Money Makeover Mid 30's - Tackle Pension or Mortgage

H

housemurph99

Registered User
Messages
7
Age:
35
Spouse’s/Partner's age:
35

Annual gross income from employment or profession:
E63,000 with 15% - 25% bonus(10k-15k)
Annual gross income spouse:
E38,000 with 10% bonus

Type of employment:
Both private sector employees

Expenditure pattern:
We moved into a new house Jan 2021 and have been spending a lot of money doing it up.
We have circa €6k coming in monthly.

Rough estimate of value of home
E520,000
Mortgage on home
E340K - currently paying 1,220 plus 100 overpayment. Total 1,320
Ulster Bank 2.2% fixed until Jan 2026

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
No CC

Savings and investments:
E30k in Zurich Fund where we also invest €140 children's allowance from Dec 21, so only 5 months premium gone in. 3
Keep 3k in credit union where we use for unexpected items and then top back up to 3k

Do you have a pension scheme?
Yes, I have 90k from my previous employer. My current company does not currently contribute towards pension. I am in the process of setting up PRSA.
Herself has 80k from previous employer. In process of joining company scheme where she will put 5% away and that is matched by the company.

Do you own any investment or other property?
No.

Ages of children:
2 and expecting another in July.

Life insurance:
Basic Mortgage Protection @350k
Job have death in service benefits and income protection.

What specific question do you have or what issues are of concern to you?
Pension? I was planning on a monthly contribution of 10% salary into a PRSA.

Is the mortgage overpayment necessary? It was purely to lower the term of the mortgage from 35 to 30 years.

Children's allowance investment? Should I increase pension instead to take advantage of tax relief?

We are lucky that we have had no child care costs to date. This might change but would be max €600 as we are able to rely on family for dig out.

We went straight into work from school so have had to work hard to be in current position and would like some pointers to achieve better financial situation. Any advice would be greatly appreciated.

Thanks.
 
340k mortgage on a €110k salary is 3 times, which is on the high side.

It's over 4 times the higher salary of €80k if the lower salaried spouse wants to take a career break or quit work.

So I think that to maximise your flexibility, prioritise overpaying the mortgage ahead of the pension.

housemurph99 said:
E30k in Zurich Fund where we also invest €140 children's allowance from Dec 21, so only 5 months premium gone in. 3
Keep 3k in credit union where we use for unexpected items and then top back up to 3k
Click to expand...

With two jobs, you don't really need a fund like that. You are better off paying it off your mortgage, where you get a cost free, tax free and risk free return of 2.2%.

At age 35 with a big mortgage, you should only contribute enough to maximise your employers' contributions. When you have your mortgage at a very comfortable level, you will have much lower mortgage repayments and can then start contributing to your pension fund again.

Brendan
 
What is a comfortable mortgage?

I would say 3 times the higher salary. So about €240k.

Or 50% Loan to Value which is €260k.

Certainly get it down below 60% LTV to make sure you can switch to the cheapest mortgage rate around. That would be €310k or thereabouts so you are not too far off that.

Brendan
 
You have the correct structures and approach and that is half the battle.

You should start your pension. The longer it is investor for, the more impact that compounding can have on it.

Is the Zurich Life plan for future education? If you are putting the children's allowance in it from the beginning, it should ease a future burden on those costs.

You are already reducing your mortgage term. this is something that can be address over the years by gradually increasing the overpayment amount. Your repayments aren't high and the mortgage will be paid off by retirement. With 3 kids life will be expensive, so the capacity to do so may be reduced.

You should look at taking out some private life cover for you and your wife. You have work cover and your pensions will pay out lump sums but the loss of a parent/ spouse is devasting. Having some additional cover can ease any financial issues.


You are in a great place and will do just fine.


Steven
www.bluewaterfp.ie
 
Steven Barrett said:
You should start your pension. The longer it is investor for, the more impact that compounding can have on it.
Click to expand...

A common misunderstanding. I must do a key post on it.

Compounding works on mortgages as well. If you pay off your mortgage early, compounding saves you a multiple of the interest.

Update: Key Post here so I don't have to keep repeating myself:

Key Post - Compounding doesn't just work on pensions - it also works on mortgage overpayments!

