Sacrificing Daily Lifestyle (and pension pots) to Overpay Mortgage?

lledlledlled

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319
Age: 38
Spouse’s/Partner's age: 36

Annual gross income from employment or profession: €66k
Annual gross income of spouse: approx. €58k

Monthly take-home pay €5,688 combined

Type of employment: e.g. Civil Servant, self-employed

Myself: Private sector, construction industry

Wife: Public Sector

In general are you:
(a) spending more than you earn, or
(b) saving? Saving

Rough estimate of value of home €400k
Amount outstanding on your mortgage: €295k


What interest rate are you paying?

Split loan 75% fixed for 10yrs @ 2.99%, 25% variable @3.1%

Other borrowings – car loans/personal loans etc

Repayment of interest free loan to family member of €115 per month. Approx 3yrs remaining.

Do you pay off your full credit card balance each month? n/a – no credit card
If not, what is the balance on your credit card?

Savings and investments:

Approx €3k in equities

€5.5k in instant access savings a/c – this a/c has two purposes i.e. saving for a modest replacement used family car & Rainy Day Fund (saving €450 per month to this account)


Do you have a pension scheme? – yes, as follows:

Me – Occupational scheme – I pay 5%, employer pays 10%

Wife – Public sector ‘Single Scheme’ – possibly with the option to buy back years in the future


Do you own any investment or other property? – no

Ages of children: Child #1 – 5yrs, Child #2 – 7months

Life insurance:

Me – some death in service benefit through employer – not sure of the details

Wife – Unknown – assume similar to mine through Public Service


What specific question do you have or what issues are of concern to you?


Our main medium/long term financial priority is to save for our children’s third level education. We live close to a number of universities & I.T.’s in Dublin so we’re assuming they will live at home through the college years.

Our main challenge is maintaining a decent standard of living while saving for the above. It is proving to be quite a struggle.

Our strategy is to overpay our mortgage by as much as we can afford, keeping the term unchanged, and reducing monthly repayments due, so that we can change to saving cash for college when our repayments become more comfortable. The other reason for this strategy is my employment in the construction industry – if/when there is a decline in the sector, my salary may decrease or worst case I may be out of work for a period. In such a scenario, it would be good to have low(er) monthly repayments to prevent us going into arrears.

The first difficulty I have with this is it is hard to determine when we’ll be able to switch from overpayments to saving cash. I have it in my head that we’ll look into switching for Child #1 after primary school and then do the same for Child #2. But this time period isn’t based on any calculation so it might be too early to stop overpayments.

The second difficultly is the strain on our finances of meeting the additional payments each month, compared with the following month’s reduction in repayment due. It varies month by month but we overpay by approx. €400 (edit) each month and it only seems to knock about €2 off the next month’s repayment. (edit: we also save €450 per month into an account which acts both as a Rainy Day Fund and a savings account to pay for a replacement car in approx. 2yrs time). Given the sacrifices that we make as a family (lots of holidays, house renovations, etc., put on the long finger as well as day-to-day stuff), it’s hard to justify that the reward next month will be €2!

I’m probably painting too grim a picture here, and much of the sacrifice is self-imposed. For example, if/when I get a bonus in work, we try to use most of it to overpay the mortgage. I suppose our attitude is ‘if it isn’t a little bit painful, we could/should be making a bit more effort’.

Our other concern is our pensions. I’m in a decent scheme now but only started about 3yrs ago. I’m choosing to use any disposable income to overpay the mortgage rather than using AVC’s to improve my pension pot. Similarly, my wife started her pension in 2013 but is forgoing AVC’s for mortgage overpayments. The plan would be to address pensions when kids are finished college but by then we’ll only have approx. 12yrs to go until retirement. Is this too late?

To wrap up, I used to dip into a range of different products such as State Savings, Prize Bonds, some equities, investment trusts, P2P lending, etc., and my tolerance for risk would be medium to high. However, due mainly to Ireland’s penal tax regime on most forms of investment, I’ve become somewhat disillusioned with the other options.

