Top up mortgage repayments now or with ESPP proceeds?

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apd

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I have just taken a 3.1% tracker mortgage from AIB for 266,000 for a house valued at 330,000. My repayments over 35 years will be 1000 monthly approx.

I had planned to pay this and put 15% of my salary into an Employee Share Purchase Scheme with my company. This means every 6 months the money I have saved in the scheme approx 4200 euro will be used to purchase shares in the company at 15% discount. I can immediately sell these and make 15% profit (less tax). With this lump sum I was planning to make payments off the mortgage lump sum every 6 months (provided the bank let me do this and do not take the lump sum and use it to pay interest rather than directly off the principle)

Would I be better with that strategy or just adding the 700 euro per month directly to my mortgage payments i.e. paying 1700 pm rather than the 1000.
If I do this will the bank just use the extra money to just pay their interest up front quicker rather than eating into principle.

Regards.
 
Re: Mortgage Repayments

apd said:
I have just taken a 3.1% tracker mortgage from AIB for 266,000 for a house valued at 330,000. My repayments over 35 years will be 1000 monthly approx.

I had planned to pay this and put 15% of my salary into an Employee Share Purchase Scheme with my company. This means every 6 months the money I have saved in the scheme approx 4200 euro will be used to purchase shares in the company at 15% discount. I can immediately sell these and make 15% profit (less tax). With this lump sum I was planning to make payments off the mortgage lump sum every 6 months (provided the bank let me do this and do not take the lump sum and use it to pay interest rather than directly off the principle)

Would I be better with that strategy or just adding the 700 euro per month directly to my mortgage payments i.e. paying 1700 pm rather than the 1000.
If I do this will the bank just use the extra money to just pay their interest up front quicker rather than eating into principle.

Regards.
Click to expand...

don't forget you need to pay 42% tax (i persume from the figures you pay the higher rate) on that 15% discount on the shares...
 
Re: Mortgage Repayments

you should be able to get 2.95% off AIB (I have similar mortage although over 30years). One AIB branch offered 3.1% only but the branch I had my account in offered 2.95%, it seems to be down to who you are dealing with but try to push them to switch it to 2.95%........no harm trying.
 
Re: Mortgage Repayments

jhegarty said:
don't forget you need to pay 42% tax (i persume from the figures you pay the higher rate) on that 15% discount on the shares...
Click to expand...
Plus 6% PRSI/health levy.
 
Re: Mortgage Repayments

apd said:
Would I be better with that strategy or just adding the 700 euro per month directly to my mortgage payments i.e. paying 1700 pm rather than the 1000.
If I do this will the bank just use the extra money to just pay their interest up front quicker rather than eating into principle.
Click to expand...
If the choice is between making a single lump sum each six months or making increased monthly repayments then the former will save more money since you are chipping away at the outstanding capital balance sooner. This assumes that the lender is calculating mortgage interest monthly or more frequently (e.g. daily). If you have no other pressing need for the money each half year then this is a good way to reduce your overall mortgage interest bill, effective term and get your mortgage down to a manageable level or clear it early. When making accelerated lump sum or regular repayments make sure that you give instructions to the lender in writing that these are to be used as accelerated capital repayments and not, for example, held in reserve for use when you fail to make regular repayments or anything like that!
 
Re: Mortgage Repayments

I'm confused! I think the increased monthly payments would be better.

If you opt to increase monthly payments when would they commence? Month One or month Six. Would you be waiting for a six-monthly lump sum then draining the lump sum by 700 each month to top up payments? I think Clubman's advise was based on this.

Or would you be increasing the mortgage payments by 700 instead of the ESOP?

Bizzy
 
Re: Mortgage Repayments

yes the 700 per month extra would be from month one. i would then not be contributing to the ESPP.
 
Re: Mortgage Repayments

Sorry - I was assuming that you were assuming that you were getting the lump sum from the maturing ESPP (each 6 months) and it was then a case of either paying that off the mortgage immediately or else splitting it into six separate increased monthly repayments over the six months following the ESPP maturity date. My comments above were predicated on this sort of choice in approaches. Does that make sense and clarify my comments?

Don't forget that ESPP schemes, which often guarantee a c. 15% gross (c. 8% net after income tax and PRSI) on up to 15% of your gross income (my employer's scheme works this way) return if you exercise and sell on maturity so be careful that you don't forego this offer and instead make increased monthly repayments which, in the end, give you a lower overall return. On the face of things I would be more inclined to participate in the ESPP, exercise and sell on each six month maturity date, deduct the tax/PRSI (your employer should be doing this these days as far as I know) and then use some or all of the ESPP lump sum to make a capital repayment. I suspect that this be better than foregoing the ESPP and using the money that you would have contributed to it to defray your mortgage borrowing. However you should crunch the numbers to be sure. If in doubt get independent, professional advice.
 
Re: Mortgage Repayments

thanks. it was my first impression too that the 15 percent i was gaining in the ESPP and then make bi annual lump sum repayments would outweight the gains in making the addition monthly mortgage contributions.
 
Re: Mortgage Repayments

Yes - I suspect that this would be the case. Try calculating what you would earn from the ESPP (net of tax) separately and the see what effect the six monthly lump sum capital repayments would have on the mortgage. Then compare this to the savings achieved by foregoing the ESPP and using the €700 (?) as a monthly mortgage repayment capital repayment top up and see what the difference is. Karl Jeacle's mortgage calcultor is good for this sort of stuff. Hope that helps.
 
Re: Mortgage Repayments

If Revenue have deemed your ESOP scheme to be a share option for tax purposes, don't forget that you'll have to pay Revenue the tax due within 30 days - The admin effort of filling out the tax form every six months and paying the tax within 30 days (probably shorter than it takes for me to recieve/lodge/clear a USD cheque) drove me out of my ESOP scheme.
 
Re: Mortgage Repayments

Just to be clear - we are talking about an ESPP and not an ESOP here (i.e. Employee Stock Purchase Plan and not an Employee Stock Option Plan - although perhaps apd's employer also runs the latter too?) and, as far as I know (and certainly the case in my current job) the employer is obliged to deduct via payroll and remit income tax and PRSI/health levy liabilities arising from participation in the scheme and the BIK arising from the ESPP discounted price. I think that this requirement on the employer came in with the BIK changes brought in a years or so ago. In my case it means that the income tax and PRSI/health levy liability is taken care off with no need for further administrative hassle on my part but it does mean that I get hit with a relatively big BIK tax and PRSI/health levy bill in the month that the ESPP six monthly purchase period ends. Obviously if I hold the shares purchased and sell them subsequently at a gain with respect to the market price on the day of purchase I may be liable for CGT which I have to self assess and return. In most cases ESPP schemes (often involving at least a 15% discount on market price of shares purchased with up to 15% of gross income over six monthly purchase periods) are simply too good an offer to turn down even if they imply a bit of additional paperwork to deal with the tax issues. Even if you exercise and sell immediately at the end of the six montly purchase period you stand to gain 15% gross or c. 8% net which is a guaranteed return not to be sneezed at!
 
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