Case study Pay off SVR mortgage or hold savings

M

Madra

Registered User
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So my situation is (circa)

Mortgage 100k
Savings 100k

Current payments 10k p.a.with 15 years left. Apartment is let out.

Gains
10k - 800 x 12

Losses
2.0k - 2% interest
1.6k - 75% of 3k @ 52% (tax liability on rental)


Net Gain
6.4k

Some points:

  1. AVR is currently 4%
  2. Tax liability would decrease over time so the gain would grow
  3. The rental received is not relevant as the liability is the only thing I can decrease
  4. Apartment is in about 25k N.E.

The question:
I like the idea of having ready cash and no doubt as long as nothing changes dramatically in the near future I could have a nest egg growing quickly within a few years. I am private sector but in a good field and no dependents as yet. So does the gain of paying off the mortgage wiin hands down given the poor return on savings ? Another factor would be the safety of deposits ? Is there something I am missing above which could increase the pros or cons ?
 
You have not taken into account under "losses" the amount of net rental income you will forego.
 
callybags said:
You have not taken into account under "losses" the amount of net rental income you will forego.
Click to expand...

OP has savings to pay off the mortgage - not thinking of selling the apt so would still have the rental income, although with a higher tax bill.

OP, you could pay off some of the mortgage - hedge your bets sort of thing.

What interest is the deposit earning? There are several threads on here on the topic, have a look at some of them.

If it's a low interest tracker then you may be earning more interest than you are paying.
 
Actually there is something I will lose also, the 250 relief for insurance will be gone so that's another loss of net rental income of 130.
What interest is the deposit earning? There are several threads on here on the topic, have a look at some of them.

If it's a low interest tracker then you may be earning more interest than you are paying.
Click to expand...
Even the best of deposit rates will not net any more than 2% at the moment (3% - DIRT). The second is answered in the original post - 4% SVR rate, no tracker.
 
Are these your only assets, the investment and the cash? I don't think it's a good idea to pay of the mortgage on a rental because of the mortgage interest relief and the fact you'd pay higher tax on rent if you did. Shouldn't you be thinking of buying a home ? You might have to pay down the mortgage to a certain percentage of the investment to do so.
 
Bronte has hit the key issue here.

You have to look at your total wealth - all assets and all liabilities.


If you have a SVR mortgage on your home you should pay that off before you pay off your SVR mortgage on your investment.

Of course, if you have more expensive debt e.g. a CU loan or CC debt, you should pay that off, but I assume you don't have other debt.

You also have to look at your plans. If you don't have a home, then you should probably retain the €100k in order to buy one. Owning a home is generally a good tax-free investment.

I suggest that you repost in the Money Makeover Section and provide all the information.

Brendan
 
These are only only assets and liabilities. The problem I have is I bought the property with a view to live in it as a home. I am in a position where I have a very low rent because of family circumstances. This won't last forever. From a purely short term point of view (5 years say) I'm wondering what is the best value for money for me, considering things such as deposit safety as well. I didn't post in the MM section as the question is more specific as to value for money.
 
Do you intend to live in the house in 5 years, and will it be your 'forever' home?

Where did the 100K come from? Are you saving every month? Do you have a pension etc. What age are you?
 
I think that the arithmetic is easy enough.

Assuming that the rental profit excluding interest exceeds 75% of the interest paid.

Gross interest rate: 4% ( Not sure which lender this is)
You can claim tax relief on 75% of the interest paid i.e. on 3%
Tax relief: 1.5% ( 50% of 3% which is 75% of 4%)
Net interest rate: 2.5%

Can you get 2.5% net interest on a deposit?

Look at it another way. Would you borrow €100k at 2.5% net to put it on deposit? Most people wouldn't.

Would you borrow at 2.5% to invest somewhere else? For example, in a portfolio of shares or an ETF.

This is risky, but you have a good income and low outgoings. You have net assets. You can handle the risk. I suspect that the net return on a portfolio of shares will be higher than 2.5% over the coming years. In some years you will lose, but in other years you will gain. And if the situation changes, you can always sell the shares and pay the proceeds off the loan.

Summary
1) If you are prepared to take the risk, invest the €100k in a portfolio of shares.
2) If you are not prepared to take the risk of investing in shares, pay off the loan as the risk of a default in the deposit outweighs any benefit.
 
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