33 - majority of capital gathering dust as cash in bank. How should I change things?

begbie

New Member
Messages
4
Age:
33
Spouse’s/Partner's age:
31

Annual gross income from employment or profession:
€130k
Annual gross income of spouse:
€60k

Monthly take-home pay:
€9819

Type of employment:
Both private sector

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving

Rough estimate of value of home:
€390,000

Amount outstanding on your mortgage:
€320,000

What interest rate are you paying?
2.65% fixed for three years with KBC. We can pay up to 10% extra off the principal in that time.

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
Yes

Savings and investments:
€125k cash
€20k stock locked up in private company
€10k shares in public company

Do you have a pension scheme?
We both recently started PRSAs.
I pay 400/month (3.6k total)
Partner pays 250/month (4.4k total)
No employer matching.

Do you own any investment or other property?
No

Ages of children:
n/a

Life insurance:
Yes

What specific question do you have or what issues are of concern to you?
I now realise having most of our capital as cash sitting in the bank isn't useful. I’d like to put it to work. My understanding of my best options are:
  • Pay off mortgage
  • Max out pension
  • Invest in index funds
  • Invest in [other]?
We plan to move house sometime in the next 5 years. Likely in the €500k-€600k range. I like the idea of keeping our current house as a new source of income, €2k+/month in our area. But admittedly don't know enough about that at the moment to understand if it's a viable option for us.

I have three questions I’d really appreciate your thoughts on.
  1. How should I allocate my existing funds currently in the bank?
  2. How should I think about allocation of all future income?
  3. What other avenues of investing would you recommend I investigate?
 

RedOnion

Frequent Poster
Messages
3,296
We can pay up to 10% extra off the principal in that time
You can pay as much as you like off. The 10% is amount you can pay before they calculate a break fee.

I'd pay a big chunk off mortgage, and massively increase pension funding, while you can afford it.

Then start building up savings again for future house move. You don't need to take on risks if you plan to move in 5 years. You'll need 20% deposit, plus legal fees and enough for any immediate redecorating / improvement works.

Take the higher risk investment through your pension.
 

sputnik1

Registered User
Messages
7
Based on the mortgage rate you are paying €1262.28 a month, with a monthly take home pay of €9819. Taking away both the generous cost of living of 50% of the monthly take home pay and the mortgage this leaves you and your wife with the enviable position of having 4278.26 to play with (I'm jealous, well done) .
Based on this amount you can afford all four option:
  • Pay off mortgage
  • Max out pension
  • Invest in index funds
  • Invest in [other]?
I think the decision for yourself and your wife is what percentage of the disposable income to allocate to each option. Personally I would allocate a higher % on paying the mortgage and maxing out the pension. For sure pay the 10% extra on the mortgage at the very least but also follow up on the breakage cost it very well may be worth your while. Also check what rate you will default to once the fixed term is up. This is what I would do as I hate carrying any debt.
The argument against that is you are planning a significant purchase in the short to mid term future. If you are not planning on selling your current house to fund the purchase the future house you may need the funds to secure the new mortgage or reduce the amount or term.
 

Blackrock1

Frequent Poster
Messages
476
the other consideration is do you plan on starting a family, if so your financial position will change.

Child one, you both continue to work full time, then creche will relieve you of 1.1-1.4k a month
Child two, you are at 2k and looking at the possibility (of the lower earner normally) cutting back to 3 or 4 days.,
 

Easel

Frequent Poster
Messages
134
Keep €20k in cash for emergency pot. Max out pension contributions allowable for each. Pay down mortgage. Don't bother considering other investments whilst carrying a mortgage.

Can you pay 10% off the principle every year like Ulster Bank or is it 10% over the 3 year fixed term? I would ask for a break fee to see if there is any saving to be had.
 

begbie

New Member
Messages
4
Thanks for the input @RedOnion

I'd pay a big chunk off mortgage, and massively increase pension funding
Some posts I have read suggest taking care of the mortgage first, then paying heavily into pension when the mortgage is paid up. I'm trying to wrap my head around these different points of view. What makes you suggest a split?
 