I’m not sure what my specific questions are here, besides am I taking the right approach?
 
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Brendan Burgess

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40,535
Loan to value: 75% €295k/€400k

Loan to income: 2.4 times €295k/€124k

So your Loan to income is fairly comfortable even if your LTV is a bit high.

You have a 5 year old child so you will need to be able to pay for their education in about 13 years - so a fair bit away at this stage.

I would prioritise the mortgage over the pension until it's down to a more comfortable level. You are paying in a fair bit at the moment anyway.

However, I don't think you should be struggling. I am not suggesting a spending spree, but you should be making sure that you are not too hard on yourself.

You haven't told us what the remaining term on your mortgage is but assuming it's got 20 years to go, you are paying €1,600 a month, of which €900 is repayment of capital. So you are paying down your mortgage or saving €11,000 a year anyway. That is not bad for someone with two young kids.

Oddly enough, I think you should use the surplus cash to repay the family member. You owe them €4,000. In fact, I would probably use the savings to clear that loan, unless the purchase of the car is imminent. If there is an emergency, the family member would probably lend to you again.

How much will the car be?
When will you buy it?
How will you fund it?

It does not make sens to overpay your mortgage at 3% if you end up borrowing at 9% to buy a car.

So live a reasonable life but don't make too many sacrifices.
Clear the family loans.
Rebuild your car fund to the level at which you can buy it for cash.

Then use any surplus to pay the mortgage.

Children's college fees
Don't worry about this now. When the eldest starts secondary school in 7 years you can review it then. The best long term, tax-free, guaranteed return on your money is to pay down your mortgage.

Have you looked at switching mortgage?
3% seems very high. You can switch to Ulster Bank and pay 2.4%. But maybe you like the security of being fixed for 10 years.

Brendan
 

Brendan Burgess

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40,535
It varies month by month but we overpay by approx. €800 each month and it only seems to knock about €2 off the next month’s repayment.
3% of €800 is €24 a year or €2 a month.

That seems small.

But does 3% of 9,600 = €288 interest a year saved seem better.

It is by far the highest guaranteed, risk-free, tax-free return you can get.

When interest rates eventually rise, your savings will be higher. It's well worth doing but not worth living on bread and water to do it.

Brendan
 

RedOnion

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Messages
4,426
Paying off a mortgage early is a bit like eating an elephant - you need to do it one bite at a time.

Coming up with 800 extra a month isn't easy, and psychologically you feel like you're getting little reward for it. But you shouldn't be putting yourself under too much pressure - keep chipping away at it and look at the annual savings rather than each month.

800 is 0.27% of your mortgage balance, so you're not going to see much reward the following month. But remember, that 2 euro is every month.

What I used to do was save up for a few months, and then pay it off together. I got to a point where I was paying off 1% of the balance every few months. My circumstances were different - I was on short term contracts and never certain how much longer I'd have a job so I had to save. Then when I'd get a new 6 month contract I'd raid savings to pay a lump sum off mortgage and start again.
Whether you pay 800 every month or 2,400 every 3 months won't make much difference to the cost over 20 years, but might feel like more of an achievement.
 

WaterWater

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Messages
391
Paying off a mortgage early is a bit like eating an elephant - you need to do it one bite at a time.
I owned 3 homes over a 27 year period, moving to a better home in a better location each move. I have always paid a lump sum off my mortgage but I did it with one payment a year, usually December for some reason. I think back in the day it may have been the way some institutions calculated their interest.
It felt good doing it in one lump sum. I always remember the TV show Harry Worth who used to keep individual glass jars to keep his savings in. One for the Electricity, one for the rent, one for the Christmas, etc
At the end of the year you could do the same.....a payment off the mortgage, a payment toward University costs etc

In my case, each of the houses that I owned had increased substantially in value. For me, paying off lump sums, meant that I could borrow more for my next home when the time came.
I would try the Harry Worth method but by paying most off the mortgage and a little toward University. It will make you feel that you have at least started.
Incidentally not all my children went to University in the end but they all ended up doing well.
 