Time and time again, posters will trot out the statement "the earlier you start your pension, the longer you have for the power of compounding to work". But this is only half the story. Compounding also works on mortgage overpayments in the same way. If you make an AVC of €1,000 to your...
www.askaboutmoney.com

Brendan
 
Last edited:
Steven Barrett said:
With 3 kids life will be expensive, so the capacity to do so may be reduced.
Click to expand...

Agree fully that 3 kids will make your life expensive over the next 20 years, which is why you should be reducing your future outgoings by paying off your mortgage. You won't be able to access your pension until long after the kids have grown up.

Paying down the mortgage, maximises your flexibility.
 
Brendan Burgess said:
Agree fully that 3 kids will make your life expensive over the next 20 years, which is why you should be reducing your future outgoings by paying off your mortgage. You won't be able to access your pension until long after the kids have grown up.

Paying down the mortgage, maximises your flexibility.
Click to expand...
Brendan, this is a point that I have disagreed with you over on many of these makeovers. There is nothing wrong with reducing debt but it should not be the sole focus. A bit of A and B and C can provide more flexibility than just A.

The OP has 30 years left on mortgage, already reduced it from 35 years. With 3 kids, how quickly do you expect him to be able to pay it down? Knock another 10/15 years off it? What if he needs money in the intervening years? He can't do an equity release. He would be able to draw down his retained pension benefits from age 50.


Steven
www.bluewaterfp.ie
 
Hi Steven

I have done a key post on the topic here:

Key Post - Compounding doesn't just work on pensions - it also works on mortgage overpayments!

Time and time again, posters will trot out the statement "the earlier you start your pension, the longer you have for the power of compounding to work". But this is only half the story. Compounding also works on mortgage overpayments in the same way. If you make an AVC of €1,000 to your...
www.askaboutmoney.com

They are already contributing to his pension! So they have a bit of A.

I don't think that drawing down your pension at age 50 should be part of their financial planning.

I am not concerned with the number of years left on their mortgage. I am concerned that it is a high multiple of their combined salary and an even higher multiple of a single salary.

At age 35, trading up is a much more likely outcome than retiring at age 50.

Brendan
 
I must be missing something here.

They are 35 years old.
They have a 2 year old and another on the way.
They have a mortgage of €340 k which is three times their combined income.
They have €170k in their pension fund.

They are doing very well - but retiring at 50 doesn't seem to be on the horizon.

Ah, are you suggesting stuff the pension fund for the lower paid person, then retire at 50, and use the money to pay off the mortgage?

I think if they pay down their mortgage instead, they have a better chance of the lower paid spouse taking time out or retiring early.

Brendan
 
What is the benefit of an education fund in Zurich when you can gurantee 2.2% by paying extra of the mortgage with the same funds. In doing so they will have a lot smaller mortgage in 15 years time and be in a stronger position to deal with education costs out of their salaries.
Are education funds worth it or just a product that investment firms pull on parents heartstrings with.
 
Cavanbhoy said:
What is the benefit of an education fund in Zurich when you can gurantee 2.2% by paying extra of the mortgage with the same funds.
Click to expand...

Hi Cavnbhoy

Agree fully.
It's a guaranteed 2.2% tax-free! Versus an uncertain return subject to tax.

They would be much better off paying it off their mortgage and keeping a separate mental account of the money if they want to allocate it to their children.

Many people keep a separate fund for third level education. This is usually not a good idea, but definitely wrong when the eldest child is 2 and they have a big mortgage.

Brendan
 
The "invest versus pay down debt" debate is a perennial one around these parts.

My own view is that the return on pension contributions invested in a decent equity fund is highly likely (but not guaranteed) to exceed the weighted average mortgage rate over the same ~30 year term. That is particularly the case when you include the tax relief on contributions, which effectively constitutes an interest free loan from the State.

So, in general, I think it makes sense to maximise pension contributions in priority to paying down a mortgage ahead of schedule. The "use it or lose it" nature of the relief on pension contributions is also relevant.

I don't think your mortgage is uncomfortably high relative to your household (or even your individual) income so I wouldn't have any concerns in that regard.

Conversely, our tax code is such that IMO it generally doesn't make sense to make after-tax investments while carrying a mortgage. So I would re-direct the contributions to the Zurich saving plan to a pension product.
 
