Should I pay a lump sum off my mortgage?

tronman

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I have a variable rate mortgage with AIB, approx €190,000 left. I'm considering paying a lump sum of 60k off.

I want to lower the monthly payments rather than shorten the term.

Would this mean a big savings on interest? Also I presume as it's variable I won't be penalised?

Any advice would be much appreciated.
 
Using AIB’s standard variable rate of 4.40%;

€190K @ 4.4% over 33 years would incur an interest payment of €170,497 over the term.

€130K @ 4.4% over the same 33 year term term would incur an interest payment of €116,656.

That’s a saving of €53,841.

Play around with Karl Jeacle’s Mortgage Calculator here;

http://www.drcalculator.com/mortgage/

As you are on a variable rate you will not be penalised.
 
Thanks for the reply.

Would I be right in saying if I pay 900 per month now, I'd only be paying just over 600 after the lump sum payment?

Also does anyone know if I can transfer the lump sum via internet banking or have to go into a branch?
 
€622.87 according to Karl.

I have transferred payments via internet banking with Danske without issue.
 
Thanks. Do you know if there's a limit in the amount I can transfer using internet banking?
 
Transaction Daily Limit

Personal Users Business Users**
Overall cumulative limit* EUR1,050,000 EUR1,600,000
AIB Top Up Service EUR220 EUR220
International Payments EUR5,000 EUR30,000
Other Funds Transfers (Intra & Inter Account)*** EUR5,000 EUR30,000
Bill Payment EUR10,000 EUR30,000
Maximum Transfer amount (between your nominated AIB accounts) EUR1,050,000 EUR1,600,000

Source: [broken link removed]
 
Thanks very much. Which one would apply here? This one?...
Maximum Transfer amount (between your nominated AIB accounts) EUR1,050,000 EUR1,600,000?
 
Its the €5000 limit that applies, AIB will charge you for every individual transaction, bless them.
Leave your mortgage term the same and just ask them to reduce the repayment amount, its the best strategy as it minimises your repayment amount. You can always make extra repayments any time you want if you are still able to.
 
I have a variable rate mortgage with AIB, approx €190,000 left. I'm considering paying a lump sum of 60k off.

...

Would this mean a big savings on interest? .

The only right way to assess this is to calculate the interest saved every year. To say "That’s a saving of €53,841 over 33 years" is meaningless as it ignores the time value of money

€1 saved in 2014 is completely different from €1 saved in 2047.

If you are paying 4.5% interest and you pay off €60,000, you will save €2,700 over the next year. That is the correct way of looking at it.

Brendan
 
To say "That’s a saving of €53,841 over 33 years" is meaningless as it ignores the time value of money

For simplicity, it was a calculation that ignores the time value of money and any other factors, admittedly though over 33 years, that might be too simple.

Rather than call it a saving, would it be considered meaningless had I said that’s €53,841 that you will not have to pay in interest over the next 33 years.It must at least give the O/p something to think about.

Perhaps a simpler answer to the question asked is ‘’yes, it would mean big savings on interest’’
 
would it be considered meaningless had I said that’s €53,841 that you will not have to pay in interest over the next 33 years.

I was being kind, calling it "meaningless". It's very misleading.

The OP may well think "Great for €60,000 I can save €53k interest. That's a return of 90%"


You can't add apples and oranges and grapes and say 53,841 fruits. You can, but it's meaningless.

It's a saving of 2014€ 2700 , plus 2015€ 2,700,+ 2016€2,700 etc.
 
The only right way to assess this is to calculate the interest saved every year. To say "That’s a saving of €53,841 over 33 years" is meaningless as it ignores the time value of money

€1 saved in 2014 is completely different from €1 saved in 2047.

If you are paying 4.5% interest and you pay off €60,000, you will save €2,700 over the next year. That is the correct way of looking at it.

Brendan

I don't agree that it's meaningless. The calculation twofor1 did is correct - perhaps a one-line addition at the end might help - "The value of the €53,841 will be considerably less by the end of the 33 years than what it is now."

But the calculation is not meaningless.
 
What is the meaning of it?

Over 33 years, he will save 53,841 what? . If he had a 20 year mortgage, it would be only 40,000 somethings. So should that change his view?

The figure means nothing at all and is of no use in the context of answering the question "should I pay a lump sum off my mortgage?" And it may be misleading.
 
The original poster has €60,000 to invest and can evidently afford to invest it for a very long time. Any decision s/he makes will be affected by inflation. If s/he decides to stuff it into a mattress instead, the eventual "return" will be €60,000. But the value of that €60,000 will be significantly less than what it is now. The only way to illustrate the effect of inflation would be to assume a rate of inflation and reduce the €60,000 by this rate for 33 years. It would illustrate the point.
 
OK

Let's look at the main options which the OP has

1) Put it in a mattress
2) Put it on deposit at 1% (net after tax)
3) Pay it off the mortgage at 4.5%

The term of 33 years is simply irrelevant to the decision.
Would the advice be any different if the term was 23 years or 43 years? If we do the apples and oranges calculation, we would calculate that he would save 43,000 (apples and oranges and grapes - I refuse to call them €) . If the term remaining is 43 years, he would save 63,000 (apples and oranges and grapes). Does this make any difference? Of course, it doesn't.

This year, he will save 3.5% of €60,000 or €2,100. This is the key financial issue to be considered. And the only financial issue.

After that, he should look at the other issues, to see if there is some other reason which suggests an alternative use

  • Invest in shares instead of paying off the mortgage
  • Keep the money to start a business
  • Keep the money to buy a car or to trade up
 
Pay it off if you can and also keep up the payments, you will be astonished at how much both will impact your mortgage debt and mortgage term, additionally the feel good factor of getting your house into your control is nothing short of fantastic, if you want to be conservative pay a smaller lump sum off and a larger monthly payment, that way you are not losing control of all your lump, additionally your bank may agree to release the lump sum out of course reduction or a part thereof back to you should you require this into the future, worth clarifying at least.

I note you want to reduce the monthly payments so this is just another point of view in your decision making process.
 
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