Savings = Mortgage.. What to do?

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paulocon

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Hi all,

Doing a bit of accounting last night and I am coming close to a position where my savings equals the outstanding balance on my mortgage. My savings are spread across a few different accounts (but are all on deposit at the moment)..

Trying to figure out if I should clear off my mortgage or not. I know this depends on my personal situation but can anyone advise what the factors are that I should be looking at. I'm earlish 30's with a steady job..

On a related note, would a current account Mortgage be advisable for me?

All advice/pointers appreciated...
 
Not sure of the ins and outs of a current account mortgage but on the face of it, perhaps splitting the two might be a safe option.

Depending on the amounts involved maybe using 2/3rds to pay-off some of the mortgage and 1/3rd as cash in the bank would be a good idea. In these uncertain times I would definitely like to have cash available at all times. This would have the added effect of reducing mortgage payments and therefore allowing you to keep saving and adding to your amount on deposit.
 
Mortgage free and still in early thirties??
First of all well done to be in that situation.
You can use all sorts of configurations as to the correct, rational way of dealing with your funds, but I would be inclined to clear it if I had that possibility. It does however depend on the magnitude - and you may want enough of a mortgage to keep receiving the TRS rebates.
Leaving a bit of a balance for that purpose would also allow you to retain some savings for an emergency fund while safe in the knowleddge that by maintaining current repayments the mrotgagewill be paid off in a short period.
If you are not adeqquately set up with a pension, then the advice might be different, as you may want to invest some of your cash in a pension to get you started on the road to funding your eventual retirement.
 
Use Karl Jeacle's mortgage calculator to estimate how much in interest costs you stand to save by clearing the mortgage early. Adjust the savings for any owner occupier mortgage interest relief you would have obtained since the calculator does not do this. Also factor in the fact that you will presumably save on the erstwhile mortgage protection life assurance premiums if you clear the mortgage. Then see if you can get a guaranteed return on your money equivalent to or greater than this. If not and you don't need the money for other purposes and you would not clear the mortgage only to sooner after borrow again at possible higher non-mortgage rates then clearing the mortgage could be a good idea. Another possible thing to consider is if you could make some pension contributions in respect of 2007 and 2008 income to avail of tax relief. Ultimately what's right for you really depends on your specific overall financial and personal circumstances.
 
Hi all,

Thanks for the great advice..

amgd28.. closer to 35 than 30 to be honest, some might say early-to-mid thirties!!

clubman, cheers for the great link to the mortgage calculator, a great resource..

Buttermilk, this is one of the options I am looking into.. maybe keeping some of the cash for a 'rainy day'.. Of course, the other side of it is that if I get the mortgage fully paid off, I will be able to save/invest a substantial amount of money each month going forward. There is also something very appealing to me about being Mortgage free, I hate debt of any kind and tend to avoid it like the plague.. not sure if that's a good or a bad thing (tend to be on the conservative side as regards investing etc)..

I suppose I need to go speak to an independant financial advisor who will look at my situation - been meaning to do so for a while now.
 
Sorry to hijack this thread a little, but I'm sure the OP is interested in my follow on questions......

Actually, I might be in a similar situation quite soon as to the OP.
Was planning on clearing my mortgage completely. I'm prepared to take the risk of not having cash on hand in the short term, - i reckon at least my outlays would be significantly reduced so the likelihood of an emergency emerging would be lower (i know, of course the unexpected can happen in life...).

You mention:
"you may want enough of a mortgage to keep receiving the TRS rebates."

Very interesting.... Would we be better off maintaining a small mortgage to avail of continued TRS rebates?
If the principal is sufficiently low, is it possible that we would have no interest payable (ie. it would be covered by TRS) ?

Another one, if I pay off my mortgage do I lose TRS completely, ie. I intend in trading up very soon, - would I again be entitled to TRS despite having cleared a previous mortgage ?

 
raven said:
If the principal is sufficiently low, is it possible that we would have no interest payable (ie. it would be covered by TRS) ?
Click to expand...

No, TRS is 20% of the interest paid (subject to applicable maximum) and has noting to do with the principal.
 

You'd have to balance things carefully to ensure that your principal/interest balance equals the maximum of your TRS relief, but you should be able to start from a point where the TRS matches your interest directly (although you will lose TRS as you repay the loan as part of the repayment will go to principal and your interest will then go down)

You can still get TRS if you pay off your mortgage completely if you buy another PPR and you are within the relevant period for TRS relief - it applies for (7 years?) and travels with you from PPR to PPR.

Sprite
 
Hi paulocon

Some people get a huge psychological benefit from being debt free. That may well outweigh any financial benefits of having a mortgage.

In simple terms, you should not borrow money to put it on deposit at a lower rate. So if your mortgage is costing you 5% after tax relief, you should be earning at least 5% after DIRT to justify not paying off your mortgage. It is unlikely that you are doing so.

You are obviously in a healthy earning position, so you don't really need a rainy day fund. You will build one up again quickly. If you have an unforeseen need for cash, you can always borrow again.

However, it does make sense to borrow at mortgage rates to invest in a pension. You will get tax relief on the payments into the fund and tax relief on the growth within the fund. It is very, very likely that over the longer term, this should increase your cost of borrowing.

There is some risk that the return on your pension fund might not exceed the cost of borrowing, but you can handle this small risk.

Someone said elsewhere on Askaboutmoney or in the papers that we will look back at this time next year and scratch our head how share prices were allowed to fall to such low values. I think they used the expression that we are in the equivalent of a half-price sale in the stockmarket. If you have no other borrowings and your mortgage is at around 5%, then you are taking very little risk buying into the stockmarket. And as your borrowings are low and your income is high, you can handle any stockmarket falls.

