Shrugselent
Registered User
- Messages
- 3
Age: 36
Status: Single, no children.
Annual gross income from employment or profession: € 60,000
Monthly take-home pay: €3,022 (After tax and pension contributions)
Type of employment: Private sector employee.
In general are you:
(b) saving?
Rough estimate of value of home €350,000
Amount outstanding on your mortgage: €225,500
What interest rate are you paying? 2.95% (variable - AIB)
Other borrowings – car loans/personal loans etc: None
Do you pay off your full credit card balance each month? N/A (no credit card)
Savings and investments: Cash: €22,000
Do you have a pension scheme? Yes, through employer. Current value approximately €30,000. I recently increased contributions. I now put in 15% of salary, employer puts in 5% so that's €1,000 contributions per month going forward.
Do you own any investment or other property? No.
Life insurance: Just the reducing balance policy I had to get when taking out the mortgage. As I am single, and I don't have kids or other dependents this policy is only of benefit to the bank really.
What specific question do you have or what issues are of concern to you? Please see below.
Hi I am a long term reader of the Askaboutmoney forums, but this is my first time posting.
I bought a house in 2016. I took out a 31 year mortgage (approximately 29.5 years remaining). When I started the mortgage payment was €1002 per month but it dropped a few months back thanks to the AIB rate change and is currently €961 per month.
My monthly take-home pay is €3,022 (after tax and pension contributions). Of this, I put aside €1,000 to 'pay-myself first' which leaves me €2,022 for monthly expenses (from which the €961 mortgage is paid etc).
My initial goal (which I have almost reached) was to build up a cash-cushion of €25,000 as rainy-day/emergency fund (representing one year of expenses).
My question concerns the next step of my plan. I am thinking that once I have the €25,000 cash cushion that then I should take half of my €1,000 'pay-myself first' money, and start making additional payments of €500 per month against the mortgage.
My thinking:
(1) If I make an additional €500 per month payment then I will pay my mortgage off quicker, i.e. in approximately 16 years (at about age 52) rather than 29 years (at 65 age).
(2) I save on mortgage interest.
(2) The LTV (based on on the value above) should drop below 50% by 2021 which may make it easier for me to re-mortgage at a lower rate sooner / increase my options.
(3) I understand from reading other posts on this forum that when extra payments are made AIB will keep the mortgage term at the original 31 years and simply reduce the monthly payments. So in effect my 'minimum payment' which is currently €961 per month will be recalculated after each extra €500 payment I make. So after about a 13 months or so of those extra payments my 'minimum payment' will be something like €933 per month rather than €961. I like the idea of the minimum payment dropping month by month. I think it would be a good psychological 'win'. Although of course to ensure that I am actual paying an extra €500 per month I will of have to adjust the €500 upward every month to account for the gradual drop in the minimum payment, so that overall I am still paying €1,461 per total month.
(5) I will still be able to save the other half of my 'pay-myself first' money, which should mean that I have €6,000 per annum of additional cash savings to cover unexpected expenses (without touching the emergency fund) and to put towards a sinking fund for car replacement. My car is 12 years old but it is is in very good condition with very low mileage. I bought it used from a family friend so I know the mileage is genuine. I don't anticipate it should give me any trouble in the next few years. As long as the insurance company doesn't refuse to insure it due to age it should easily last me another 5 years.
(6) The cash cushion : €25,000 in total of which €15,000 will be kept in Ulster Bank's Special Interest Deposit Account (0.85%), €4,000 in the Ulster Bank current account (to avoid bank charges I must keep €3,000 minimum, and I use €1,000 as a buffer above that minimum), which leaves €6,000 which I will keep in the AIB current account (from which the mortgage is paid - no AIB fees b/c of the mortgage).
(7) I have large mortgage ebt, and a long repayment term (29 years remaining). While we are paying higher rates in Ireland than other Eurozone countries, the Eurozone rate is still very low. It is very probable that over the next 30 years interest rates will be higher than they are today, and likely sooner than later. It would be best to pay-it down as soon as possible at these lower rates rather than leaving it as a hostage to fortune.
(8) But by the same token, if I don't make the extra payments then I would have extra cash to add to the cash-cushion/emergency fund or to invest.
(9) I can stop making the additional payments if I feel they are squeezing me too much. Howver I won't be able to get them back as cash.
Other Points I have considered, and my thoughts:
(i) Inflation. I would be paying off €500 early. Due to inflation €500 at the current time should be worth a lot more in purchasing power terms than €500 in the future. So in a way the value of the debt is being eroded by inflation anyway. Does it make sense then to take the €500 in 2018, 2019 etc and pay it off the mortgage which otherwise would be paid in 2046, 2047? But against this, if I don't pay it off the mortgage then what do I do with it instead. If I just put it in cash deposit account it will definitely get eaten away by inflation. At least if I put it against the mortgage I am saving 2.95% pa on it. I would need a gross return of 6.02% before tax on dividends to get a 2.95% net of tax return (assuming a 51% tax rate) or a gross deposit rate of rate of 5% to get to net 2.95% (assuming DIRT at 37% and 4% PRSI). So it doesn't seem such a bad use of the money even with inflation.
