A recent post got me thinking are we close to the point where it makes financial sense to save rather than to pay down debt i.e., for some borrowers the return on savings (net of DIRT & PRSI) is greater than overpaying a fixed rate mortgage.
There was a point in the past where this strategy made sense for tracker mortgages.
https://www.askaboutmoney.com/threads/should-i-overpay-my-tracker-mortgage.187499/
At the start of the 2022 both Avant and ICS were offering various fixed terms at 1.95%. I think the best rate on the market was a green mortgage from BOI (I think) @ 1.9%. With DIRT @ 33% a deposit rate in the order of 2.83% (BOI green) or 2.92% (Avant/ICS) would seem to be the tipping point whereby some people could be better off switching from overpaying to saving. Factor in PRSI and the same rates increase to been 3.0% & 3.1%.
To put those rates into context a quick look on raisin suggests a 5 year fixed rate could earn you as much as 3.45% gross on your savings.
The above is not completely risk free:
There was a point in the past where this strategy made sense for tracker mortgages.
https://www.askaboutmoney.com/threads/should-i-overpay-my-tracker-mortgage.187499/
At the start of the 2022 both Avant and ICS were offering various fixed terms at 1.95%. I think the best rate on the market was a green mortgage from BOI (I think) @ 1.9%. With DIRT @ 33% a deposit rate in the order of 2.83% (BOI green) or 2.92% (Avant/ICS) would seem to be the tipping point whereby some people could be better off switching from overpaying to saving. Factor in PRSI and the same rates increase to been 3.0% & 3.1%.
To put those rates into context a quick look on raisin suggests a 5 year fixed rate could earn you as much as 3.45% gross on your savings.
The above is not completely risk free:
- Deposit rates may be fixed when you take it the savings product but DIRT and PRSI are not. You would only know when interest was paid what your effective after-tax deposit rate actually was. This is less of an issue for shorter term deposits e.g., Thanks to the budget I know what DIRT should be on fixed deposits maturing in 2023. 2024 onwards is less certain.
- You have to ask why are the deposit rates on offer so high? Remember only the first €100K of savings are protected by deposit guarantee schemes.
- It might make sense to pick a deposit term less then the duration of your fixed mortgage as future variable/fixed mortgage rates may be higher. No point making marginal gains in say year 1 and 2 if after you turn refix you've locked into a net loss in year 3 and 4.
- Movement in interbank rates might mean any marginal gain from the above might swallowed up by changes in break fee.
- What is the ultimate plan for your savings? I've assumed it's eventually to pay down the mortgage debt. If you're tempted to spend the money elsewhere it might be advisable to just focus on paying off the mortgage.
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