Paying lump off Tracker Mortgage or State Savings - options

[mloc]

I have a tracker mortgage with Pepper Finance.
It currently stands at approx €210,000 with 222 payments remaining. Current repayment is €1,001 per month (€97 of which is interest, per Pepper)
The tracker rate is .50% above ECB so my interest is .55%.

I was recently left money and am considering paying €60k off the the mortgage. Another option I considered for the savings is to put it into a State Saving Account for 10 yrs which will deliver 25% interest on the €60k if the savings stay in place for the 10 yrs.

Can anybody tell me if I'm missing any details in my choices which I see as:

1. Pay €60k off €210k and have a reduced monthly repayment of approx €713 for the remaining 222 payments.
2. Pay €60k off €210k and reduce the term to approx 145 payments (according to Pepper).
3. Do neither of the above and put the money into the 10 yr State Savings option for 25% interest.

I'm not going to get another chance at making such a difference to my mortgage or savings. Can anybody see if any 1 option stands out as better then the others. (1 and 2 look the same to me).

Many thanks

 

[Sarenco]

That really is an incredibly low mortgage rate.

Is the mortgage secured on your PPR and, if so, are you entitled to mortgage interest relief?

You can really only compare the (after-tax) rate on an instantly accessible deposit with a variable rate mortgage. Comparing a variable rate to a 10-year fixed rate is not an apples-to-apples comparison.

 

[44brendan]

You can really only compare the (after-tax) rate on an instantly accessible deposit with a variable rate mortgage.

But the OP does not have a VR mortgage!! The obvious answer as to which of the 3 options would give you the better return is option 3. Given the low tracker rate there is no case to be made for paying down your mortgage as virtually any comparable secure investment would give you a better return. Have you maximized your pension investments. If not you should consider AV's or other pension related investments if you are in a position to put these funds away until retirement.

 

[Sarenco]

The OP certainly does have a VR mortgage - a tracker is simply a type of variable rate mortgage where the rate is tied to an external (variable) rate.

Assuming the mortgage is secured on the OP's PPR and the OP is not entitled to MIR, the question is really whether the OP could get a rate of interest, after DIRT and PRSI (if applicable), on an instantly accessible sight deposit above 0.55%. Even then, the deposit is not entirely risk free (even if guaranteed by the State) so you are taking on some degree of risk by not simply paying down the debt.

Any other form of investment, however tax efficient, will be subject to additional risks (market, default, term, etc.).

Option 3 (ten-year savings bond) may well turn out to be the best option but you will only be able to tell that with the benefit of hindsight. Interest rates (including the ECB refi rate) could increase very significantly over the next ten years, in which case the 10-year savings bond won't look like such a smart investment.

 

[trasneoir]

1. Pay €60k off €210k and have a reduced monthly repayment of approx €713 for the remaining 222 payments.
2. Pay €60k off €210k and reduce the term to approx 145 payments (according to Pepper).
Can anybody see if any 1 option stands out as better then the others. (1 and 2 look the same to me).

Option 2 gives you less flexibility than option 1.

Imagine in two years time you were to experience a change in circumstances, and could only afford €800 a month. With option 1, you would be at Pepper's mercy and end up losing your tracker rate. With option 2, you can pay a minimum of €713, and "overpay" without penalty to shorten your term if/when you choose to.

Needless to say, read the fine print on anything you are asked to sign very carefully.

 

[mloc]

Thanks for the replies.
It is a mortgage on my PPR and Pepper don't apply mortgage interest relief (I just checked) so I'll have to ring revenue commissioners for clarification on that one, although the mortgage is over 10 yrs old and I thought you only get mortgage interest relief for the first 7 years of your mortgage??

Based on the points made, the savings bond looks like the best option. Money can be taken out with 7 days notice but on checking, they dissentivise (spelling!) you from doing this by applying a low interest rate in the first years of the 10 yr savings bond. The interest they give you is as follows:
Yr1 .1% / Yr2 .5% / Yr3 1.1% / Yr4 2.5% / Yr5 4% / Yr6 6% / Yr7 9% / Yr8 12% / Yr9 18% / Yr10 25%

I'm not a finance person but in terms of investing/saving the money, I haven't seen any other options with as good a return as the 10 Yr State Savings with such minimal down side risk to losing the capital amount.

Has anybody seen any other options that may be worth looking at?

 

[Sarenco]

You should definitely check out the position in relation to mortgage interest relief.

If you started paying the mortgage in 2003 or earlier, your entitlement expired in 2009.

For a mortgage taken out between 1 January 2004 and 31 December 2012, your entitlement to relief will continue until the end of 2017.

You should also bear in mind that the relief increases significantly on marriage.

To be honest, I don’t think the 10-year State Savings bond adequately compensates you for the term risk involved (i.e. the risk that inflation and interest rates will increase significantly over the term of the bond).

If I was in your position, I think I would probably put around €25k in an on-demand deposit account with RaboDirect (AER 1.25%) and the balance in a 90-day notice account with RaboDirect (AER 1.45%). Rabo is one of the safest banks in the world and the deposits would be fully guaranteed by the Dutch government so the default risk is negligible.