Brendan Burgess

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40,535
with one payment a year, usually December for some reason. I think back in the day it may have been the way some institutions calculated their interest.
Correct. In the old pre-computer days, interest was calculated on the annual rest system. Interest was calculated and charged to your account on 1 January each year. So going into arrears didn't matter as long as you cleared them by the 31 December. (However, if you had paid a lump sum during the year, they would have credited back some of the interest charged.)

At the end of the year you could do the same.....a payment off the mortgage, a payment toward University costs etc
This might have worked for Harry Worth, but he was renting. And there might be some sense in having a separate jar for the rent.

However, it makes no sense to build up savings for the children's education when you are paying 3% on a mortgage.

If he pays €10,000 off his mortgage today, that and the reduced interest will reduce his mortgage balance by €14,700 after 13 years.

If he puts €10,000 into a savings account at 0% interest, it will amount to €10,000 after 13 years.

Brendan
 

lledlledlled

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Messages
319
Original Post edited above. We actually overpay the mortgage by approx. €400 per month (not €800). We save an additional €450 per month into a separate account which acts both as a Rainy Day Fund and a savings account to pay (in full) for a replacement family car in approx 2yrs time.
 

Alkers86

Registered User
Messages
112
Your post seems to be two separate queries, the best strategy to adopt (which has some answers already) and that you're finding it difficult to balance the lifestyle Vs early repayments.
You don't mention what your mortgage repayments are or what other significant outgoings you have in order to have a look at where your money is going that you need to be making so many sacrifices.
You only live once, and you're only young once so you have to ensure you have some life experiences now rather than solely saving for the future!
 

Brendan Burgess

Founder
Messages
40,535
We save an additional €450 per month into a separate account which acts both as a Rainy Day Fund and a savings account to pay (in full) for a replacement family car in approx 2yrs time.
That seems reasonable.

The €5,500 is will cost you about €330 in mortgage interest over the next two years

The €450 will be an average of €11,000 for two years which will cost you about €660.

So this approach is costing you €1,000 now.

But you will have €27,000 to buy a car and will save about 6% interest per year on that or €1,600 in the first year alone.

Brendan
 

lledlledlled

Frequent Poster
Messages
319
Thanks for the replies.
For now, I think I'm going to fix the variable portion of my mortgage for 2yrs at 2.3%. I won't have to change banks so no legal fees etc., just have to get a valuation.
 

lledlledlled

Frequent Poster
Messages
319
Loan to value: 75% €295k/€400k

Loan to income: 2.4 times €295k/€124k

So your Loan to income is fairly comfortable even if your LTV is a bit high.

You have a 5 year old child so you will need to be able to pay for their education in about 13 years - so a fair bit away at this stage.

I would prioritise the mortgage over the pension until it's down to a more comfortable level. You are paying in a fair bit at the moment anyway.

However, I don't think you should be struggling. I am not suggesting a spending spree, but you should be making sure that you are not too hard on yourself.

You haven't told us what the remaining term on your mortgage is but assuming it's got 20 years to go, you are paying €1,600 a month, of which €900 is repayment of capital. So you are paying down your mortgage or saving €11,000 a year anyway. That is not bad for someone with two young kids.

Oddly enough, I think you should use the surplus cash to repay the family member. You owe them €4,000. In fact, I would probably use the savings to clear that loan, unless the purchase of the car is imminent. If there is an emergency, the family member would probably lend to you again.

How much will the car be?
When will you buy it?
How will you fund it?

It does not make sens to overpay your mortgage at 3% if you end up borrowing at 9% to buy a car.

So live a reasonable life but don't make too many sacrifices.
Clear the family loans.
Rebuild your car fund to the level at which you can buy it for cash.

Then use any surplus to pay the mortgage.

Children's college fees
Don't worry about this now. When the eldest starts secondary school in 7 years you can review it then. The best long term, tax-free, guaranteed return on your money is to pay down your mortgage.

