Use your education or emergency fund to bring your LTV down to avail of lower rate band?

I have been arguing this for some time, but the force of the argument has been lost in the topsy-turvy world of Irish mortgage lending where there hasn't been much, if any, of a reduction in rates for a reduction in LTV.

But with the advent of the sensible LTV based lending of Avant Money, this argument needs to be made again.

Example 1 - getting your mortgage rate below 80% LTV



By paying €20k off your mortgage you can reduce your interest bill by €1,000 a year.

That is the equivalent of a guaranteed, risk-free, tax-free return of 5% on your money.

Or put it another way, keeping a €20,000 emergency fund is costing you €1,000 a year.

Of course, the return is greater if your mortgage is just above €320k and a reduction of €5k would bring you into the <80% LTV band.

Example 2 - Getting into the 60% LTV band



By paying €20k off your mortgage, you are saving €800 a year, the equivalent of a guaranteed, risk-free, and tax-free return of 4% on your money.

Get a valuation of your house and work out the key flip points for lower mortgage rates. I am using Avant's rates here, but it applies to some other lenders as well.


If your mortgage is just above €320k, you should use your education fund and your emergency fund to bring it down just below the 80%.

You can build up these funds again until they are enough to bring it down below 70%.

Getting below 80% LTV is the first priority as it's the figure which will allow you trade up.

If you are thinking of trading up, you should be aiming to go well below 80% as you will need 20% of the value of your new home.

Brendan

If you are fixing your rate for 3 years, then you won't be able to just reduce the LTV band when you bring it down to the next band.

So you should time the fixing of your rate to when you get it below one of the key points.

For example, if you are just over the 80% rate, don't switch and fix until you have the LTV below 80%.

Brendan

I've started the process to switch but I'm in a fixed period already. I'm at around 60% LTV of the original mortgage. I know I need a new valuation. For argument's sake say I'm at 61% LTV. Can I go to the new lender and say "when switching I want to borrow the equivalent of 59% and I'll transfer you the difference"?

Isn't an emergency fund for emergencies? And when the mortgage is paid off it's paid off!

In principle you are right. If you have a year's net income sitting on deposit it makes sense to do as Brendan advises.

3-6 months net income in liquid form is a sensible part of any personal finance strategy. I wouldn't reduce it too aggressively personally.

Not much good being on a lower LTV and saving 1 grand a year if you have used all your emergency fund and lose your job a month later... Especially in current climate

Not sure of the actual mechanics.
Maybe switch to a variable rate and then fix?

Brendan

Sunny said:

Not much good being on a lower LTV and saving 1 grand a year if you have used all your emergency fund and lose your job a month later... Especially in current climate

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In cases like mine the difference could be a small part of the emergency fund, not all of it.

In any case the size of people's funds will vary greatly.

Brendan Burgess said:

Not sure of the actual mechanics.
Maybe switch to a variable rate and then fix?

Brendan

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I will ask the broker how to do this.

iamaspinner said:

I've started the process to switch but I'm in a fixed period already. I'm at around 60% LTV of the original mortgage. I know I need a new valuation. For argument's sake say I'm at 61% LTV. Can I go to the new lender and say "when switching I want to borrow the equivalent of 59% and I'll transfer you the difference"?

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Yes this is possible. But you don't transfer the difference to the new lender. You pay it to the old lender when clearing the old mortgage.
Say the house is worth 100k and outstanding mortgage is 61k. The new mortgage would be 59k plus you'd chip in an extra 2k to clear the existing 61k mortgage.

iamaspinner said:

I've started the process to switch but I'm in a fixed period already. I'm at around 60% LTV of the original mortgage. I know I need a new valuation. For argument's sake say I'm at 61% LTV. Can I go to the new lender and say "when switching I want to borrow the equivalent of 59% and I'll transfer you the difference"?

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FWIW I've found valuers quite flexible in cases like this. Valuing houses is very subjective so they have some leeway. I've just mentioned when they arrive that I'm going onto a fixed rate and it would be great if the house was now worth €XXXk to help me get onto the lower LTV band. If it's just a few percent I think you'll be pleasantly surprised.

iamaspinner said:

In cases like mine the difference could be a small part of the emergency fund, not all of it.

In any case the size of people's funds will vary greatly.

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I understand that but I think Brendan needs to reword his original post. Advising people to use their emergency fund AND their education fund if they have one to bring down their LTV on their mortgage to get a cheaper rate is not good advice. If people can afford it, of course they should pay down their mortgage but I would strongly disagree with telling someone with 20k in an emergency fund that it is costing them 1k a year and they would be better off paying their mortgage with the 20k. As with all these things, you need to take a holistic view to personal finances. No point bragging that you are are only paying 1.95% if you lose your job or put on reduced hours which is very possible in this climate and struggling to make next months mortgage payment because you have no spare cash.