Pay down tracker mortgage early or pay Warehouse?

H

Hesseny

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Hi there,
I have a tracker mortgage with approx. 140k left over 8 years and also a " warehouse" amount of 130k. My tracker is set at .75% over ECB so the rate now is 3.25%. This will cost approx. 4k in interest payments this year after paying €1200 for the past 10years or so.
I have never given much thought to the Warehouse part of the mortgage as it doesnt accrue interest and just sits there to be paid off at the end of the mortgage (perhaps by downsizing or by savings). Recentli I saw on this platofrm that the bank may be giving a bonus to any payments made to the warehouse of an additional 20% top up.I rang my bank and they did indeed conform this. The catch for me is that the 10 year anniversary of the split mortgage is in 20 months time and this incentive stops then.
After putting the kids through college etc., my partner and I are managing to save again and have 50 k savings at the moment and probably the same again in 2 more years. My question is should I focus on paying down the tracker or fix the tracker and put money in the warehouse loan to take advantage of the bonus scheme while its there?
KR, Hesseny
 
Update from Paul F. For split mortgages with AIB, it appears that any lump sums must be applied to the warehouse first.
Warning Note: All lump sum payments must be applied firstly to the Split Loan Account. If the amount of the lump sum payment is greater than the balance required to fully redeem the Split Loan Account, the remainder of the lump sum payment will then be applied to the Base Loan Account(s).
Click to expand...

Other lenders may or may not have a similar rule. Read your Split Mortgage agreement and ask your lender. Even if the agreement has a rule like this, they may be prepared to ignore it in some cases.


An interesting question.

Which lender is it? It sounds like AIB?

So if you pay €50k off the warehouse now, you will get a further €12,500 written off the warehouse. ( I think it's 25% top up)
If you pay it off the active part of the loan you will save 3.75% for 8 years. That will save you about €17,000 interest over the remaining 8 years. (The 3.75% could go up or down, but it's the best rate to use to do the comparisons.)

So it seems like you should clear the active part of the mortgage.

Brendan
 
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Now you are down to €90k at ECB +0.75% or fix for 5 years at 4.2% (or thereabouts depending on your LTV)

Hesseny said:
have 50 k savings at the moment and probably the same again in 2 more years.
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Stay on the tracker and pay your savings off the active mortgage as you accumulate them. No need at all to wait for two years and pay off a lump sum. (This didn't matter so much when the rate was 0.75% but it does matter now.)

If you fix , you could face early repayment penalties on the €50k. So don't fix.

Brendan
 
So after two years, you mortgage will be down to about €30k with 8 years to go.
Keep overpaying it and it will be cleared well ahead of the deadline.


Then start clearing the warehouse so that in 8 years, you will have either cleared the warehouse entirely or will have a small enough balance left that you will be able to clear over the following few years.

Of course, the warehouse is an interest-free loan, so you might choose to save the money somewhere else and earn interest on it and then use the saved money to clear the warehouse when the mortgage term ends.

Brendan
 
So back to my original calculation.
€50k now for 8 years saves you about €17k in interest.
But if pay off the mortgage early, you won't be facing the interest for the full 8 years.

Does this affect the calculations? It does a bit, but probably doesn't bridge the gap between €17k and €12,500 so I think it's still right to clear the active part.
 
Brendan Burgess said:
If you pay it off the active part of the loan you will save 3.75% for 8 years. That will save you about €17,000 interest over the remaining 8 years. (The 3.75% could go up or down, but it's the best rate to use to do the comparisons.)
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Are you sure you've got this right?

First of all, it seems like you used a rate of 4.25% (since €50,000 x 4.25/100 x 8 = €17,000).

Secondly, the above approximation isn't appropriate since we are talking about the entire remaining term (8 years), and not e.g., the next 4 years of a 30-year mortgage.

As per this calculator, the total amount of interest saved (assuming a rate of 3.75%) would actually be €7,950

Mortgage Calculator UK

Free online mortgage calculator specifically customized for use in the UK including amortization tables and the respective graphs.
www.calculator.net www.calculator.net

And if @Hesseny parked their €50k now in a high-yielding savings account (with a term of 18 months or less), they might make an extra €3,000 over the next 18 months. (But if you do this make sure that you keep en emergency fund of 3 to 6 months' living expenses outside of the fixed-term deposit account.)