So in summary, make the maximum contribution to your pension. Then invest the balance in the stockmarket.

Brendan
 
Perhaps i'm missing something but i never understand why people say "keep your mortgage at a certain level so you can avail of mortgage interest relief"

You may be getting 20% off the interest but you're still paying a load of interest to the bank. What is the advantage of paying any interest at all if you have savings? (Ignoring of course the rainy day fund argument)

It's like borrowing 100 euro from a bank at 5%. Just because the government gives you 1 euro back to lower your repayments to 4 euro, you're still paying a bank 4 euro a year unnecessarily if you have other money sitting in the bank.

Surely mortgage interest relief is called what it is for a reason - to provide relief/lower the interest repayments on a mortage. It isn't there as an alternative investment strategy.

Can someone clarify?
 
You could probably make more on deposit (after DIRT) than e.g. the effective 4% you would be paying to the bank on interest. You're right though, it's marginal - and it only works on amounts up to €10,000 (for singles)

Sprite
 
I totally agree with you. The idea that borrowing is necessarily "a good thing" because you get tax relief on some interest makes no sense in itself.
 
I can only add this as someone who has become morgage free on on two occasions. It's a wonderful feeling and provided one maintains the discipline of saving , it is the ideal. However , friends of ours who did this and then needed to release equity had to go through the whole morgage search thing again with legal fees etc. We have a very small morgage and needed 60.000 Euros for a couple of months and so we just added it on to the existing morgage without any of those searches or fees. BoI charged 220 Euros admin fees, we made sure there was no penalty clauses for early repayment and paid it back a few months later. It was a cheap way of getting a loan .So maybe keeping a small morgage is not the worst thing.
 
There should be earlier threads (unless they were on pre-vBulletin Askaboutmoney?) about the pros and cons of keeping a small mortgage outstanding for reasons like ease of topping up and/or storage of deeds etc. However remember that an outstanding mortgage will generally require you to be making mortgage protection life assurance premium payments which is an additional cost.
 
I'd suggest retaining 6 months emergency fund and pay the remainder off the mortgage.

No point in having it paid off with no savings and then car / job / illness/ family problem require you to go borrow unnecesarily.

But its a very nice problem to have
 
Been offline for the weekend so just to say thanks to everyone who replied - great advice and food for thought in each of the replies.

Thanks again..
 
Sorry for jumping in, I am almost in similar situation but I am playing this differently. I am currently paying mortgage at 4.75 % . I am not getting the maximum TRS as the amount of interest is well below the max limit.

Instead off paying off a good part of mortgage I am keeping my monies in using high earner savings account. There are good few savings account with interest rate above 5%. Also if you can drip feed into regular saving account you can get up to 7-8%.

My calculation:

My savings are earning interest at around 5.2% (spread into few saving + regular savings account), taking out 20% dirt it still comes out at 4.16%. Now if I take the mortgage interest of 4.75% minus 20% TRS will give me 3.8% (approx).

So in essence I am better off saving the monies rather than paying off mortgage provided I can find the better location for my monies in term of interest rates (which currently I am).

To me it make more sense, but I could be missing few points here.
 
I have to say I disagree with a lot of the points made here. As already stated, I can't see any point in keeping a mortgage just to avail of 20% interest relief. Ok, you may want to top-up in future without the hassle of a new application, but the OP is not going to need to as he will have a sufficient 'rainy-day' fund built up in no time once his debts are cleared.

Also, in relation to the stockmarkets, I don't agree with the comment referred to in the newspaper/AAM about a 'half-price sale'. My opinion would be that when stocks were at their highest values recently, they were 100% overvalued. So who's to say they will go back to those values soon. Those values were based on the fact that banks were throwing out mortgages for 5 years. Now it looks like they couldn't afford to do that so I would say today's market values are spot-on. Granted banks are not the only companies on the ISEQ but between them and construction they pretty much make up the bulk.

This leads me to pensions. As a 29-year-old who has been constantly warned to start a pension sooner rather than later, I am so glad I did not start one 2 years ago when I got the forms. Pension funds have dropped hugely over the last 12 months and I don't see any change in that short-term.

I guess this whole ramble of mine is pointing towards the fact that in the current climate my approach would be to pay-off any debts I had regardless, and then start saving.

I know in my first post I suggested you keep back 1/3rd of your cash, but now that I realise you are in a better position to build that cash back up quickly, I would use it all to clear your mortgage. If you don't need a large amount of cash in the very near future then I would imagine you will do just fine with the extra disposable income every month.
 

viz06 said:
To me it make more sense, but I could be missing few points here.
Click to expand...

I think you might be wrong in your mortgage interest calculation. Unless you are paying interest only, then you don't get 20% back on your total mortgage spend. The mortgage amount you pay is made up of principal and interest (if repayment mortgage) and you only get 20% back on the interest portion of that, up to the limits natch. So, if you are paying 50/50 interest and principal, you're mortgage rate is only 10% less than the 4.75 = 4.275. And that assumes you are getting relief on 100% of your interest (which you do say that you are)

Sprite
 
Last edited:
WaterSprite,

Here are my calculations

Outstanding mortgage : 100,000
Mortgage rate of Interest : 4.75%
Annual Interest paid : 4750
Annual interest after TRS : 3800


Savings : 50,000
Savings rate of interest: 5.2%
Annual Savings : 2080 (after 20% dirt)

To explain my case lets assume I have 100,000 in my savings

If I have 100,000 instead of 50,000 I would earn 4160. Which means I can earn 4016 - 3800 = 360 more if I continue with the savings and not pay off my mortgage.

Does this make sense?
 
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