Should we reduce our mortgage term?

[micamaca]

Hi everyone,

I would be grateful for some advice before I contact our lender.

We have a mortgage since Jan 2006. There are 31 years left on it. The original sum was for 235k.

My father since passed away and I inherited money. We decided that we wanted to have options with the money. So we did not pay off the mortgage, but we did use another of the banks flexible options. So we put 200k resting in the mortgage account. This money may be withdrawn by us at a later date. There are reasons for this, which I'd rather not go into, suffice to say we may need to use at least half that money later.

Our mortgage repayments are around 85 euros at the moment, but I learned from our bank, that only 30 euros or there abouts is going towards repaying the capital. The other 55 euros is interest. This appalled us, but the bank guy said it is because it is the balance of the mortgage over 31 years. This got us thinking.

We would like to reduce the term of our mortgage, so that we are paying less interest. If we were to reduce it by ten years, maybe more. But are terrified of interest rates shooting up. Our own futures here in this country are uncertain too. We may go abroad and need to rent out the house to make repayments.

I'm sorry for all the waffle. I suppose in short, are we wasting our money by having it sitting against the mortgage? Should it be sitting somewhere else making interest? Obviously interest rates were different when we took this move.

I feel mad to be paying off interest for a 31 year term mortgage, when we have no intention of having a mortgage for that long. But it was the best terms we could get at the time, as I wasn't working.

If anyone can give an opinion, I would be grateful. I will be contacting our lender, but I want to hear what other people think too.

So to recap, should we reduce the term of our mortgage or just remove our money, pay higher mortgage repayments and shift money somewhere else? But keep in mind, we may be leaving the country and need to rent the property.

cheers mica

 

[Riverman]

Are you sure you will be able to get hold of that 200k when you want it? If you have a current account mortgage this shouldn't be a problem.

But if not, the bank may regard it only as a prepayment of instalments. There are advantages to this - it reduces your repayments and the amount of interest you pay overall - but once it's in the mortgage account, it stays there. So one of your options (withdraw the money) would no longer be an option. But perhaps you may be able to swing something with the bank if you feel you were misled by them.

On the assumption that you can withdraw it when you want, it really depends on the situation with interest rates. Generally mortgage interest rates are higher than savings ones, so you may be better leaving it where it is because you're saving more interest than you would earn somewhere else.

But if you're on one of those really low tracker rates that were available a few years ago, maybe not, especially if you feel comfortable putting the money into a fixed term or notice savings account (though watch out because some of these will only pay good rates of interest up to a certain balance - often a lot less than 200k). What's your interest rate and is it a tracker or a standard variable?

Either way, when doing your comparison don't forget to take account of TRS on mortgage interest and DIRT on savings interest. These work in the same direction (reducing the effective rate) so will cancel each other out to some degree, but not exactly.

To answer the other question, reducing the term will benefit you by paying lower interest over the life of the loan. But presumably you realise you will still be paying the same amount per month in interest (initially at least). The difference will be that the capital repayment will increase so your total repayment will increase. Thus hitting your cash flow, which may be a problem for you if you can't get the 200k back when you want it.

Alternatively can you arrange with your lender to make regular overpayments without actually reducing the term? This will in effect add to the 200k that you put into the mortgage. Obviously only an option if you're able to get back the 200k when you want it. Otherwise, again, you're only tying up yet more money. And you'd want to watch out that it doesn't reduce your mortgage balance to zero, otherwise the bank may regard you as having paid off the loan and your 200k may then be "gone" (i.e. used to pay off the mortgage) for good.

 

[micamaca]

Hi Riverman,

thanks for your substantial and thorough reply.

To confirm, we should be able to withdraw the money again. This was one of the chief reasons we went with this bank over others. I think it is one of the few banks with these flexible options on its website. My father, God bless him, was also concerned about this facility and he gave me a list of things to double check with the lender. So I have an email from the bank confirming that the redraw facility does what it says on the tin. The bank is currently still offering these flexible options.

I'm not sure of the exact rate we're on, but it is very low. It is a tracker. Thankfully my husband had the sense to hassle the bank about that during the boom and we got a good tracker rate. So we are happy with that now!

We will keep the TRS/DIRT comparison in mind. That is something I wouldn't have taken into account at all, but should. I know the TRS is very low at the moment because we are repaying so little. The reason for this is precisely what you mentioned; we don't want to end up repaying the mortgage in full by accident and have them holding onto our lump sum :eek

I would also have expected, if we reduced the term, that the interest repayments would reduce immediately... so you have probably saved my bank an irritable phone call from me. Why does it not reduce immediately, if the term is shorter? Mortgages are complicated beasts!

I was considering using some of the lump sum to actually shorten the term, but my husband wants to keep the lump sum and just raise his monthly repayments.

