Separated 40year old with 2 kids - Options on how to use savings and change mortgage terms

Minerva

Registered User
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2
Age: 40

Spouse’s/Partner's age: We are amicably separated- still friends and committed to raising the kids together
Covers half the kids' expenses + pays the electricity bill and broadband monthly

Annual gross income from employment or profession:
E55,000

Monthly take-home pay: €3,500.0

Type of employment:
Private sector

Expenditure pattern:
'saver' On average €850/month savings

Rough estimate of value of home
E485,000

Mortgage on home
E160,000
I pay the mortgage €1,200/month; 14years left on loan
In the ‘separation agreement’ we agreed I will keep the house after divorce next year

Mortgage provider: AIB

Type of mortgage: Variable

Interest rate: 2.75%

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
N/A

Savings and investments:
E60,000 savings.

Do you have a pension scheme?
Not yet/Employer set up one in February 2020, but no payments were made due to COVID
Hoping to start pension monthly payments in Jan 2021 10%myself+10%Employer

Do you own any investment or other property?
Yes/ Apartment Valued at €90,000. Monthly rental income after tax and expenses paid is around €350

Ages of children:
8 and 4

Life insurance:
Mortgage Cover only €24/month
Death in Service- Employer

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

Unsure how to best use savings. Would like to keep 20/25k savings untouched…So only €35/40k to play with and looking at the following options:
  • Use savings to make Lump Sum payment into mortgage to bring mortgage loan to €130/€140k and then switch to a fixed rate; available options from AIB now either 3year fixed at 2.35% or 5year fixed at 2.25% and possibly increase monthly payments to €1400 and reduce mortgage term to 10 years?
  • Maximize permissible Lump sum payment into pension scheme(20%)- backdated for 2020 (Employer won’t contribute 10% for 2020) and possibly small 10k lump sum payment to mortgage- switch to a fixed lower rate as per above(3 or 5 year?) and increase monthly payments to €1400 with reduce mortgage term to 10years.
It’s tempting to switch to a fixed rate but my gut tells me AIB will improve the lending rates offering again in less than a years’ time so maybe is best to stay on the variable until early 2021. If only I had a crystal bowl…

Your comments/suggestions would be greatly appreciated!
 
I take the view that it makes sense to prioritise pension contributions that are relieved at the higher rate over paying down a mortgage ahead of schedule.

So, in your shoes, I would maximise your contributions for 2019 (20% or 25%, depending on when you turned 40, of your earned income in 2019), which you can do before the end of this month. I would also maximise your contributions for 2020, which you can do now or any time before the end of October 2021.

I think it makes sense to retain €25k on deposit for emergencies. Any remaining after-tax savings can be applied against the PPR mortgage.

Are you sure it makes sense to retain the rental apartment? It might make sense to cash out the equity in the rental apartment and apply it against the PPR mortgage.
 
Thanks for the response Sarenco, I haven't thought about backdated pension contributions for 2019...I need to talk to the employer and see if that is possible as the Employer pension scheme was set up to start in March this year and was put on hold due to COVID so not sure if it is an option...

Regarding the apartment and the option of selling it... it is paid in full so no outstanding debt on it and is in a great location, 5mins walking distance to a big University, also I get minimal hassle from renting it as my retired parents deal with it ...thought to keep it for the kids, and only sell if strapped for cash... but thanks for the link it is useful to get the maths done on longterm benefit for keeping it.
 
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