An advanced way to look at funding children's education

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WicklowGael

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I know Brendan feels strongly about this but may I present the following information for commentry.

If we take having an extra 500 euro a month to spend/save over 20 years leaving out inflation etc

Savings account for College

Starting Value €0.00
Interest Rate 3.5% (using same value as Mortgage for comparison purposes)
Term (Years) 20
Compounding Periods per Year 12


Future Value €173,941


less DIRT @ 39%

to give a final figure of

€106,104 after 20 Years as a nest egg


Early Mortgage Repayment


Monthly repayments

Current New

Repayment

€1,449.90 €1,949.90

Mortgage term:

20 Years 13 Years and 4 Months


Cost of credit:

€97,976.00 €61,984.00


Savings in Interest Payments = €35,992


Now if we look at what we could save if we have our mortgage cleared after 13 years and 4 months. We could use the remaining 6 years and 8 months to put the extra funds into a savings account at this point

Starting Value €0.00
Interest Rate 3.5% (using same value as Mortgage for comparison purposes)
Term (Years) 6 Years and 8 Months
Compounding Periods per Year 12
€500 per month

Value €45,109

less DIRT @ 39%

to give a final figure of

€27,517 after 6 Years and 8 Months of Savings

If we add this to our savings in interest payment of €35,992 we get a total figure of

€63,509 by paying of our mortgage early as a nest egg


But if we look at instead of putting the €500 into a savings account after 13 Years and 4 months, we actually put the €1949 that we had being paying a month into a savings account

Starting Value €0.00
Interest Rate 3.5% (using same value as Mortgage for comparison purposes)
Term (Years) 6 Years and 8 Months
Compounding Periods per Year 12
€1949 per month

Value €174,845

less DIRT @ 39%

to give a final figure of

€106,655 after 6 Years and 8 Months of Savings

If we add this to our savings in interest payment of €35,992 we get a total figure of

€142,647 by paying of our mortgage early as a nest egg


Which is the correct way to look at things because continuing to add the 500 a month after the mortgage is paid off early, it seems that using a savings account with compound interest working for us would be the better option but continuing to add 1949 a month after the mortgage has been paid off early , it would seem that paying of the mortgage is a better option.

Thoughts and commentry very welcome
 
Sorry, but I don't follow your figures.

Your basic approach is wrong.

You are doing a very complicated calculation, when the answer is clear from a simple sum.

You can get a return of 3.5% tax-free and risk-free by overpaying your mortgage. This is better than 0% after DIRT by putting it on deposit. Therefore the correct thing to do is to pay off your mortgage.

If you do some complex calculation which comes up with a different result, then there is an error somewhere in your calculation.

Just to be clear - under current conditions of 3.5% mortgage interest and 0% return on deposit, this is the correct decision today.

If next year, mortgage rates have dropped to 2% and deposit rates have risen to 6%, then the answer would be different.

Brendan
 
Hi Brendan,

Wicklowgael reached the same conclusion, its better to pay mortgage early and after that save aggressively for college fees.
And that is also after supposing a 3.5% deposit interest rate, which is nowhere to be found at the moment.

A lot will change during the 20 years but it seems the most efficient way to approach it.
 
What if we looked at peer to peer lending where 8% deposit rates can be achieved by lending to "safe" companies.
Now its a 8% savings rate versus a 3.5% (and going lower) mortgage rate

The new 10 year fixed rates being offered seem to be a sneaky way of the banks locking you so as to prevent customers from paying off their mortgages early and them losing all that extra interest.
 
A guaranteed after-tax return of 3.5% vs lending money to a counterparty who has probably been turned down by everyone else?

Madness. Peer to peer lending is high risk.
 
WicklowGael said:
What if we looked at peer to peer lending where 8% deposit rates can be achieved by lending to "safe" companies.
Now its a 8% savings rate versus a 3.5% (and going lower) mortgage rate

The new 10 year fixed rates being offered seem to be a sneaky way of the banks locking you so as to prevent customers from paying off their mortgages early and them losing all that extra interest.
Click to expand...
I agree about the 10 year rates. Wouldn't go near them. Can't see how anyone would.
 
What's so bad about 10yr fixed at 2.99%? Do you expect the average variable rate over the next 10yrs to be much lower than 2.99%?
You are also getting the stability and security of not worrying about interest rates changing for 10yrs.
Maybe I'm missing something.

If KBC allow overpayments, I'd be tempted by this rate.
 
Since we're making the calculations so overcomplicated, again taking the numbers above (250k at 3.5% over 20 years).

We're talking about a long term horizon here - maybe 15 to 18 years.

If you overpay the mortgage for the first 10 years - it's the best risk free return you'll get for you money.

After year 10, mortgage is down to 74k, but you've no savings. Now switch to just repay what you have to for remaining 10 years of Mortgage - 740 per month, and put the full 1200 remaining into a savings account. Assuming 1.5% interest and 39% DIRT (i.e a 0.915% net return) would build up to 151k over 10 years. Or 74k after 5 years if your horizon is shorter.

You've saved yourself 25k in mortgage interest compared to just repaying to contract, but only 'lost' less than 5k interest on deposit by not saving 500 per month from the start. Your net position is still over 20k better off, and you've enough cash flow when you need it.

*ceteris paribus
 
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