I will now ring my lender and know a bit more before I go in and hopefully ask some more useful questions. I'm currently using the mortgage calculator to get an idea of monthly repayments, but they only use a low interest rate. We will have to factor in the interest rate rises and hope they don't go to high.

Thank you for your kind reply, it was very useful

All the best, mica

 

[Bronte]

A 31 year term is not advisable in nearly any circumstance. Reducing the term (to 20 or 15 years) is a very sensible option as is making overpayments. If you put the money on deposit would you make more on it than you pay in mortgage interest would be my starting point on this.

If you've reduced the amount you owe and interest rates go up you shouldn't have any problems. So far the talk is of it going up much later in the year and only by very little so I wouldn't worry about this currently.

If you are going to be a landlord the bigger the mortgage the better from a financial perspective.

If you are going to emigrate you may be better advised to sell and have your inheritance to give you a good start elsewhere.

 

[micamaca]

A 31 year term is not advisable in nearly any circumstance. Reducing the term (to 20 or 15 years) is a very sensible option as is making overpayments. If you put the money on deposit would you make more on it than you pay in mortgage interest would be my starting point on this.

Hi Bronte,

thanks for your reply. This is exactly what we are thinking...that we are crazy to be paying interest over 31 years, when we have no intention of keeping a mortgage that long. So we want to go into talk to our lender in person and ask them how much our repayments will increase by if we shorten the term to 25, 20 and 15 years... I agree absolutely, the interest we are repaying is madness, especially when we don't need it.

If you are going to be a landlord the bigger the mortgage the better from a financial perspective.

Would you mind explaining what you mean by this? Even briefly

If you are going to emigrate you may be better advised to sell and have your inheritance to give you a good start elsewhere.

If we sell now, we will lose about 60k plus on what we paid for the house. That bites! Otherwise, if the market was better, we would have been out of here quicker than a flash.

 

[suzie]

Hope you dont mind if I ask a similar question rather than creating another thread.

A friend is in a position to pay off money against his mortgage. I suggested to keep to the same remaining term, pay the lump sum to reduce the repayments to an more comfortable level, while the institute hold on to the deeds safely etc.

The institute said they couldnt do that? Is that within they rights? Its the EBS by the way. I thought a simple written letter outlining the above would suffice, rather than the institute reducing the term.

Thanks S.

 

[Bronte]

Would you mind explaining what you mean by this? Even briefly



If we sell now, we will lose about 60k plus on what we paid for the house. That bites! Otherwise, if the market was better, we would have been out of here quicker than a flash.

As a landlord you can write off 75% of interest from your rental income. Have a look at the key posts on investment property on here. But if you are going to emigrate you need a solid person to manage the property for you. Being a landlord is not for the fainthearted.

In relation to the market (which we're not allowed to discuss) you should have a serious think about it. Is the market going to get worse, is it going to stay as it is for a long time, will it recover the 60K in a short term or long term.

As an emigrant myself I know it's not an easy choice to make on what to do.

Suzie - can you rephrase your question as I don't understand it, you can start a new thread if you want.

 

[Kine]

A question on the OP's situation:

Say the OP has a 31 yr mortgage on a tracker (say 2.1%). To shorten the term, does this mean changing your contract and therefore coming onto a more unfavourable variable (say 4%)?

K

 

[NorfBank]

A question on the OP's situation:

Say the OP has a 31 yr mortgage on a tracker (say 2.1%). To shorten the term, does this mean changing your contract and therefore coming onto a more unfavourable variable (say 4%)?

K

The lender should not make you come off the tracker if you wish to reduce the term but if they do you can get a similar result by overpaying your mortgage. This will reduce the term without affecting your tracker rate.

www.moneybackmortgages.ie

 

[micamaca]

As a landlord you can write off 75% of interest from your rental income. Have a look at the key posts on investment property on here. But if you are going to emigrate you need a solid person to manage the property for you. Being a landlord is not for the fainthearted.

Cheers will do. Had no idea we could write off rental income. Better do some serious research before we even think of renting. We have no solid person to look after the property. I moved roughly 25km from my family and they all have kids. So they just would not be free or willing (you can hardly blame them) to deal with hassle with our house. So we would have to pay a management company to look after it and ask the neighbours to keep an eye on it. Best we can do unfortunately. I would much rather not be a landlord at all! Believe me, everyone posts nasty stories about their experiences and rarely do you read any good. It is very off-putting and you can be very unlucky with tenants, I'm sure.

I am trying to listen in on market news, but it is hard to know which way will it go. I think I may get the house valued to get an idea, because even around here where we live there is a variety of prices out there! But maybe then we will be in a better position to make up our minds, whether to rent or sell. Cheers for the advice.