Brendan Burgess said:
What is a comfortable mortgage?

I would say 3 times the higher salary. So about €240k.
Click to expand...

Hi Brendan. I'm just curious as to what had you arrive at 3x the higher salary as "comfortable"? It's an interesting question. It seems differing jurisdictions have arrived at different conclusions on what is an appropriate LTI. I wonder what caused the Central Bank here to arrive at 3.5x as opposed to 3, or 4 as is the case in some jurisdictions?
 
The scheduled monthly mortgage payment represents around 20% of the household's monthly income, net of all taxes.

IMO that's very comfortable.
 
I've always worked affordability on this basis

One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn't be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio.
 
24601 said:
I'm just curious as to what had you arrive at 3x the higher salary as "comfortable"?
Click to expand...

I have obviously different ideas of comfort from other people.

A big rise in interest rates would be uncomfortable.
Trading up would be uncomfortable.
Taking unpaid maternity or parental leave would be uncomfortable.
Reducing one spouse's hours to spend more time with the children would be uncomfortable.

They could probably handle any one of these. But any two of them would be very difficult.

They already have €170k in their pension fund, and they and their employers are making regular contributions and they are only 35. The pension is just not urgent. Getting the mortgage down allows them to make choices over the next few years.

To me, flexibility is the real key to financial planning.

Brendan
 
Thanks all for your input. To clarify, 1 child at the moment aged 2 and another on the way.

Re Zurich. 30k invested in Caustioulsy Managed 80% and Dynamic 20% . My wife got a redundancy payment and we were planning on making a lump sum payment to the mortgage but then the fear set in. What if something happens and we need the money down the line? Maybe be best to invest Zurich where we have access to it. We seem to have come into both funds at their high price but hopefully things settle down in next couple of months. The direct debit into Zurich is for education etc.

Re Mortgage/Home. We did get an exemption from Ulster Bank at the time, Mar 2020, probable the last ones they approved.
We are in a nice area that has very good transport links and very close to both our families. We do not see ourselves moving. My wife did take 6 months off work and we managed through it but that was when restrictions were in place and very little social events took place.

Thanks Brendan on the key post. Its prob just psychological for me, being able to tell hr/payroll to increase my pension and its gone at source.
I suppose setting up pension at 5% contributions and then diverting 5% salary at overpaying mortgage could be a balanced option. My pension pot @90k has retirement age of 60 so I was planning on leaving it alone because if i transfer into new scheme then retirement age would be 65? Is this thinking too much, should i just combine. And I will look into Life Cover.
 
Brendan Burgess said:
To me, flexibility is the real key to financial planning.
Click to expand...
The OP can stop making pension contributions at any time in the future if their cashflow comes under pressure.

If I had followed your advice and prioritised paying down my mortgage in my 30's over maximising pension contributions, I would be significantly poorer today.

I would also be regretting the fact that I didn't make use of annual reliefs on contributions that are now gone forever.
 
Brendan Burgess said:
I must be missing something here.

They are 35 years old.
They have a 2 year old and another on the way.
They have a mortgage of €340 k which is three times their combined income.
They have €170k in their pension fund.

They are doing very well - but retiring at 50 doesn't seem to be on the horizon.

Ah, are you suggesting stuff the pension fund for the lower paid person, then retire at 50, and use the money to pay off the mortgage?

I think if they pay down their mortgage instead, they have a better chance of the lower paid spouse taking time out or retiring early.

Brendan
Click to expand...

Note - Accessing the pension fund at 50 doesn't mean retiring, you just need to have left the employer where it was earned. At least for DC occupational pension schemes..

You can build a pension pot which grows tax free and which can be accessed at 50 with a tax free lump sum of 25%. Using the lump sum to pay off the mortgage and move the remaining 75% to an ARF where it will continue to grow and you don't need to start drawing on this until age 61. You are then free to move to a new job either at the same level - or as I plan to do, at a much lower level as I take the foot of the gas and find a more relaxing job.

I feel this is a far more flexible than paying down the mortgage as I will be unable to leverage this money later if plans change and inflation/wage increases over the past 15 years have made my mortgage manageable

50+o
 
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