Have you looked at switching mortgage?
3% seems very high. You can switch to Ulster Bank and pay 2.4%. But maybe you like the security of being fixed for 10 years.

Brendan
Finally looked into switching to the Ulater Bank rate. Quoted over €15k of a break fee so I guess that's the end of that for now.
I had convinced myself that it was only a matter of time before rates began to rise, but they're staying stubbornly low.
 

NoRegretsCoyote

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Messages
1,402
My priorities in descending order would be:
  1. Build up a cash contingency fund if you are seriously worried about redundancy/re-skilling in future;
  2. Increase your pension to take advantage of tax relief for the age you are at. Over a thirty-year horizon this will almost certainly return more than the 3% you get by paying off mortgage early. You can pay in up to 20% tax relieved at your age;
  3. Overpay mortgage. Don't overdo this. If you are worried about redundancy it is nearly impossible to lose your house in Ireland if you are unable to pay in full but continue to pay something;
  4. Pay off family loan. It's interest free and there is no need to pay it too soon;
  5. Save for kids' education. You will save a lot if they are living at home and they should be able to work part-time to cover costs to some extent.
 

Brendan Burgess

Founder
Messages
40,535
Hi OP

I don't want to trawl through the whole post again.

I don't know what lender you are with. But can you fix the variable bit and get a rate lower than 3.1%?

I don't know how long is left on the fixed rate mortgage.

But let's say it's 7 years.

So you have a fixed rate mortgage of €220k
You are paying 3% when you could be paying 2.4%, so that is a difference of 0.6%
The annual cost to you is €1,300
With 7 years left, that is €9,000
So clearly paying €15k for that is not good value.

Are there options to overpay the loan without penalty?

It might be worth overpaying the fixed rate even though it's higher than the variable so that the break cost will come down over time.

Brendan
 

Drakon

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Messages
678
Paying off a mortgage early is a bit like eating an elephant - you need to do it one bite at a time.
What a great expression, I must remember that one.
I made a one off over payment against my mortgage about ten years ago, ~ €10k. I can’t remember my logic of the time. It’s not something I’d ever do again unless it was to finally bring the balance to zero, ie, I’m eating the elephant’s tail.
Interest rates are very low anyway so the impact isn’t significant.
 

lledlledlled

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Messages
319
Hi OP

I don't want to trawl through the whole post again.

I don't know what lender you are with. But can you fix the variable bit and get a rate lower than 3.1%?

I don't know how long is left on the fixed rate mortgage.

But let's say it's 7 years.

So you have a fixed rate mortgage of €220k
You are paying 3% when you could be paying 2.4%, so that is a difference of 0.6%
The annual cost to you is €1,300
With 7 years left, that is €9,000
So clearly paying €15k for that is not good value.

Are there options to overpay the loan without penalty?

It might be worth overpaying the fixed rate even though it's higher than the variable so that the break cost will come down over time.

Brendan
Hi Brendan,

I'm with kbc. Still 8yrs left on 10yr fixed portion at 2.99%.
Aside from the interest rate, I'd love to switch to a lender who provides online access to my mortgage balance. I can't even get a letter from kbc to confirm which portion of my mortgage the overpayments are being applied against.

I'm not sure why I haven't considered fixing the variable bit. I guess I was happy to have a variable portion which allowed me unlimited overpayments without penalty. I'm thinking now that this is a false economy when I could be on a better rate. I haven't asked them yet but I presume I could fix the variable portion for 2yrs at 2.3%, and then start applying the overpayments against the 2.99% portion. As you point out, this would chip away at the future break fee.

Thanks for the advice. Glad I resurrected the thread now!
 

Brendan Burgess

Founder
Messages
40,535
Hi OP

And get an update on the break fee every so often.

They vary quite a bit. Some people got quoted a zero break fee and did nothing about it. Then when they got mortgage approval elsewhere and decided to move, the break fee had gone up considerably.

Brendan
 
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