@Norfbank, I had not even thought of the lender trying to take us off the tracker. I'm so green. But I will be aware now. This is exactly why I wanted to post here before going into our lender...forewarned is forearmed.

Thanks to everyone so far. All very helpful.

 

[Riverman]

I would also have expected, if we reduced the term, that the interest repayments would reduce immediately... so you have probably saved my bank an irritable phone call from me. Why does it not reduce immediately, if the term is shorter?

Possibly the guy from the bank didn't put it very clearly. I think he may have been trying to say that the repayment of the capital is spread out over the whole term. So, the longer the term, the less capital gets paid off every month. The 55 euro interest that he told you about is the interest per month. This is the same regardless of the term, because it only depends on the outstanding balance and the interest rate. So the shorter the term, the smaller the percentage of your monthly payment that goes to interest - but it's only smaller as a percentage of the overall instalment.

Here's a worked example with figures similar to yours which may make that clearer.

Mortgage balance of 20,000
Interest rate 3.3% per annum = 0.275% per month
Remaining term 31 years

0.275% of 20,000 is 55.00 which is your monthly interest amount. Notice that the term of 31 years hasn't figured anywhere in that calculation.

That balance and rate, with a term of 31 years, gives a total monthly instalment of 85.94.

Of this, the first 55.00 goes to pay that month's interest. The rest (30.94) reduces the principal balance.

Now if you'd reduced your term to say 20 years, with the same balance and interest rate the instalment amount goes up to 113.94. The interest is still 55.00 this month but you have now paid 58.94 of the capital.

You do start to get a benefit in terms of less interest monthly but it only happens gradually, as a result of the capital reducing more quickly. So in these examples with the 31 year term next month's interest will be 54.91 whereas with a 20 year term it will be 54.84.

The formula for the instalment amount is complicated and I won't attempt to repeat it here. Instead there is at least one online calculator out there - do a search on AAM for "Jeacle" and you'll find a link to it.

A friend is in a position to pay off money against his mortgage. I suggested to keep to the same remaining term, pay the lump sum to reduce the repayments to an more comfortable level, while the institute hold on to the deeds safely etc.

The institute said they couldnt do that? Is that within they rights? Its the EBS by the way.

One possible explanation is that your friend may be on a fixed rate.

Alternatively they may just be unlucky with EBS. Lenders vary according to what they will allow.

As a landlord you can write off 75% of interest from your rental income.

This may or may not be Irish tax law (I thought it was 100%, perhaps it has changed) but if someone goes to live somewhere else for more than 6 months, chances are they will become tax-resident there and there may be no allowance for this. However that does raise a few other questions - anyone able to comment?

Can the Irish authorities could still chase the tax in this situation? They would probably get to know about it one way or another, particularly if using an agent to manage the property.

Would the 75% (or whatever) allowance still be available to a non-resident landlord?

Perhaps the landlord wouldn't be liable for tax on this income in their new country anyway? Would probably depend on the country, but possibly not as long as it was kept in Ireland and not sent to that country (the "remittance basis" of taxation). Agreements between countries usually prevent someone being double-taxed in this situation, but ensure they're still liable in one of the countries. I'll stop now before I find myself straying into another forum.

 

[micamaca]

Riverman,

thank you very much both for the explanation and the example you set out in sums. I have no head for figures, but even I understood that beautifully. It makes perfect sense now. I will look up the Jeacle thingy and do some more research on that. But your figures where not far off what we are dealing with and more importantly, I understand better how the interest repayments and capital repayments work.

My head gets all confused when it tries to think about how these things are worked out, so fair play to you... you've done good work here today

We really must do our research on renting and tax on income in that regard before we even consider renting it out. One step at a time...

What did people do before the internet and and the kind helpful people on Ask About Money

Thanks again Riverman and everyone else too.

 

[Bronte]

Management companies I do not recommend, better to sell for sure if you go down that route. A competant family member who you can deal with professionally and pay accordingly is your best bet.

 

[micamaca]

Management companies I do not recommend, better to sell for sure if you go down that route. A competant family member who you can deal with professionally and pay accordingly is your best bet.

Oh dear, looks like we'll be selling then! I have one person I would say would be perfect for the job, but they already have their hands completely and utterly full. Anyway, I don't like involving family in this stuff. I think that works in some families; it just wouldn't work well in mine. Even if I were to pay my other family members instead of a management company, I would be dreading picking up the phone to ask them to do something, because I'd know the reaction I would get.

I have heard one or two horror stories about management companies too and considering we will be living abroad, there will be no pressure on them to do better.

Well, we will get the estate agent out and see where we stand and what we can live with losing. By the time one of us gets a job abroad, we might have come around to the idea.