Accelerate Mortgage Repayments Vs. Spouse's Pension

[dafmurray]

[FONT=&quot][/FONT][FONT=&quot]Age: 40 – Civil Servant
Spouse: age: 40 – Office Administrator

Annual gross income: 35,500
Annual gross income of spouse: 27,500[/FONT]
[FONT=&quot]
Rough estimate of value of home: valued at 275,000 in March 2007

[/FONT]
[FONT=&quot]Amount outstanding on your mortgage[/FONT][FONT=&quot]: [/FONT]
[FONT=&quot]79,000 of an original 142,000. Repayments fixed at 1,000 per month. Remaining term seven years four months.[/FONT]
[FONT=&quot]We made a once off principal repayment of Euro 50,000 recently.[/FONT]
[FONT=&quot]Property is affordable housing with valuation of 250,000 at time we took out mortgage. County Council ‘clawback’ applies on remaining 108,000 approx of value.[/FONT]
[FONT=&quot]
What interest rate are you paying? 5.2% fixed for 10 years. In year three. First Time Buyers.

Other borrowings – car loans/personal loans etc: None.

Credit Card: Balance paid in full each month.

Savings and investments:[/FONT]
[FONT=&quot]We are trying to save approx 250 to 500 a month.[/FONT]
[FONT=&quot]We have a 2 year savings account with 26,700 maturing in December 2009.[/FONT]
[FONT=&quot]We have 13,000 in regular savings accounts. Interest rate will drop to E.C.B. rate on 1st June.[/FONT]
[FONT=&quot]We have approx 16,000 in credit union
Shares: approx Euro 10,000 – lost approx 35,000 in value since August.[/FONT]
[FONT=&quot]
Do you have a pension scheme? Civil Service Pension – 12 years service.[/FONT]
[FONT=&quot]Starting Notional Service Purchase in July of Euro 25 per week for 24 years for max pension.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Spouse has only one year’s pension and three years PRSA contributions before current job (approx Euro 4,000 contributions in all)
I’ve been paying 25 per week into an AVC with intent to add to spouses pension if necessary from August 2008.[/FONT]
[FONT=&quot]
Do you own any investment or other property? No.

Ages of children: None.

Life insurance: 85,000 and income continuence insurance.[/FONT]
[FONT=&quot]Spouse: 12,000 policy and another 12,700 nominal life cover in credit union


What specific question do you have or what issues are of concern to you? [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Looking for advice as to whether the plan outlined below is the correct prioritisation, or if someone can suggest either an alternative or a better refinement.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Due to ill health we have neither type of mortgage protection insurance.[/FONT]
[FONT=&quot]Only the life assurance noted above.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Although our home is in a bad part of Dublin and we have been targeted repeatedly with anti-social behaviour, the collapse in value of our shares and the current housing/mortgage situation leads me to believe we could not realistically move.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]We need to keep an ‘emergency fund’ available due to health issues – our estimate is approx 40,000.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Also we need to address my wife’s pension.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]We believe our biggest risk is the mortgage without proper mortgage insurance, especially if my spouse becomes unable to work. Our intent is to wait until June and expected further ECB interest rate cut and then to either break current fixed rate for lower rate if available, or increase repayments to min Euro 1,500 per month to clear mortgage as soon as possible. This would pay off mortgage in 5 years. Hopefully leaving us enough time to concentrate on spouse’s pension.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Does this approach seem the best use of money available. I realise we could seek a professional advisor re pension, but should we wait until mortgage is paid off?[/FONT]
[FONT=&quot]I realise no one has a crystal ball, but I’d appreciate any ideas.[/FONT]

 

[dafmurray]

Is no one replying because the actions to take are so obvious, or because there's a little overflow resentment of my being a Civil Servant . I'd appreciate any advice as the pension situation is so precarious at this time and for the foreseeable future, that I'm tempted to simply put savings into cash deposits (which I realise could have negative consequences if hyper or normal inflation resumes as widely expected).

Again anyone with any pensions advice would be really appreciated. I am aware that diversification of asset classes is very important and that low risk investments should be chosen 10 to 5 years before planned retirement age.

I've been reading all the Personal Finance sections of the newspapers and the book 'Brilliant Investing' by Martin Bamford, which was recommended by Eddie Hobbs and I found to be very informative and practical.

 

[Phibbleberry]

As a side note: if you did sell your house, as its affordable housing, isn't there a buffer so that you don't fall in to negative equity? i.e selling now may be better than having to stay in a bad area for the foreseeable? If you pay off your mortgage quicker, you're still liable for the clawback surely?
Might be an option, I'm not sure of the ins and outs, and it might be hard to sell, but..?

 

[so-crates]

I suspect you may be right about your flexibility with regards to moving so assuming you stay put....
From the tone of your post it sounds as if you strongly anticipate your health issues to worsen over the next few years, would I be right in this? Out of curiosity is this why you have opted for a ten year fixed rate? Or was this as a result of something else? It seems relatively expensive now in comparison to variable rate mortgages. You already seem to have that targeted for reduction - have you investigated the cost of breaking the fixed rate? Have you factored this into your calculations?

I would tend to agree that not having the mortgage to worry about would be of benefit in terms of limiting stress so I would probably be inclined to pay off that first. However that also comes from a certain aversion to carrying debt if I can avoid it, it does not come from a cost-benefit analysis of investing in a pension over paying off a mortgage.

On the specific pension queries you might get a better response if you post a question in the pensions forum.

 

[dafmurray]

To: Phibbleberry & So-crates, thanks for your replies.

As apartment is affordable housing, only EBS or Bank of Ireland will provide mortgages. We fixed mortgage repayments for ten years as rates were rising in 2006 and ECB have only lowered % rate since October 2008. Who knows how long the ECB will keep rates low and that was the idea of the fixed rate. I have a feeling that over the remaining 7 years of mortgage term fixed and variable rates wouldn't show a big difference.

We can investigate selling options and if mortgage can be switched, but from my research I'm not optimistic. Plus the associated tax/legal and other costs of moving and getting another mortgage would leave us vulnerable in terms of savings (I estimate costs at Euro 10,000 to Euro 20,000 excluding the actual mortgage deposit).

Fixed Rate Breakage fee quoted by EBS in February of Euro 3,000 and EBS only offering 5 year fixed rate of 4.9%. I was told the savings on interest would only be Euro 55 per month. Since we have no printed documentation from EBS to back any of this up I am skeptical. We have made a formal complaint to EBS Branch Manager. (Note: while I've always found EBS reliable and very helpful on current & savings accounts, we have only received one initial mortgage statement for 2006 and nothing since. This is not uncommon according to co-workers who have had similar experiences with both EBS and Bank of Ireland.)

I guess that like everyone else the overall mortgage/economic situation is too volitile to feel much confidence in planning a course of action.

Thanks for the advice.