free.

I think that the first priority should be a very comfortable mortgage.

With a good excess of income over expenditure, you do not need a €20k security blanket.

Brendan
 
Brendan Burgess said:
Hi fandango

Compound interest works both on loans and on investments.

If you pay €40k off your mortgage, it is like investing €40k at a guaranteed 2.45% tax-free.

I think that the first priority should be a very comfortable mortgage.

With a good excess of income over expenditure, you do not need a €20k security blanket.

Brendan
Click to expand...

I often see you say this Brendan and I wonder am I missing something. The security blanket is there to mitigate the effect of something happening to that income, which is currently well in excess of expenditure.

If OP pays €40k off his mortgage, then suffers a serious accident / illness next week, putting him out of work long term, he’d much rather have access to that €40k.
 
Hi mandlebrot

He would be paying around €1,000 a year for that insurance. That is way too high. He could probably get Income Protection for that.

Brendan
 
Claims on income protection policies take weeks to process.

If I was in the OP's shoes, I would:-

- pay €20k off the mortgage, keeping €20k cash in reserve;
- fix a portion (but not all) of the remaining mortgage (maybe, €140) @2.45% 5yr fixed;
- max out all pension contributions that are relieved @40%; and
- use any after-tax savings to pay down the variable element of the mortgage ahead of schedule.
 
grimfandango said:
I see Ulster Bank have a 2yr 2.3% fixed rate that allows you to pay 10% of outstanding mortgage balance each year without extra charge. I know it's nonsensical but I kind of want to stay with AIB as I like being able to see my balance every time I log in.
Click to expand...

You can see your balance in the UB mobile app just as easily as with AIB, they also have an online mortgage manager portal that shows all the mortgage details. I'd definitely be switching to UB or KBC in your shoes.
 
If it was me,
Move to PTSB/BOI/EBS (if you have the ability to keep moving) - get lower rate and cashback.
Then move to UB
Then move to KBC
If only doing 1 move, it would be UB or KBC

You can over pay with all of them while fixed, and even if overpaying over the allowed amount, current rates could mean fee of 5Eur for 10k overpaid (this can change greatly, but you can check before transferring)

Definitely put a big chunk of your savings off the loan - it will save you a heap on interest fees each month, and the cumulative effect will be thousands every year. With good income (don't know what your disposable is), you could make up additional funds if required the following month for unforseen things. I have a credit union account and is very easy to get cash quick if needed for a couple months - cost of credit is expensive but I haven't had to do so yet. All depends if you have a fear of being out of work and no money, need to weigh things up
 
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