Should I Cash in Quinn Fund to Reduce New Mortgage ?

Age: 38
Spouse’s/Partner's age: 35

Annual gross income from employment or profession: 60k
Annual gross income of spouse:30k

Type of employment: e.g. Civil Servant,
me: self-employed
spouse: civil servant.

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

Saving

Rough estimate of value of home Currently Renting
Amount outstanding on your mortgage: 0
What interest rate are you paying? 0


Other borrowings – car loans/personal loans etc
None.

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? 0

Savings and investments:
300k cash for house purchase.
35k cash rainy day fund.
500 euro pm to Quinn life index funds, current value 25k.

Do you have a pension scheme? Me No, spouse yes.

Do you own any investment or other property? No

Ages of children: 1,3,5

Life insurance: spouse yes. me no.


What specific question do you have

Wanted some advice please on options for a new mortgage.
We are about to purchase a house for 450k. we have 300k to put to it which would leave us with a 172k mortgage after stamp duty and other costs, (5k added for painting carpet and some new furniture)

We have been offered 4.6 % APR Fixed for 10 years. on a 172k mortgage over 25 years.

I was considering cashing the shares, reducing the loan and the term keeping repayments the same. The original plan for the shares had been pension for me / kids education.


Any opinions ?

Mnay thanks.

What shares do you mean - the Quinn life index funds, valued at 25K?

If so, it hardly seems worth it - your LTV is already going to be less than 50%, so you are very unlikely to get a better mortgage rate for reducing it further.

I would suggest reducing your rainy day fund a bit. If your financial situation is secure, leave some money in the rainy day fund, maybe 6 months' worth of anticipated expenses (including mortgage repayments), and use the rest for stamp duty, painting, furniture etc. So that way you'll require a smaller mortgage - which you can take over a shorter term. I feel 25 years is too long, unless you really can't afford bigger repayments.

Once you buy the house, you can start saving to increase your rainy day fund to the level you are comfortable with.

That is, of course, if your rainy day fund isn't tied up in a long term fixed rate account.

Why did you choose 25 year mortgage term? Is it because you can't afford larger repayments (or think you might not in the future)?

I feel a relatively small amount of shares provides a bit of diversification - and over long term shares tend to perform better than other asset classes, so keeping your shares might be better than cashing them in, especially if there are any early redemption charges for that.

If you do decide to cash them in, then reducing the term of the mortgage rather than the monthly repayments is definitely a good idea.

10 year fix might be a bit long. It provides security of knowing your mortgage repayments won't increase for 10 years, but it probably comes at a price. Also are you sure your circumstances won't change in a few years - e.g. that you won't want to move - and have to pay hefty penalty for breaking the fixed term?

Thank you for your reply Gretta.

Yes the shares are the Quinn index funds, I wonder what are the chances of them beating 4.6% return every year after charges and taxes...

I selected a 10 year fixed to cover the inevitable interest rate hikes I keep hearing about, I am guessing that they will start to rise in 2-3 years and don't know where they will stop!. The 25 year term is to keep the repayments to below 1000 per month. That figure is perhaps a mental barrier. Thinking about it now, the the bank just assumed 25 years when we met.

I am self employed contractor, so work is never really secure, hence the large cash rainy day. Saying that though I know people who have recently secured contracts easily and I am secure for the next year at least. I am reasonably confident of my prospects.

I would be happier with a twenty year term, so how to achieve that?. a 5 year fixed would be cheaper too (4.3%).

Perhaps a better choice would be to use 15k of the rainy day with a 5 year fixed (4.3%) over 20 years. This would bring repayments of 988 euro,( as opposed to 970 under the original proposal.)

I am not surprised the bank assumed 25 year term - from my own experience banks tended to steer me in the direction of as long a term as possible (though I resisted) If you were younger, the bank might easily have assumed 30 years or even 40. As it is, in 25 years you'll be just under 65, and that's all the bank cares about.

If you don't really need a long term, then it's better to have a shorter term, of course.

About the mental barrier of 1000 euro p.m. You could sit down and work out how much you can comfortably afford each month. By all means built in some allowance for some reduction in income/increases in taxes and in expenses, and for maintenance on the house etc. But then look at the figure you are left with - is that actually over 1000 p.m.? If it is, you might be able to afford an even shorter term - mortgage terms don't have to be in multiples of 5, i.e. if you aren't comfortable with a 15 year term, you don't have to have 20 years - you could have 18 or 19 years, for example. Knocking even 1 extra year off your mortgage will save you money in the long term.