(ii) Opportunity cost: Invest it all in the stock market? But I already have a pension which is investing in the stock market every month so perhaps that would be too much exposure.
(iii) Opportunity cost: Loss of access. Payments to mortgage are locked away. I can't access them again unless I effectively re-mortgage.
(iv) Opportunity cost: If an opportunity arises (say another crash in the value of the stock market) then if I had saved the cash rather than put it into the mortgage then I would have a cash to invest. Against that, human nature being what it is I would probably be just as frightened as everyone else in the market and want to hold on to the cash if there was a crash rather than invest. Or I probably would just not wait and invest it rather than holding out trying to time the market.
QUESTIONS:
So that's where my thinking is at. I would welcome a second opinion. What's your view?
(a) Is my cash-cushion/rainy-day/emergency fund of €25,000 reasonable?
(b) Assuming it is, where would you put the €25,000 to earn the best return (on cash)? (Note: the purpose of the €25,000 is an emergency fund so it must be reasonably liquid, and can't be at risk so I don't the stock market is an option).
(c) What would you suggest I do with the other €500 per month which I will be able to save going forward? Just keep it as cash or use it to invest? If invest, in what? (I had originally intended on using the €500 to buy units in an S&P500 ETF through DeGiro, no fees, CGT treatment, a buy-and-hold strategy. Unfortunately I can't do that now because of that change in EU regulations. I don't like UCITS funds because the tax treatment seems too unfavourable to make the market risk worthwhile.)
(d) Do you think I am doing the right thing in making extra payments against the mortgage? The current 2.95% is a relatively low rate of interest on borrowings. Should I just save/invest the full €1,000 of 'pay-myself' monies elsewhere and hope I get a better return? The advantage would be that I should still have access to those funds if they were (say) invested in the stock market, and the return should/could be higher. The disadvantages is that returns could be negative , and even if they were positive I would have to pay tax on the returns (lowering the effective rate of return).
(e) Am I being silly? Life is short and the future is promised to no man. Should I just spend the extra €500 a month on having fun and live it up a little?
(f) Any other thoughts?
Thoughts and suggestions please. Thanks for your time.
Shrugselent
Status: Single, no children.
Annual gross income from employment or profession: € 60,000
Monthly take-home pay: €3,022 (After tax and pension contributions)
Type of employment: Private sector employee.
In general are you:
(b) saving?
Rough estimate of value of home €350,000
Amount outstanding on your mortgage: €225,500
What interest rate are you paying? 2.95% (variable - AIB)
Other borrowings – car loans/personal loans etc: None
Do you pay off your full credit card balance each month? N/A (no credit card)
Savings and investments: Cash: €22,000
Do you have a pension scheme? Yes, through employer. Current value approximately €30,000. I recently increased contributions. I now put in 15% of salary, employer puts in 5% so that's €1,000 contributions per month going forward.
Do you own any investment or other property? No.
Life insurance: Just the reducing balance policy I had to get when taking out the mortgage. As I am single, and I don't have kids or other dependents this policy is only of benefit to the bank really.
What specific question do you have or what issues are of concern to you? Please see below.
Hi I am a long term reader of the Askaboutmoney forums, but this is my first time posting.
I bought a house in 2016. I took out a 31 year mortgage (approximately 29.5 years remaining). When I started the mortgage payment was €1002 per month but it dropped a few months back thanks to the AIB rate change and is currently €961 per month.
My monthly take-home pay is €3,022 (after tax and pension contributions). Of this, I put aside €1,000 to 'pay-myself first' which leaves me €2,022 for monthly expenses (from which the €961 mortgage is paid etc).
My initial goal (which I have almost reached) was to build up a cash-cushion of €25,000 as rainy-day/emergency fund (representing one year of expenses).
My question concerns the next step of my plan. I am thinking that once I have the €25,000 cash cushion that then I should take half of my €1,000 'pay-myself first' money, and start making additional payments of €500 per month against the mortgage.
My thinking:
(1) If I make an additional €500 per month payment then I will pay my mortgage off quicker, i.e. in approximately 16 years (at about age 52) rather than 29 years (at 65 age).
(2) I save on mortgage interest.
(2) The LTV (based on on the value above) should drop below 50% by 2021 which may make it easier for me to re-mortgage at a lower rate sooner / increase my options.
