Quick question about how a one-off payment would reduce term

R

RMCF

Registered User
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Looking to see if all the financial experts on here could help with a quick calculation.

I owe €75000 on my mortgage.
Currently on a 1.95% tracker mortgage.
It runs until March 2023.
Monthly payments €540.

If I was to make a one-off payment of €16,000, how would this reduce my 13 yr term, if I was to continue paying 540 each month?
 
Hi RMCF

You are asking the wrong question.

If you owe 75k and pay off 16k, you will reduce the outstanding balance to 59k.

You can probably set the repayment at anything you want.

But a more important question is "Can I get a better rate on deposit than 1.9%?". If so, then you should not be paying off your mortgage.
 

Thanks all for the replies.

I appreciate that if I invest the €16k I would get a better return than 1.95%, but for me this is a bit of a false return. After all, how much extra would I get?

The best rates for thios amount of money at present are probably low 3%ish. One years investment might get me €500 if I'm lucky. For me this isn't as good as knowing that I would immediately take 3 years off my mortgage term. It may be physological but it would feel better than paying €16,500 off my mortgage in a year. 6 of one, I suppose.

For me paying the money off now is 3 years closer to being mortgage free, and for me thats a big deal and a real target that I am aiming for. And to have that only 10years ago is enticing.
 
It is purely psychological. It's a thinking error called compartmentalilsation where someone is unable to take a broader view of all features of a case.

Here is a simple example.

I owe the bank €10,000 due to be paid off in 12 months and they charge me 10% interest.

I have €10,000 which I can put on deposit at 20% interest for one year.

I can pay off the loan and be psychologically debt-free.

Alternatively, I can put the money on deposit and collect €10,200 at the end of the year, pay off the loan of €10,100 and have €100 extra in my hand.

It's the same with your case, just the time-frames are a bit different.

Oddly enough, the usual example of compartmentalisation is the opposite.
Someone has a deposit account paying 1% while borrowing at 5%. They don't use the deposit to pay down the loan because they are "separate" or because "the mortgage is part of the house".

Brendan
 
Nail on head Brendan. I know what you say is correct, but for me the amount I would earn extra from investing the money is minimal.

Take this other factor into consideration. I work for a big multi-national and I am always worried that they might not be here in 5 or 10yrs time. Now if I was to make the occasional lump sum payment to get this to say 10yrs, then maybe to 8yrs etc, then the fact that I might get the house paid off BEFORE I lose my job is a real bonus, rather than losing my job and still having a mortgage.

Again, financially, this is probably crazy logic, but as you say, its purely psychological.
 
You also need to consider whether you're likely to have any significant items of expenditure over the next decade and whether you have sufficient money apart from the €16k you might use for the lump-sum mortgage repayment. If you don't, you'll be receiving a notional 1.95% return on the mortgage repayment while paying 12% or whatever on any car loan etc. you need to take out in the future.
 
oysterman has mentioned a very important issue.
If you are lucky enough to have savings, you need to ensure that you are managing your savings into the three main categories

1) Rainy day fund - money to pay for a fill of oil, emergency repairs for the car, etc
Also to tide you over if your income drops because of illness or a reduction of overtime or loss of job

2) Medium term savings - Instant or easy access savings for a holiday or a car which you will need or want in the next few years

3) Long term savings

Paying a lump sum off your mortgage is a long term saving. The money is inaccessable and expensive to liquidate. It should only be done, if you are happy with your savings under 1 and 2 above.
 


I am, thats why I am thinking of doing it.
 
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