Overpaying my mortgage

I've been dilly dallying for far too long on any sort of savings plan - every year or so, I open one of these high-interest savings account, pay a small amount monthly amount in and wait for the rate to drop to close it again, it never makes very much money, but that's how it goes.

This year, I'm taking things a little more seriously, I've been through a lot of threads and best buys here on the site, and had my plan pretty much ready to go, and then I thought about my mortgage. My lender allows overpayment and according to their calculator, even an extra 200 a month would decrease my term by over 8 years! That seems to me to be best use for my money, but not many threads discuss this a first step, so I suspect it's not as cut and dried as I thought.

I realise that the mortgage rate I'm paying is a lot lower than the AER rates the likes of First Active or Quinn Life offer (I think, are these rates even comparable?), so is it simply a question of maths, and that saving with FA or QL is better until the mortgage rate rises to meet it (by which time I suppose somebody somewhere will have an even better rate to attract investors)

For a straight comparison remember that the effective interest rate you get on the savings account is reduced by 20% due to DIRT (e.g. 7% AER is really 5.6% after tax). You also get mortgage interest relief of 20% on the portion below the threshold (e.g. 5% only costs you as much as 4% would without any relief). In this example any savings account paying more than 4% after tax is good provided all your interest repayments qualify for relief. A separate comparison leaving out the relief reduction that is less favorable to the savings alternative applies if not all the interest payments qualify for TRS.

If you save the money until the interest rate comparison changes in the mortgages favour and then make the lump sum repayment you'll achieve the longest term reduction and/or lowest amount of mortgage interest paid. If there's a risk that you'll spend the savings on something besides an early mortgage repayment then clearly you won't maximise your term reduction by saving instead of making an early repayment.

I'd reduce the mortgage unless you're a disciplined financial type. It's a good feeling knowing the mortgage will be paid off a few years sooner.

Thanks, Zod, nice response. One bit I'm not sure about. 7% AER is 5.6%, that's fine, but you then say "5% only costs you as much as 4% would without any relief" in relation to a mortgage. Does that mean that say my mortgage rate was 4%, that's actually worth 5% to me? And if my mortgage were to rise to say 5%, that's actually 6.25% or whatever? And thus greater than the 5.6% rate I could expect from my savings? And in this case, it would make most sense to reduce the mortgage?

billy-bob said:

Does that mean that say my mortgage rate was 4%, that's actually worth 5% to me?

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If the mortgage rate was 4% and all your interest repayments qualified for relief then the effective mortgage rate is 3.2% (4% less 20% reduction).

You'd therefore need a savings account paying 4%. The DIRT and TRS cancel each other out. I should have said that above as it makes it easier to understand. I over complicated it . It is a straight comparison of rates (before or after both DIRT and TRS respectively) except in the case where not all the interest payment qualifies for TRS relief. In that case the savings rate needs to be 20% greater than the mortgage rate.

does inflation come into this?
My mortgage is 450k so I consider the interest relief to be minimal, mortgage rate is 4% so I'm looking for a net savings rate of 4% but is there an inflation scenario where it would better not to pay off the mortgage?

Is this where discounted cash flows come into the picture...?

ndublinooc said:

does inflation come into this?

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Is your question will inflation reduce the value of your mortgage in real terms? As long as the ECB maintains its stated policy of price stability the answer is ‘no’. The ECB will just keep increasing interest rates to squeeze out (euro-level) inflation.

I've made two lump sum deposits of €1500 against my mortgage, in the past 6 months in addition to the monthly repayments. However, I'm wondering if it isn't better to contact the bank and ask them to reduce the term of the mortgage from 21 years to maybe 19 years. Being a first time buyer, am I correct in assuming that with the increase in monthly repayments my TRS should increase as well?

You should not necessarily need to explicitly reduce the term but you should make sure (get it in writing) that any unscheduled accelerated capital repayments were used to reduce the capital balance and not just stuck "on deposit" in the account. Some people have made accelerated capital repayments and later on had a nasty surprise when the lender did not reduce the capital outstanding because this was not explicitly agreed.

Also remember to have a look at your premium on your mortgage protection policy. If you make lump sum payments off your mortgage you might find that your annual premium might also reduce.

Strathspey said:

Being a first time buyer, am I correct in assuming that with the increase in monthly repayments my TRS should increase as well?

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TRS is calculated on the interest you're paying, not the repayments. So your TRS will not increase unless your monthly interest bill goes up (i.e. when interest rates go up). If you voluntarily increase your monthly repayment, this won't increase your TRS.

BOXtheFOX said:

Also remember to have a look at your premium on your mortgage protection policy. If you make lump sum payments off your mortgage you might find that your annual premium might also reduce.

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...but it won't happen automatically. You'd have to proactively review your cover.

Does anyone know if banks such as AIB have an admin charge for changing a final payment date on a mortgage, i.e. rescheduling the loan due to a lump sum payment. They have such a charge for anyone making lump sum payments on a car loan.

I'm just wondering if its best to keep the odd bonus and make any lump sum payments just once a year. I could just ring the bank but find that such a question has many answers in AIB