RedOnion

Frequent Poster
Messages
3,296
What makes you suggest a split?
In your case, simply because you've more cash than you can put into your pension to get tax relief on.

Your mortgage is only 1.5 times combined income, so already very manageable.
 

Sarenco

Frequent Poster
Messages
5,645
My view is pretty straightforward - maximise pension contributions that are relieved at the higher rate of income tax and then use any after-tax savings (over and above a reasonable cash reserve) to pay down your mortgage ahead of schedule.

Simples!;)
 

begbie

New Member
Messages
4
@sputnik1 thanks for the input

I think the decision for yourself and your wife is what percentage of the disposable income to allocate to each option.
Makes sense. I'm certain not having a clear grasp of why I would allocate what where has caused me to push this decision down the road time and again. Similar question to what I asked redonion, I'd love to understand why you suggest a split across mortgage/pension? Opposed to aggressively tackling the mortgage first say.

The argument against that is you are planning a significant purchase in the short to mid term future. If you are not planning on selling your current house to fund the purchase the future house you may need the funds to secure the new mortgage or reduce the amount or term.
I'll need to do a little research on this. It's possibly a nice idea that I shouldn't pursue.

thanks @Blackrock1 - yes good point, no immediate plans here but something to factor in for sure.

thanks @Easel
Don't bother considering other investments whilst carrying a mortgage.
Could you elaborate on this? Would it not be advisable for me to start investing in an index fund long term, even if in small amounts while mortgage is still being paid down?
Can you pay 10% off the principle every year like Ulster Bank or is it 10% over the 3 year fixed term? I would ask for a break fee to see if there is any saving to be had.
I believe it's 10% of the mortgage value over the 3 year term with KBC. What kind of savings do you think I could look into here?
 

begbie

New Member
Messages
4
@RedOnion @Sarenco - thanks for the straightforward explanations, that makes sense. Would you have the same opinion as Easel re: other investments while still paying down the mortgage?
 

RedOnion

Frequent Poster
Messages
3,296
Would you have the same opinion as Easel re: other investments while still paying down the mortgage?
How's your risk appetite?

Would you borrow money at 3% to invest it in something, where any positive return would be taxed?..

I don't think you need that risk.

What I would do is contact your PRSA provider tomorrow and see if you can make a contribution in time for 31st October tax deadline and get relief for last year. Put your pension into as high a risk as you like to get that out if your system!
 

Easel

Frequent Poster
Messages
134
Could you elaborate on this? Would it not be advisable for me to start investing in an index fund long term, even if in small amounts while mortgage is still being paid down?
This is essentially what you do through a pension. As RedOnion said would you borrow at 3% to invest when you are going to be taxed circa 50% on profits in addition to the costs associated with investing.

As you are high earners I would suggest possibly a split mortgage (part variable and part fixed) in the future where you can overpay any amount you wish off the variable balance.

I believe it's 10% of the mortgage value over the 3 year term with KBC. What kind of savings do you think I could look into here?


As you have €125k in cash earning no interest it is costing you 2.65% a year- €3,312.50...;over 3 years that's nearly €10k.
If you were offered a break fee of €4,000 it would be worth your while to take the hit and reduce your mortgage balance.
 

sputnik1

Registered User
Messages
7
Makes sense. I'm certain not having a clear grasp of why I would allocate what where has caused me to push this decision down the road time and again. Similar question to what I asked redonion, I'd love to understand why you suggest a split across mortgage/pension? Opposed to aggressively tackling the mortgage first say.
You are in a very advantageous financial position, at this point in your life can do both. The reason I suggest the split is twofold
1. At 33 you can make a max contribution (aside from employer contribution) of 20%, you will get higher rate of tax relief on this. After making that contribution you still have enough to pay down the mortgage aggressively.
2. I am conservative and a worrier, I don't like to carry debt and not providing having a pension would keep me awake at night.

Indecision can be crippling, and really there is only right decision is whats right for yourself and your wife.
At this point why not hedge your bets and do all options. You can always adjust, you have time on your side.
 
Top