Should I cash Solidarity Bond early, or increase mortgage to keep them

Daisy987

Registered User
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Hi,
I have invested 20k in Solidarity Bonds back in 2012. Will get back 30K in 2022 (10k profit no dirt tax).
We are in the process of buiyng a house for 260k, sale agreed. Would have 130k cash towards the price ,if I pulled out of bonds now and loose the future profit, and would need to borrow 130k. Other option is to keep the bonds and borrow 150k instead. So, after 5 years, I would take that 30k off the loan.

have been approved in principal with BOI for 130K/ 25 years already. Fixed for 3 years @3.1%.

I know BOI is not favourite/best according to this forum. The problem is we were refused by AIB already based on our work contracts ( says long term full time = key word "permanent" isn't on it ).

Is it worth my while?

thanks!
 
Can you get a mortgage of 150K? If so, what is the interest rate?
Because if you can only get 130K then none of the below applies.

If you borrow at 3.1%, it is costly you 620 in interest a year. Assuming that you get the same rate after the 3 year fixed, then it will cost 3100 in interest ( which is less than the 10K you would get leaving the Bond in place
If after 3 years rates goes up to say 5.1, it will cost you 1020 per year, so 3900, still less than the 10K

On the face of it , it looks better to leave the bond in place, however:
- Will you get a mortgage of 150K?
- Can you comfortably afford a mortgage of 150K?
 
Blinder thanks for reply!

The difference in mortgage repayments would be less than 100 euro/month and BOI online calculator shows the same 3.1% fixed rate.

I have applied for 150k yesterday so should find out approved or not next week. If its approved should I consider fixing for 5 years?
 
A little difficult to work out your question but I think what you are asking for is is it better to borrow €150k now and pay a lump sum off the mortgage in 2022 or is it better to take €20k now (since you would be penalised that I think) and start with a lower mortgage.

For the sake of convenience I am going to assume the same fixed interest rate applies to both and will do so for 5 years. That is not a very safe assumption but it makes it difficult to calculate otherwise!

I would suggest using an online calculator such as this one to play with the figures yourself as you will be better able to provide useful input to it: https://www.drcalculator.com/mortgage/ie/

Using that with the following parameters
Principal: €150,000
Interest: 3.1%
Term: 25 years
gives an overall cost of €215,743 (€65,743 in interest over the 25 years)
and a monthly repayment of €719

Principal: €130,000
Interest: 3.1%
Term: 25 years
gives an overall cost of €186,977 (€56,977 in interest over the 25 years)
and a monthly repayment of €623

So based on that the cost of borrowing the additional 20k works out to €8766 in interest and nearly €100pm on your repayments.

Repaying a lump sum of €30k in 60 months (5 years) time would provide a considerable saving on the overall cost of a €150k mortgage. Plugging that number into the calculator gives you a saving on interest of €20,859.

Based on that it does look like a good idea to hold onto it.

However...
If you can afford to comfortably pay €719 pm for the higher mortgage amount to hang onto your bond then the question is why pay only €623 for the lower mortgage? If you were to go for a 20 year term at that rate instead of 25 you would make a similar saving. Alternatively if pre-payment was an option you could keep the term but still benefit from accelerating your balance reduction.

The other point to consider is whether you would be wiping all of your savings doing this - you may want to place a value on the bird in the hand, having some savings is generally preferable.
 
so-crates, yes you got my question correct! english is not my native language...

thanks for all your calculations

i think its 3.3% rate to fix it for 5 years
 
How likely Irish banks will drop their variable rates before ECB starts raising interest rates?
 
You must ignore repayments in your calculations as they include capital and interest.

The only way to work this out is to compare the interest cost of both over the next 5 years.
  • The repayments are irrelevant
  • What happens after 5 years is irrelevant
  • The term of your mortgage is not relevant

If you cash the solidarity bonds now, do you lose all the profit or do you get some return?

It's one of the reasons I advise strongly against these. People can't plan 10 years ahead.

Assuming, you get no return if you cash now, you have €20k which will be worth €30k in 5 years.

If you borrow €20k @3.1% for 5 years, and roll up the interest, it would amount to €23, 298.

So it's clearly correct to borrow the money at 3.1%.

Even if interest rates rise to 6% for the last two years, it would amount to €24, 627. So it's still clearly correct to increase your mortgage.

The complicating factor
Borrowing the extra €20k might increase your Loan to Value and thus increase the interest rate on the whole loan. If, for example, it increased it by 0.5%

So it would be €20k @3.1% for 5 years which is €3,298
+
€130k @0.5% for 5 years which is €3,282

So it would still be better to leave the money where it is.

Brendan
 
thanks Brendan,

If I cashed bonds now, all I get is €500 in return...If I waited to pull out till Nov 2017, will get 10% return , but the house won't wait...

Borrowing 20k more will bring LTV to 57% (with 130k its @50%)
 
I have invested 20k in Solidarity Bonds back in 2012.

That only changes it a little.

So you are getting a return of €9,500 by not cashing now.
You are getting a return of €8,000 by not cashing in November.

I don't think that the LTV changes the rate on the whole mortgage. (BoI seems to have stopped quoting rates on their website in an easy fashion.)

So you are getting a return of at least €8,000 for a cost of €3,298. It's not close.

Keep the bonds if you can.

Brendan
 
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