Is it mad to pay off a cheap tracker?

Have a cheap tracker mortgage ~1%
Owe 200k
Have 290k on deposit earning around the same rate
Don't plan on trading up house
About 180k invested in stock Market

I have pretty much decided to pay off mortgage , feels like a bad move paying off a loan that is costing so little in interest , but Interest rates are so low for deposits and I don't want to juggle money around for an extra 0.5% here or there , i'll ask the bank will they do me a deal for paying off the mortgage early but i'm not holding my breath.

Any opinions on why I shouldn't pay off are welcome , I have read key posts etc on "should i pay off a mortage " if this was a variable rate I wouldn't be hesitating at all .

Cheers
Fella

If I had the spare cash I would, lot to be said for being mortgage free and especially if you can't get a higher deposit rate.

I paid my own off with a redundancy payment down to 5k o/s which I pay off at the rate of €100 p.m., I pay no interest as it is an offset mortgage on tracker, this is just to give me the flexibility of maybe doing a top up if for any reason I needed it. I don't expect to need it but you never know. I prefer to know that no matter what else happens with banks/countries going wallop I own the roof over my head.

Unless I was planning to buy another house I'd pay off the mortgage; the deposit interest after DIRT can't be much more than the interest you;re paying on the mortgage anyway.

I wrote this Key Post back in 2009

Should I overpay my tracker mortgage?

Let's say you were in the following position


Now, a lender offers you a loan of €200k @1% over 15 years.

If I were offered a loan at 1%, I would take it and buy shares.

There is an element of risk. The stock market could go into a long term decline and I might lose money.

But over the next 15 years, it is very likely that the return on the stock market will be more than 2%.

There will be stock market falls and corrections, but they don't worry you. You have experience of them and you will not be forced to sell.

And although I have no plans to trade up, plans change.

And there is the small kicker that they might do a deal. Even more unlikely now, but it's a kicker.

Brendan

Even if I were offered a loan at zero percent I would not take it and buy shares with it.

Brendan Burgess said:

Let's say you were in the following position

View attachment 456
Now, a lender offers you a loan of €200k @1% over 15 years.

If I were offered a loan at 1%, I would take it and buy shares.

There is an element of risk. The stock market could go into a long term decline and I might lose money.

But over the next 15 years, it is very likely that the return on the stock market will be more than 2%.

There will be stock market falls and corrections, but they don't worry you. You have experience of them and you will not be forced to sell.

And although I have no plans to trade up, plans change.

And there is the small kicker that they might do a deal. Even more unlikely now, but it's a kicker.

Brendan

Click to expand...

Well, there certainly have been 15-year periods in the past where equities in general would not have produced a total return of more than 2% per annum, on average, after commissions, fees and taxes are taken into account - the last 15 years would be one such example. And that's before taking inflation into account...

Also, the OP's mortgage rate is not fixed at 1% for the next 15 years and is very likely to rise at some stage over that period.

Deposit rates have now fallen to a point where it actually makes financial sense to pay-off a cheap tracker on a PPR ahead of schedule (assuming MIR is not available), when you take account of the punitive taxes on deposit interest, provided you have no need or desire:-


The OP would still have a substantial cash sum after paying off his mortgage and already has a significant exposure to both equities and real estate. Whether or not the OP has any further need to invest in risk assets really depends on the OP's strategy for funding his retirement and whether or not he has any dependants or a strong desire to leave a legacy to a favourite charity, etc.

I think there is almost zero chance that the OP's lender will offer him a discount for paying off the tracker ahead of schedule. The cost of funds of our mortgage lenders is now so low that they have no real incentive to offer such discounts.

Thanks for the replies , the reason I mentioned equities in my original post was because I suspected sound advice may be to invest it in the stock market , I'm continuing my plan of buying monthly until I reach a 30/70 % split of cash and equities maybe I'm foolish not just dumping all my cash straight into the stock market but I'm happy to stick with this plan for the foreseeable future or until a better plan comes along.

Outside of the stock market there is not much that is attractive property yield by my calculations isn't great at the moment , peer to peer lending doesn't look to be a huge success in Ireland and of course deposit interest is very low.

I suppose the reality is I have no other use for that 200k other than pay off the loan.

Sarenco said:

Well, there certainly have been 15-year periods in the past where equities in general would not have produced a total return of more than 2% per annum, on average, after commissions, fees and taxes are taken into account - the last 15 years would be one such example.

Click to expand...

I would say that there have been few such periods, and they have been far outweighed by the much higher number of periods of positive return and sometimes spectacular returns.

"after commissions" ? Commissions on buying and selling shares would be 2%. They have almost negligible impact on someone who buys and holds a diverse portfolio of shares.

"fees"? There are no fees if he buys shares directly as I am suggesting.

"taxes"? Yes, as I have pointed out taxes will reduce the return. While dividends will be taxed, if there is no capital gain, there will be no CGT.

And that's before taking inflation into account...

Click to expand...

