Pay off mortgage when planning refurb

[David_Dublin]

Hi - I think the answer to this is pretty straightforward.

We have a split mortgage (50/50), one half is on tracker, another is on variable at a good rate with AIB due to low LTV.

We have enough savings to pay off the variable rate. But we plan to do a major job on the house in 2 years that will cost at least this amount, probably more.

Should we pay off the variable rate mortgage so that we are not paying interest on this? If we did, would save each month what we'd instead be putting into the mortgage.

We're 10 years into a 35 year mortgage. Seems like a no brainer to pay down the mortgage, and when we're doing the job we'd look to take out another mortgage for it. But maybe I am not taking into account how mortgages work, i.e. paying majority of interest up front/early in the lifetime of the mortgage.

 

[Brendan Burgess]

In theory, you are correct. If you are paying 2.75% on €100k , you are better off paying that off in full now and borrowing it again when you need the money in two years.

But, and it's a big but...

Are you sure that AIB will give you the loan in two years?

They probably will, but they might not. Lending practices might change. Your employment might change, so they won't give you the loan because you are on probation. They might give you the loan subject to quitting the tracker (very unlikely, but possible.)

If you were starting the work in 6 months, it would be clear that you should not pay down the mortgage.

If you were starting the work in 6 years, it would be clear that you should pay down the mortgage.

Two years is the in between stage.

If you are a public servant with a cast iron job and the amount you are borrowing is well covered by the LTV, then go ahead and repay the mortgage.

If there is any uncertainty, hold off.

Brendan

 

[Brendan Burgess]

maybe I am not taking into account how mortgages work, i.e. paying majority of interest up front/early in the lifetime of the mortgage.

There is nothing magic here, although people make statements which make it sound very complicated.

You pay interest on the balance of the loan.
If your loan today is €100k @2.75%, you will pay €2,750 interest.
Normal repayments will bring the capital down to, say, €90k next year, so you will pay 2.75% of €90k or €2,475k

By tradition, the repayments on a loan are kept constant over the life of the loan, so as the interest falls, the proportion of the repayment that is capital, rises.

Brendan

 

[David_Dublin]

Thanks Brendan - those a really helpful posts, I appreciate the insight.

 

[Slippers]

In theory, you are correct. If you are paying 2.75% on €100k , you are better off paying that off in full now and borrowing it again when you need the money in two years.

Curious about the above recommendation. If a chunk of the mortgage is paid now I understand that there will be savings on interest savings made. However in 2 years when they proceed with the house work they will need to take out a home improvement loan or can you get a mortgage for home improvements?

As far as I am aware a home improvement loan has an interest rate in the region of 6-8%. Would those initially mortgage interest savings made be eroded by the interest paid on the home improvement loan?

 

[David_Dublin]

If that is the case, then I would definitely not pay down the mortgage.

Could I not just take out an additional mortgage? I wonder what the criteria is for new mortgage versus home improvement. The refurb job is going to cost 220k +....

 

[Brendan Burgess]

Hi Slippers
That is a really good point and I think you are correct for some other lenders.

But as far as I know, the top up loans for AIB are at the same rate.

Mortgage Top Up To Refinance Your Home, Remortgage, Top up Mortgage Calculator | AIB

Pay for home improvements by borrowing against the equity in your home (Remortgage). We offer refinancing for your home. Find out more, talk to one of our mortgage advisors.

aib.ie

But David, you should check this with AIB.

Brendan

 

[Brendan Burgess]

It's confirmed by AIB online chat

10:07:27 AM :

Brendan: I have an AIB mortgage. If I borrow more money to build an extension what will the interest rate be? The total LTV will be <50%.

10:10:08 AM :

Hayley: If you apply for a top up you will have the choice of our new rates , Here’s a link to them: https://aib.ie/our-products/mortgages/mortgage-interest-rates

 

[Brendan Burgess]

I have checked the other lenders and they all seem to charge the same rate other than ptsb

Bank of Ireland doesn't. https://personalbanking.bankofireland.com/borrow/mortgages/articles/equity-release/#panel1


ptsb charges 4.5% for top ups https://www.permanenttsb.ie/mortgages/mortgage-interest-rates/


Yet, another reason for avoiding ptsb.

Brendan

 

[David_Dublin]

Thanks folks.

I wonder if it would be considered a top up when the extra borrowed amount wouldn't be on an existing mortgage? I'd have the tracker, which they would not allow me to top up, and no other mortgage. Probably something to get in writing from them.

 

[Brendan Burgess]

It's the same mortgage but just a separate account.

You could get an answer from them using the online chat, so that you would have a record of it.

But you might be better to make an appointment now with a mortgage advisor and tease out the various options.

Then follow up with an email to them confirming your understanding.

But the policy could change between now and then.



Brendan

 

[Monbretia]

That amount is too big to be done as a top up product, would require either a new full additional mortgage with legal costs or worse still a consolidation of existing mortgage into new one. I wouldn't chance paying it off, you never know what the lending situation will be in two years time.

 

[David_Dublin]

Spoke to AIB. So paying down now would mean a new mortgage when looking to borrow 200k in a couple of years time. This would be a full/fresh mortgage application. They went through the various considerations with this - job security, term based on age, borrowing based on salary; also I'd need certs for draw downs, 2 valuations, some legal fees. But all looks do-able. It goes back to what Brendan mentioned originally, the hassle of going through all this for 2 years max of saving on interest.

 

[Brendan Burgess]

Hi David.

I'd need certs for draw downs, 2 valuations, some legal fees

I hadn't thought of these hassles. The more I think of it, it's too much hassle.

Another thought you might explore with them.
The repayments on your mortgage will be €48,000 over the next two years.
Could you pay this in advance and cut the interest bill? I don't think so, but you could ask.

Brendan

 

[David_Dublin]

I agree, the more I think about it, the more it's going towards the "more hassle than it's worth" category.

Might be worth considering pre-paying, I'll see if they can support that.

Thanks again for the advice.

 

[Horatio]

Why not put those savings to work for the next 2 years?

Offset your interest and also make some cash toward the refurb while avoiding attrition due to inflation?

 

[David_Dublin]

Why not put those savings to work for the next 2 years?

Offset your interest and also make some cash toward the refurb while avoiding attrition due to inflation?

I'd welcome any advice you might have, but I'd be very much tending towards low risk, so not sure there is much out there for me to choose from where I'd see any significant earnings, without adding risk to the principal.