Does the fact that any mortgage overpayment is buying you something tangible (equity in the property) need to be considered?
Does the fact that any mortgage overpayment is buying you something tangible (equity in the property) need to be considered?
Paying down debt is never a bad option it's just potentially in this case it's the second best option.The logic of minimising monthly repayments on a low interest rate mortgage makes a lot more sense in countries with very long-term fixed periods, like the United States where 30-year fixations are common. You can save the extra money in a deposit account at a higher rate as you say, invest in a pension, or invest in some other asset.
There’s another possible benefit in that the principal on your mortgage is fixed, but your income and wealth might rise over time with inflation. So, you might want to take the bet that inflation will ease your debt burden over time and that you can ride out the higher interest rates that might accompany the inflation. The downside is that house prices might also fall, pushing you into negative equity and making it hard to move or refinance. Those price declines might also come at the same time as your income falls or your employment becomes more precarious.
A major complexity for your strategy is that the vast majority of fixed rate periods in Ireland are less than 7 years. Avant and Finance Ireland have/had niche products with up to 30-year terms, but those are really exceptional cases. So the moment your fixed rate period is up, you are exposed to market pricing again. For most people with fixed rates, this will be somewhere between 0-5 years away.
Even the advice in this country to never give up a tracker rate was predicated on abnormally low ECB rates continuing indefinitely. That strategy is now coming unstuck for many people and their repayment burdens are rising swiftly. The length of time they enjoyed those low tracker rates was pure luck. The risk of higher rates coming back was always there.
Given the way the market looks in Ireland, I think the best strategy for mortgage borrowers will depend on how far you are into your mortgage term. If you expect your LTV to still be quite high when you come off your fixed rate, then you could potentially see your monthly repayment jump by an awful lot. You are obviously also much more exposed to negative equity risk. So, the downside risk is much higher when you are early into your mortgage term. If you are a fair way into your mortgage term and are comfortable that you can ride out price declines or serious interest rate rises, then minimising your repayments and investing elsewhere isn't a terrible strategy given historical precedent. But it comes down to risk appetite ultimately. Overpaying off the mortgage being the safe bet and allocating funds to another purpose the more risky one.
...Should you pay off your mortgage with money that you can put on deposit at a higher rate?
Objectively, if you can get a guaranteed return, after tax, at a higher rate than your mortgage, then the answer is no.
This approach has the added benefit of not tying up the cash.
The next question is, can you really get a guaranteed return, after tax, greater than your mortgage rate?
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