Also how much can you pay off extra each year without incurring early repayment charges? Fixed term mortgages usually allow you to overpay by a certain % of the original loan each year. Usually by either 5% or 10%. That way you could take the mortgage over, say, 20 years, then increase repayments (but not too much) and pay the mortgage quicker. If some years down the line you struggle, you can revert back to the original term. It is easier to do this with variable rate mortgages that have no early repayment penalties and you could overpay them by as much as you want. With fixed rate mortgages you can't overpay by more than a certain % of the loan which varies between banks. So make sure you check what it is in your case.

Is this quote from your bank the best one you obtained - or could you, perhaps, get something better from another bank - considering how large your deposit is?

Hi nochain

The biggest issue here is whether or not you should fix for 10 years. I don't think it's a good idea for the following reasons:
1) You are both good earners and you may wish to increase your repayments or pay a lump sum off your mortgage. This won't be possible if you are on a fixed rate.
2) Likewise, you may wish to reduce your repayments/extend the mortgage term and it will be easier with a variable rate mortgage.
3) 10 years is a very long time. Who knows what will happen? After 5 years, you may wish to sell the house and get stuck with a big early repayment fee. The mortgage market may become competitive again and you may want to switch providers.

I just don't think that you need the security of a fixed rate for that length of time. You will have a very low ltv and a very low mortgage. You will be able to handle the interest rate rises when they come.

An alternative would be to fix half of the mortgage for 10 years, so that you can reduce the variable bit without penalty.

Should you pay down your mortgage?
Put it another way - if you had a home worth €450 and a mortgage of €150k, would you borrow €25k at 4.5% to invest in funds?

After management charges and exit taxes, it's hard to see it beating 4.5%.

You probably should maximise your pension contribution now
This is probably the last year you will get tax relief at the top rate on pension contributions. There will be no point in making contributions after 2010. I suggest that you move money from Quinn Life or your rainy day fund into a one off pension contribution.

What size rainy day fund do you really need?
I would ask the same question. Would you borrow at 4.5% to put money on deposit at 2% (3% less DIRT)? I presume that the answer is no. Given your good income and low mortgage, if you did need money, your bank would probably give you an overdraft. I would use the fund to reduce the mortgage. Your job is secure for the next year. If the outlook gets worse, then you can start saving again in anticipation.

If you do need a rainy day fund, then use the Quinn fund
You can cash the Quinn fund at any time as there are no entry or exit penalties. Given your overall level of wealth, you can handle a fall in the value of the fund. You won't like it, but it's a small part of your overall wealth, so it won't be too serious.

Your question should be rephrased: Given that I want to keep a rainy day fund, will the net return on the Quinn Fund exceed the 2% net return I am getting on deposits? The answer is probably yes.

Another possible reason for not cashing the Quinn fund
The Quinn fund is probably at a loss at the moment. Say you invested €30k and it's worth €25k. any gain in value between now and €30k will, effectively be tax free as you will just be recovering losses.

Thank you Brendan.

Okay, I have decided that I will use most of the rainy day cash on deposit to reduce the amount borrowed and go for a 20 year term. The shares will be kept as an emergency fund. (they are worth about 1000 less than what i paid).

By selecting a 10 year fixed, I was trying to outguess the banks and hoping to win overall against interest rate increases down the road. But I agree that a better way of looking at it is as insurance which I don't absolutely need. So scratch 10 year and probably five year fixed.

that leaves 2 year fixed and variable. 2 year fixed is cheaper (I wonder why?) but I need to find out what rate I will go to at the end of a two year period. Will I no longer be considered "new business" at that point ?

Brendan, you seem to be suggesting a variable may be a better bet ?

1 Year New Business Variable 3.60% Gross
2 Year Fixed New Business 3.10% Gross
5 Year 3.70% Gross
10 year 4.5% Gross

I am not a fan of fixing but if that is what you want I would suggest that you leave a portion of it on a variable rate. It allows for overpayment if you were to have extra cash.
If you want the security the 5 yr fixed looks good.