You should ignore inflation. You should compare the nominal return with the nominal interest rate paid.

Fella said:

I'm continuing my plan of buying monthly until I reach a 30/70 % split of cash and equities

Click to expand...

That does not make any sense. I suspect you have fallen victim to the "euro cost averaging" fallacy.

If you think that you should have 70% of something in the stock market, then do it now. If you think that the stock market is overvalued, then you should not invest anything in it.

Brendan Burgess said:

That does not make any sense. I suspect you have fallen victim to the "euro cost averaging" fallacy.

If you think that you should have 70% of something in the stock market, then do it now. If you think that the stock market is overvalued, then you should not invest anything in it.

Click to expand...

I agree it doesn't make any financial sense , I'm new to investing in the stock market so was dipping my toe at the start I'm less than a year into it and was nervous about just putting a big lump in every year , I find it hard to alter my mind set on this , hopefully I can, thanks .

Hi Fella

Had you put your chosen allocation into the stock market when you started a year ago, you would be far better off now.

Of course,if you do it in one lump sum now, you could be doing it just before a crash.

So it is hard to understand.

There are some good graphs around that show that those who invested for the long term just before each of the big crashes, have still got a very good return on their money. Of course, they would have suffered regret for a good few years afterwards and many would have cashed out at a loss, but long term investors should not try to time the market.

Fella said:

I agree it doesn't make any financial sense , I'm new to investing in the stock market so was dipping my toe at the start I'm less than a year into it and was nervous about just putting a big lump in every year , I find it hard to alter my mind set on this , hopefully I can, thanks .

Click to expand...

Hi Fella

I am attaching a link to a study Vanguard published a few years ago on lump sum investing (LSI) versus dollar cost averaging (DCA) that you might find interesting.

The key conclusion is that LSI beats DCA two thirds of the time over ten year rolling periods across various markets (although the difference is fairly modest) but that DCA has a role in protecting down-side risk.

The bottom line is that your current approach is perfectly fine and won't have a dramatic impact on your expected returns. If this approach helps you sleep at night, then you should probably stick with it.

https://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

Thanks guys , I try to make perfect value plays all the time , so can't alter this now for the stock market , I am disappointed in myself tbh it was a terrible decision not to invest all my cash last year in one lump, i'll invest 100k at start of next month (max transfer is 5k from bank a day) and then continue investing between 5/10k a month (depending on how much I save) , I'll pay off the mortgage as well , once again thanks for opinions.

Brendan Burgess said:

"after commissions" ? Commissions on buying and selling shares would be 2%. They have almost negligible impact on someone who buys and holds a diverse portfolio of shares.

"fees"? There are no fees if he buys shares directly as I am suggesting.

"taxes"? Yes, as I have pointed out taxes will reduce the return. While dividends will be taxed, if there is no capital gain, there will be no CGT.

Click to expand...

Hi Brendan

I would just note that costs and taxes have a compounding impact on return that inevitably becomes material over time.

Perhaps you should look at your pension option! If you have the capacity to supplement your pension by means of AVC's/other then it makes far more sense to do this than a straight-forward investment in stocks & shares. Always bear in mind that no investment is without risk. Ensure that you look at downside risk in making any decision.

I don't really consider AVC's an option I think they benefit high earners , my job salary I only work limited hours so pay very little if any tax.
This is going to be my pension just amass as much wealth as possible in the next few years and stick around 70% in the stock market and pray ! I understand the risks , the main risk is the government and tax on funds , ill keep going till the 8 year deemed disposal and rethink the strategy then , paying the government 40% tax will hurt a lot but meh 8 years is a long time lots can/will change.

Had a reply from ptsb re paying off tracker they are not doing any deals

Fella said:

...I only work limited hours so pay very little if any tax.

.... ill keep going till the 8 year deemed disposal and rethink the strategy then , paying the government 40% tax will hurt a lot but meh 8 years is a long time lots can/will change.

Click to expand...

I have just seen this now.

If you are paying very little tax, you should be investing directly in shares and not in funds as there will be little tax to pay on the dividend income - presumably 20% vs. 40%.

When you hit 40% tax,you should be looking at pensions if you still have pensionable income.

Brendan

Brendan Burgess said:

I have just seen this now.

If you are paying very little tax, you should be investing directly in shares and not in funds as there will be little tax to pay on the dividend income - presumably 20% vs. 40%.

When you hit 40% tax,you should be looking at pensions if you still have pensionable income.

Brendan

Click to expand...

I think you are correct , the problem is for me getting the diversification needed I would want more than 10 more than 20 companies and the transaction cost of buying these would add up , the funds reinvest the dividends so there is no tax due until 8 year deemed disposal which is similar to paying CGT on disposal , theres not that much in it 33% CGT v 41% exit tax , I keep meaning to do a spreadsheet to work it out , but with the dividends reinvested you are not paying tax on this yearly so you are gaining this dividend compounding tax free till 8 years so it has to be worth something .