All of that suggests to me that paying €50k (or more) off the warehoused part in 18 months is the better choice. Thoughts?

(A fuller analysis is more complicated because we'd have to account for the fact that paying a lump sum off the active part now would reduce the monthly repayments, which would free up some cash that could either be used to overpay further or to pay a bit off the warehoused part.)
 
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OK, so I have changed my mind.
Place it in a savings account but make sure you can get it out before the deadline.
Then pay it off the warehouse.

The 25% bird in the hand swings it.

The paying it off the active mortgage assumed a return of 3.75% for the full 8 years. But if you pay it off and then another €50k, you would not be getting a return of 3.75% for the full 8 years.

Brendan
 
Brendan Burgess said:
The paying it off the active mortgage assumed a return of 3.75% for the full 8 years. But if you pay it off and then another €50k, you would not be getting a return of 3.75% for the full 8 years.
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Yes, that's what I was getting at when I mentioned the approximation (because I thought that you had used €50,000 x 4.25/100 x 8 = €17,000 to arrive at €17k). Either way, the reducing balance has to be factored in, which is why approximations won't do here.

Brendan Burgess said:
50 @2.68% = €1,340 less tax (40%?) = €800 per year or €1,200 for 18months.
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Oops, yeah, 2.68% looks like the best rate for 18 months (not 3%). But DIRT is now 33%. So, we're looking at about €1,340 in net interest over 18 months. I was thinking that @Hesseny had €100k right now for some reason.
 
Brendan Burgess said:
I have no idea how these foreign deposits are taxed. But we don't need to know exactly. Approximations will do. :)
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I thought (assumed!) that the only tax liability on such deposits for an Irish resident was DIRT. Perhaps it's not as simple as that.

Brendan Burgess said:
50000*(1.0375)^8 = €67,123.40

It's compounding the interest saving.
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Paul F said:
the reducing balance has to be factored in, which is why approximations won't do here
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Brendan Burgess said:
But I just worked out the interest compounded on the €50k , which is the corollary of the reducing balance.
Click to expand...

I need a bit more time to get my head around this (i.e., why the two approaches don't deliver the same figure) but, assuming 8 years at 3.75%:
  • The total interest on a €140k mortgage is €22,265
  • The total interest on a €90k mortgage is €14,313
– an interest saving of about €7,950. As you say, using the €50k to pay a lump sum off the warehoused part (in 18 months) seems like a better option.
 
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@Brendan Burgess A separate question while I chew on all of this. If @Hesseny cleared their tracker mortgage in 5 years, would the warehoused part then become due immediately? Or would it only become due 3 years later, i.e., 8 years from now?

Do lenders (or loan servicers like Pepper) have a default payment plan that they offer to the borrower when the warehoused part becomes due? Or is it the borrower's sole responsibility to arrange finance/build up savings to pay off the warehoused part?
 
Hesseny said:
Almost certain that the warehouse bonus is 20% and not 25%
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Check out your split mortgage agreement. Ask AIB for a copy of it if you don't have it.

I assume it's a standard wording taken from another contract - the wording is poor, but the example is clear.

In the event that you wish to fully or partially redeem your Split Loan Account prior to the 1st of the month following the 10th anniversary (but after the 1st the month following the 5th anniversary), if applicable, the Lender will consider your contribution to be 80% of the overall reduction applied to the outstanding balance on your Split Loan Account with the lender making up the 20% difference (Lender Further Reduction).

For example; if you lodge E8,000 to your Split Loan Account, your outstanding balance on your Split Loan Account will be reduced by EIO,OOO. Please note that this will only apply in the event that the lodgement by you is a minimum amount ofEI,OOO.


Repay €8,000
Top up €20 = 25% of €80
Total reduction: €10,000

But the €20 is 20% of the total of €100.

Brendan
 
Paul F said:
If @Hesseny cleared their tracker mortgage in 5 years, would the warehoused part then become due immediately?
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No. It's not due until the 8 years is up.

The AIB split was very different from all the others. There was no provision for a review.

If you paid off a ptsb split early, they would probably say "Now you can resume full repayments on the warehouse"
 
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