So many Options - help needed

[Rebelman]

Hi All,
I have about 55k to invest and I have been reading all the options on Askaboutmoney, but I thought that I could get a bit more info with my specific case. At the moment I have three main outgoings per month:
Mortgage
Car loan
SSIA
My SSIA will be maturing this month, and this is included in the 55k. My mortgage is about €1300 per month (with 28 years remaining - hmmm!) and the car loan is €440 per month (with €10000 remaining). So this is what I am considering:
1. Pay off car loan straight away - down to 45k.
2. As I will then have no carloan to pay I will put €300 per month into an AIB regular savings account at 7.1%
3. Put €5000 into a Rabo account to get 5% - useful for a rainy day - down to 40k.
4. At present I am not contributing to a pension (I am 28, but have a pension from a previous position) - I am planning on using the money which I was paying into the SSIA, €254, and put it into a PRSA - can increase this amount if needed.
5. Put 40k into my mortgage

If anyone can advise on any of the following it would be great:
- Is it best to pay off the car loan immediately?
- Is Rabo Direct currently the best place to put a sum of 5k - I will probably not make many additional lodgements to the account, just to have it there if needed?
- Is AIB currently the best option for a regular savings account?
- What is the best option for a PRSA at the moment?
- Is putting 40k into the mortgage the best option - I would hope to take a couple of years off the mortgage with this rather than just reduce the monthly payments?

I have looked at the best buy options on Askaboutmoney. I understand that there are alot of questions and that people will have all different opinions, but all are extremely welcome.

Many Thanks,

Rebelman

 

[ClubMan]

Is it best to pay off the car loan immediately?

In general it makes little sense to save while having outstanding debts. Check in case there are any penalties for clearing the loan but it may well be a good idea to clear this before worrying about saving/investing.

Is Rabo Direct currently the best place to put a sum of 5k - I will probably not make many additional lodgements to the account, just to have it there if needed?

They currently offer the best standard demand deposit rate for up to €10K (i.e. 5% gross CAR).

Is AIB currently the best option for a regular savings account?

Check the best buys list.

What is the best option for a PRSA at the moment?

The cheapest PRSA?

Possibly www.prsas.ie for a 0%/1% PRSA for the cost of a charitable donation at your discretion (obviously you need to make sure that the funds on offer suit you needs).

- Is putting 40k into the mortgage the best option - I would hope to take a couple of years off the mortgage with this rather than just reduce the monthly payments?

You can do the latter by just instructing your lender in writing that you are making a lump sum capital repayment and want to keep your repayments at their "normal" level thus reducing the effective term. See Karl Jeacle's mortgage calculator for info on the effects of such accelerated repayment strategies.

 

[Rebelman]

Hi Clubman,
Thanks for all the info. There are no penalties for repaying the carloan early (well at least that's what I was told when taking it out - will double check it though). As for the 5k in Rabo - will I be charged account fees if I do not make additional contributions to it? The mortgage calculator is very useful - thanks for the link.

Thanks,
Rebelman

 

[ClubMan]

As for the 5k in Rabo - will I be charged account fees if I do not make additional contributions to it?

No.

By the way - if you are finding the number of product options confusing and are not sure what you can do to best organise your finances for your own individual needs/circumstances then you should consider getting independent, professional help from an authorised advisor or good multi-agency intermediary who will be better placed to do a comprehensive financial review and recommend specific matching your needs.

 

[Rebelman]

Thanks again Clubman,
I know a couple of accountants who I could get adivce from, but I just thought I'd pose the questions here as there seem to be alot of users which are very upto date with all the savings/loans/PRSA options.

Rebelman

 

[Dreamerb]

You can do the latter by just instructing your lender in writing that you are making a lump sum capital repayment and want to keep your repayments at their "normal" level thus reducing the effective term.

Bear in mind you'll need to monitor this with rate changes - if your lender recalculates your current repayment by adding a fixed overpayment to the "new" base payment, rather than by fixing your monthly repayment, then the base payment will be recalculated on the basis of the outstanding capital and the original term, and the same overpayment applied on top. This can result in the wonderful contradiction of your monthly payment reducing when the interest rate increases. It's important to be very clear on this in communicating with your lender so there's no room for confusion. Preferably a little clearer than my explanation, I suspect.

It's so much easier to show these things algebraically...

 

[Rebelman]

Hi Dreamerb,
As I was reading your reply I was thinking........ 'I'm sure this person knows what they are talking about, but it's making no sense to me ;-)' Any chance you can explain it slightly differently, I'm sure it would be useful to understand it when going to the bank.

Many Thanks,

Rebelman

 

[ClubMan]

Bear in mind you'll need to monitor this with rate changes

What I meant was tell the lender that you wanted to leave the repayment at its current rate which (on a tracker/variable) will fluctuate with future rate changes but which will mean that the capital repayment is working to reduce the effective term of your mortgage rather than impacting repayments. You need to put these instructions clearly in writing to avoid any confusion.

 

[Dreamerb]

Here goes:

Current mortgage = A
Redemption date = N
Capital repayment = B
Annuitised monthly repayment on A for term N = x
Rate = r

You wish to make a repayment B on A but retain the monthly payment x.

Your bank has two ways of doing this.

