Advice on what to do with a lump sum

D

Deano

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Age: 45
Spouse’s/Partner's age: 44

Annual gross income from employment or profession: 85k (inc commission)
Annual gross income of spouse: 100k

Monthly take-home pay: approx. €2,600 me, €3,500 wife

Type of employment: work in IT for a US multinational

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

Rough estimate of value of home: 800K
Amount outstanding on your mortgage: 290K
What interest rate are you paying? 2.75% (AIB)

Other borrowings – car loans/personal loans etc: None

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

Savings and investments: 70K cash, 10K shares

Do you have a pension scheme? Yes - €175K DC. Contributions: 1K p/m.
Importantly - my wife is in a DB scheme and will be eligible to retire at 60 on full pension.

Do you own any investment or other property? No

Ages of children: 6 & 4

Life insurance: Both covered through work schemes

Biggest outgoings:
Mortgage repayment: 1,700 p/m
Childcare: 1,600 p/m


What specific question do you have or what issues are of concern to you?

I'm just looking to get some advice on what to do with the limp sum that I have. I was made redundant at the end of last year but will be starting a new job shortly so am in the lucky position of having up to €70k cash available. I'm not the type of person that would blow this on something stupid so I'm looking at using approx. €60k to pay off my mortgage so is this a good idea? We only own one property and moved into our house two years ago. Here are some specifics -
House value: 800k
Mortgage total: 310k
Current balance: 290k
Term: 20 years (from March 2016)

So, we basically have 18 years to go and I will be 63 at that point. Ideally we are aiming to retire at 60 so I'd like to bring the mortgage date down if possible. My wife has an excellent DB pension but will not receive a state pension. I'll have a DC pension and will receive the state pension.

Is my best option to re-mortgage over a term of 15 years? Or would I simply pay the lump into the mortgage account and the term would simply end quicker? I'm just not sure if I'd save on interest doing it this way??

Any advice on this or any other suggestions would be greatly appreciated. Thank you!!
 
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My advice would be pay it off mortgage, once you've some savings left for emergencies.
Say you pay a 60k lump sum, your options are:

1. Keep term the same. Monthly repayment drops to 1350. You will save 16k interest, but will take 18 years.

2. Keep monthly repayment, and reduce the term to 13.5 years. Save 32k in interest, and have mortgage cleared before 60.
Just be careful with decision here - if you ask bank to reduce the term, that's a permanent adjustment to your contract. Might be better to retain flexibility in case anything unexpected happens.

If you don't pay lump sum, but just shortened the term to 15 years, interest saving is 13.7k.

All numbers based on current interest rate. If interest rates rise, you will have saved much more by paying off lump sum.
 
If you pay 50k off the mortgage today, and pay 1700 a month for the foreseeable future, it has the same net effect if you shorten the term or not. The only difference is the committed monthly repayment versus the over-payments made.

As @RedOnion has said, the most flexible option is to keep the term the same and continue to overpay each month. This allows you to drop back in the over-payments from time to time if the situation suited you to do so. Once you reduce the term, its stuck at that.

I am not sure if you are expecting a drop in childcare costs any time soon, or you expect that to be offset by increases elsewhere in activities.
 
Thanks for the info guys - much appreciated!

We talked it over a bit and I think we prefer the idea of option 2 above. Yes, it is less flexible and the payback rate does not reduce but it's the reduction in the term that is most attractive to us. @RedOnion - where do your calculations come from?

So, my next step is to call the bank and discuss??
 
Ah, you were lucky. I had a few minutes to spare today and worked it out in Excel when your questions were so clearly laid out.

There's a really handy calculator here if you want to check other scenarios: https://m.drcalculator.com/mortgage/
You can put in each scenario, and the difference in total interest is what you save.

Yes, just ask AIB to pay off the lump sum off mortgage. If you want to reduce the term, as it's permanent, they will ask you (both if joint names) to sign a letter to that effect.
 
Actually @Deano
When you speak with AIB, ask them is it possible to continue repayment at 1700 per month until further notice, but allow you to revert to 'normal' repayment if you ever need it.
I'm not sure how flexible their systems are, but they might be able to accommodate that.

Another option is to let them reduce payment to 1300, and you set up a standing order for the extra amount you want to pay and then you're in control if you need to reduce. You will get frequent letters from them though as they'll keep reducing you repayment as you overpay.
 
RedOnion said:
Another option is to let them reduce payment to 1300, and you set up a standing order for the extra amount you want to pay and then you're in control if you need to reduce. You will get frequent letters from them though as they'll keep reducing you repayment as you overp
Click to expand...
.

This is exactly what I have done just in case the worst case scenario occurs and I need to revert back to the lower payment.
Brendan has a whole thread dedicated to the importance of understanding this concept.
Hopefully Brendan can post the link here........
 
RedOnion said:
Actually @Deano
When you speak with AIB, ask them is it possible to continue repayment at 1700 per month until further notice, but allow you to revert to 'normal' repayment if you ever need it.
I'm not sure how flexible their systems are, but they might be able to accommodate that.

Another option is to let them reduce payment to 1300, and you set up a standing order for the extra amount you want to pay and then you're in control if you need to reduce. You will get frequent letters from them though as they'll keep reducing you repayment as you overpay.
Click to expand...

OK, thanks for that. So just to make sure that I understand correctly, I'm looking at paying off the €60k from the mortgage and keeping the term the same. This will reduce the payment to approx. €1300 p/m. I can then setup a standing order for an additional €400 p/m into the mortgage account and this will have the result of reducing the mortgage term?

Hopefully I have that right. I assume that by doing it this way that the savings in interest will be the same as option 2 above?
 
Spot on. And then you can stop the standing order anytime you want.

You'll see @landlord confirmed that's exactly what he's been doing.
 
RedOnion said:
Spot on. And then you can stop the standing order anytime you want.

You'll see @landlord confirmed that's exactly what he's been doing.
Click to expand...
Great, thanks a million. I just wanted to be 100% sure that it would end up reducing the term and saving the interest at the end.
 
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