(3) I understand from reading other posts on this forum that when extra payments are made AIB will keep the mortgage term at the original 31 years and simply reduce the monthly payments. So in effect my 'minimum payment' which is currently €961 per month will be recalculated after each extra €500 payment I make. So after about a 13 months or so of those extra payments my 'minimum payment' will be something like €933 per month rather than €961. I like the idea of the minimum payment dropping month by month. I think it would be a good psychological 'win'. Although of course to ensure that I am actual paying an extra €500 per month I will of have to adjust the €500 upward every month to account for the gradual drop in the minimum payment, so that overall I am still paying €1,461 per total month.
(5) I will still be able to save the other half of my 'pay-myself first' money, which should mean that I have €6,000 per annum of additional cash savings to cover unexpected expenses (without touching the emergency fund) and to put towards a sinking fund for car replacement. My car is 12 years old but it is is in very good condition with very low mileage. I bought it used from a family friend so I know the mileage is genuine. I don't anticipate it should give me any trouble in the next few years. As long as the insurance company doesn't refuse to insure it due to age it should easily last me another 5 years.
(6) The cash cushion : €25,000 in total of which €15,000 will be kept in Ulster Bank's Special Interest Deposit Account (0.85%), €4,000 in the Ulster Bank current account (to avoid bank charges I must keep €3,000 minimum, and I use €1,000 as a buffer above that minimum), which leaves €6,000 which I will keep in the AIB current account (from which the mortgage is paid - no AIB fees b/c of the mortgage).
(7) I have large mortgage ebt, and a long repayment term (29 years remaining). While we are paying higher rates in Ireland than other Eurozone countries, the Eurozone rate is still very low. It is very probable that over the next 30 years interest rates will be higher than they are today, and likely sooner than later. It would be best to pay-it down as soon as possible at these lower rates rather than leaving it as a hostage to fortune.
(8) But by the same token, if I don't make the extra payments then I would have extra cash to add to the cash-cushion/emergency fund or to invest.
(9) I can stop making the additional payments if I feel they are squeezing me too much. Howver I won't be able to get them back as cash.
Other Points I have considered, and my thoughts:
(i) Inflation. I would be paying off €500 early. Due to inflation €500 at the current time should be worth a lot more in purchasing power terms than €500 in the future. So in a way the value of the debt is being eroded by inflation anyway. Does it make sense then to take the €500 in 2018, 2019 etc and pay it off the mortgage which otherwise would be paid in 2046, 2047? But against this, if I don't pay it off the mortgage then what do I do with it instead. If I just put it in cash deposit account it will definitely get eaten away by inflation. At least if I put it against the mortgage I am saving 2.95% pa on it. I would need a gross return of 6.02% before tax on dividends to get a 2.95% net of tax return (assuming a 51% tax rate) or a gross deposit rate of rate of 5% to get to net 2.95% (assuming DIRT at 37% and 4% PRSI). So it doesn't seem such a bad use of the money even with inflation.
(ii) Opportunity cost: Invest it all in the stock market? But I already have a pension which is investing in the stock market every month so perhaps that would be too much exposure.
(iii) Opportunity cost: Loss of access. Payments to mortgage are locked away. I can't access them again unless I effectively re-mortgage.
(iv) Opportunity cost: If an opportunity arises (say another crash in the value of the stock market) then if I had saved the cash rather than put it into the mortgage then I would have a cash to invest. Against that, human nature being what it is I would probably be just as frightened as everyone else in the market and want to hold on to the cash if there was a crash rather than invest. Or I probably would just not wait and invest it rather than holding out trying to time the market.
QUESTIONS:
So that's where my thinking is at. I would welcome a second opinion. What's your view?
(a) Is my cash-cushion/rainy-day/emergency fund of €25,000 reasonable?
(b) Assuming it is, where would you put the €25,000 to earn the best return (on cash)? (Note: the purpose of the €25,000 is an emergency fund so it must be reasonably liquid, and can't be at risk so I don't the stock market is an option).
(c) What would you suggest I do with the other €500 per month which I will be able to save going forward? Just keep it as cash or use it to invest? If invest, in what? (I had originally intended on using the €500 to buy units in an S&P500 ETF through DeGiro, no fees, CGT treatment, a buy-and-hold strategy. Unfortunately I can't do that now because of that change in EU regulations. I don't like UCITS funds because the tax treatment seems too unfavourable to make the market risk worthwhile.)
(d) Do you think I am doing the right thing in making extra payments against the mortgage? The current 2.95% is a relatively low rate of interest on borrowings. Should I just save/invest the full €1,000 of 'pay-myself' monies elsewhere and hope I get a better return? The advantage would be that I should still have access to those funds if they were (say) invested in the stock market, and the return should/could be higher. The disadvantages is that returns could be negative , and even if they were positive I would have to pay tax on the returns (lowering the effective rate of return).
(e) Am I being silly? Life is short and the future is promised to no man. Should I just spend the extra €500 a month on having fun and live it up a little?
(f) Any other thoughts?
Thoughts and suggestions please. Thanks for your time.
Shrugselent