(1) Simplest [for you] is simply for them to fix the repayment at x
but it depends on their software and your exact instruction.
They can also
(2) Take your new data and annuitise (A-B) over the term to date N at rate r, which will yield a new - lower - payment y
(2.1) In order to maintain your repayment x, they take (x-y) and add that numerical total to your payment y [which, when r is constant, yields [y+(x-y)] which simplifies to x.

This is fine when r is constant. However, if you have a new rate applied, say (r+0.25%), they will then recalculate your payment again. Remember, you'll have overpaid additional sums from your difference of (x-y), so now you'll have:

(3) Annuitisation of [(A-B) - ordinary repayment element - overpayments] to date N at rate (r+0.25%).
This will yield your new base payment z, to which the overpayment (x-y) is added.

Because the additional overpayments are also subtracted from the capital, then, depending on how long they've been made for, it's entirely possible that z may be less than y, and therefore that (z+(x-y)) will be less than x.

Likewise it's possible that z will be more than y, and your payment of (z+(x-y)) will be greater than x.

The point is that with a fixed overpayment, you'll have a floating component to your total repayment and the effects on the mortgage term aren't fully predictable - but with regular rate changes, will be significantly lessened.

With a fixed payment, and interest rates which are volatile in a small band, you have greater predictability, although obviously the value of your overpayment may be eroded if the rates are going up.

What this all boils down to is that you need to be clear on how the lender handles your overpayment - there's a big difference between fixing the payment and fixing the overpayment.

The other option is to reset your term formally - but that will leave you less flexibility if your circumstances change.

Is that any clearer??

 

[Dreamerb]

What I meant was tell the lender that you wanted to leave the repayment at its current rate which (on a tracker/variable) will fluctuate with future rate changes but which will mean that the capital repayment is working to reduce the effective term of your mortgage rather than impacting repayments. You need to put these instructions clearly in writing to avoid any confusion.

I think that's nearly as confusing as I was!

Do you mean "at its current nominal amount"?

I did interpret your post that way, btw, but as far as I gather different institutions have different ways of setting up payments, and that means that hapless mortgage holders have to be well informed and instruct carefully.

This particular issue is one of my hobby-horses, having had an epic saga with a previous lender which didn't explain that the term remains the same even if the instructing correspondence specifically requires that all overpayments be applied to reduce the term of the mortgage. In more naive days, I assumed that the marvellous software at their disposal would allow them to recalculate on the basis of progressively reduced mortgage terms. I still fail to see why they can't do that - with a little work I suspect I could set up the calculations myself on excel.

 

[ClubMan]

I think that's nearly as confusing as I was!

Do you mean "at its current nominal amount"?

All I know is that I did this very thing with EBS years ago when clearing the original 20 year mortgage for IR£40K in about 7. Whatever about the technicalities it worked and saved a lot.

 

[MandaC]

This post is very valid to me too. I will have about 35K left over when I get my SSIA. I want to pay 20K straight off the mortgage, but actually up the repayments, so I am also reducing the term. How am I able to work out, for example if I want to fix my monthly repayments so that I pay €12K pa off the capital sum of the mortgage as well as paying the interest.

Am I better by saving the additional payments in, say, my rabo or northern rock account and then paying it as a lump sum off at the end of the year.

 

[ClubMan]

This post is very valid to me too. I will have about 35K left over when I get my SSIA.

Your SSIA is worth €35K!?

I want to pay 20K straight off the mortgage, but actually up the repayments, so I am also reducing the term. How am I able to work out, for example if I want to fix my monthly repayments so that I pay €12K pa off the capital sum of the mortgage as well as paying the interest.

Maybe try Karl Jeacle's morgage calculator?

Am I better by saving the additional payments in, say, my rabo or northern rock account and then paying it as a lump sum off at the end of the year.

Not unless your lender calculates interest anually. Otherwise you would most likely be better off making accelerated repayments as soon as possible.

 

[MandaC]

I wish my SSIA was worth €35K - no its only worth about €16K I did not put the full amount in from year 1. I have money left over for doing up the house that I am not going to use, plus a bonus coming in work, so all in all I will have about €35-€36K.

I have fiddled about with calculations and reckon if I pay €20K straight away, plus up my monthly repayment to about €1400 (before TRS) that I will have the mortgage cleared off in just over 11 years.

I will still have a bit of cash left for any emergencies.

Sounds tempting!!

 

[Rebelman]

Thanks for clearing it up Dreamerb - it does make more sense now. I have my mortgage with AIB at the mo - I am going to pay the 40k to them - make sure they reduce the term of the mortgage while keeping the repayments at what they are. If they do not do this I will be moving (thinking about it anyway). If I do decide to move I presume it would be best to pay AIB the 40k and then move to another provider - start off with a lower loan and a better LTV ratio, hence get a good rate from the new provider?

 

[GeneralZod]

4. At present I am not contributing to a pension (I am 28, but have a pension from a previous position) - I am planning on using the money which I was paying into the SSIA, €254, and put it into a PRSA - can increase this amount if needed.

Assuming you're a top rate tax payer you can put €479 (= €254 / 0.53) into the pension a month and it will still only cost €254 in take home pay.

 

[Rebelman]

Thanks GeneralZod - that's about what I would be hoping to put into it - waiting on someone to come back to me with what PRSA would suit me best.