With rising deposit interest rates is it time to stop overpaying low interest mortgages?

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smndly

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I currently have a mortgage of €248000 at 2.2% fixed until 2027 with PTSB (originally Ulster Bank). I have a public sector pension. We currently overpay the mortgage by €1000 per month. This is not our forever home and will likely trade up in 4-5 years or so.

I liked the idea of overpaying my mortgage as a risk free tax free savings scheme essentially and to build equity in the house so that when it comes to sell we will have a larger deposit for the next house.

However, now that deposit interest rates are rising and with rates of 3.5% from some providers via Raisin ( net about 2.3% after DIRT) I'm considering stopping my overpayments and instead putting my money on deposit. This would give a slightly better return and also have the advantage of not being tied up as equity when it comes to trading up. In addition if an emergency was to happen I could access this money. Another option I was looking at is government bonds but I'm less clear on how this would work.

Has anyone else made a similar change to their overpayments recently?
 
Can you get a guaranteed return of 2.2% after tax somewhere else? If so do that instead. If not, pay the mortgage.
 
Off topic: one point about trading up.

Don't you need to have 20% deposit in cash?

Having large equity in first house is great, but until first house is sold, the owner can't get their hands on that equity to use as cash deposit for second house.
 
I think your reasoning is correct.

If you can get a net deposit rate close to or in excess of your mortgage rate, then access to cash is worth something.

Brendan
 
I am in the same position as you and will think harder about this if rates increase further.

Pros
  • Currently you would gain a net 10bps vs. overpayments.
  • If rates rise, then you can re-invest the whole deposit fund at the new higher deposit rates.
  • Most importantly, you retain access to the deposit fund for any other purpose once the deposit term is up. For the next few years, you essentially have a DIY offset mortgage.
Cons
  • The banks you invest in via Raisin often look quite odd and probably have high funding costs for a reason. You might encounter difficulty dealing with either Raisin or some other country's deposit guarantee scheme in the event that your deposit institution hits the wall.
  • Administrative hassle of doing your own tax return for DIRT purposes, setting up accounts via Raisin, and handling your more complicated banking affairs. A mortgage overpayment is much cleaner by comparison.
10bps might not be enough for me to overcome the cons. I would have to think again though at 35 or 60bps.
 
There are (so far) very few people who can earn more on deposit after DIRT than their mortgage rate.

But as a general rule the opportunity cost of cash on deposit while holding a mortgage is now a lot lower.

The generic advice of “pay down your mortgage first” may not always apply now.
 
I raised this very topic last year. Apart from uncertainty around future taxation and your own willpower it does make financial sense.

Better to save than to overpay a low fixed rate mortgage in some instances?

A recent post got me thinking are we close to the point where it makes financial sense to save rather than to pay down debt i.e., for some borrowers the return on savings (net of DIRT & PRSI) is greater than overpaying a fixed rate mortgage. There was a point in the past where this strategy...
www.askaboutmoney.com
 
I used to look at this from a mostly mathematical perspective. However from recent experience if you are likely to need cash in the future the financial benefit does not outweigh the inconvenience and stress of dealing with the banks to get your money back in my opinion.

In my scenario, I overypaid a lump sum on my mortgage in the region of 75k a few years ago knowing that in 2 years I would need the cash for home improvements. I naively thought doing an equity release would be easy....it was not. It took 4 months, countless unanswered emails, phonecalls and one formal complaint to get the equity release over the line. My financial position had improved in the 2 years.

The bank was very quick to take my overpayment but not so quick in returning it. As the op is looking to trade up in a few years, the op should carefully consider just saving the 20% deposit and removing the reliance on bank to an extent.
 
DublinHead54 said:
I used to look at this from a mostly mathematical perspective. However from recent experience if you are likely to need cash in the future the financial benefit does not outweigh the inconvenience and stress of dealing with the banks to get your money back in my opinion.

In my scenario, I overypaid a lump sum on my mortgage in the region of 75k a few years ago knowing that in 2 years I would need the cash for home improvements. I naively thought doing an equity release would be easy....it was not. It took 4 months, countless unanswered emails, phonecalls and one formal complaint to get the equity release over the line. My financial position had improved in the 2 years.

The bank was very quick to take my overpayment but not so quick in returning it. As the op is looking to trade up in a few years, the op should carefully consider just saving the 20% deposit and removing the reliance on bank to an extent.
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Proof if ever we needed it that banks solely exist for their own benefit and been attentive to customers needs or requests come rock bottom. I've always felt it prudent to keep savings where possible even at the detriment of paying a high % on small loans.
 
Protocol said:
Off topic: one point about trading up.

Don't you need to have 20% deposit in cash?

Having large equity in first house is great, but until first house is sold, the owner can't get their hands on that equity to use as cash deposit for second house.
Click to expand...

Won't I need to sell my current house anyway prior to trading up? I can't see a bank letting me take out c 3.5x income mortgage when I already have an existing mortgage on my current house. Unfortunately bridging loans no longer exist so it seems impossible to me to trade up without first selling current home. So I don't see any advantage to having the 20% sitting in cash from a trading up point of view.

noelÓm said:
10bps might not be enough for me to overcome the cons. I would have to think again though at 35 or 60bps.
Click to expand...
I think Im in a similar state of mind myself. I would ideally like the savings account to be with a more reputable bank with decent credit rating. It is very easy to overpay the mortgage as things stand. But if deposit interest rates continue to rise during this year I'll definitely consider switching over to savings.
 
smndly said:
Won't I need to sell my current house anyway prior to trading up? I can't see a bank letting me take out c 3.5x income mortgage when I already have an existing mortgage on my current house. Unfortunately bridging loans no longer exist so it seems impossible to me to trade up without first selling current home. So I don't see any advantage to having the 20% sitting in cash from a trading up point of view.


I think Im in a similar state of mind myself. I would ideally like the savings account to be with a more reputable bank with decent credit rating. It is very easy to overpay the mortgage as things stand. But if deposit interest rates continue to rise during this year I'll definitely consider switching over to savings.
Click to expand...

As an immigrant to Ireland from the UK, I am still puzzled as to how it is not possible in Ireland to sell a house and buy another house on the same day. It's really not that tricky, unless there is a long chain of buyers / sellers. Does anyone know why this seems to be so hard (impossible) in Ireland?
 
smndly said:
Won't I need to sell my current house anyway prior to trading up? I can't see a bank letting me take out c 3.5x income mortgage when I already have an existing mortgage on my current house. Unfortunately bridging loans no longer exist so it seems impossible to me to trade up without first selling current home. So I don't see any advantage to having the 20% sitting in cash from a trading up point of view.
Click to expand...

This is not necessarily the case in my experience. I held a mortgage with Bank A, and got a Mortgage with Bank B, which resulted in a LTI of 4.8x income. Bank B assessed my ability to repay mortgage A like a loan rather than capping my lending to a combined 3.5x over both mortgages.
 
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