Dramatic effect of overpaying mortgage

[monkeyboy]

Say a couple, curently on max SSIA contributions, both contribute the payamnet to their mortgage on top of normal payments:

Product Type: Average Tracker Rate
Term:20 years
Amount:€ 300,000
Existing Average Repayment:€ 1864.60/m
Total repayment over period:€ 447,505
Total Interest Over Period:€ 147,505
Effect of increased repayments of €508/mth is :
New Average Repayment : 2472/m
New Total Repayment : 399,190
Term Reduced To : 13.94
Total Interest Reduced To : 99,190

Interest saved:
=147505-99190=48315
Term reduced to:
=14y.
Anual Effect of 508e per month over payment:
=48315/14=3450pa

In effect 508 per month saves you 3450 per year. No wonder the banks want you to reinvest your SSIA in an other account. That allows them
A.retain your funds
B. Entitles them to a further 48k interest off you if you choose not to use towards your mortgage.

They would stand to lose a lot of money at the borrowers benefit.
Is there a better return out there on 508 per month? Plus the property is yours 6 years earlier.

 

[BigM]

Re: Dramatic effect of overaying mortgage

It is amazing how much interest/time you can save by repaying extra amounts (Christmas bonuses/demutualisation windfalls etc) into your mortgage.
The only question is whether you should be investing all your surplus funds into it. If you continue to invest some of the funds in other (tax-efficient) products you will achieve some sort of diversification and not leave yourself 100% exposed to the property market.
One of the key threads here talks about the 'comfortable' level of mortgage - once you've achieved that, it's time to expand your investment horizons.
Having said all that, the prospect of owning your own home debt-free is incredibly appealing!!

 

[kramer2006]

Re: Dramatic effect of overaying mortgage

Monkeyboy, it would be worthwhile to adjust your "Interest Saved" figure for inflation. Karl Jeacle's mortgage calculator allows you to do this.

 

[monkeyboy]

Feel free to!
If one holds onto their lump sum for more "interesting/exciting/glamorous" investment I fail to see any way that 508 e per month can be used in a better way.
Example..

508 / 3 years @ 5% on a deposit interest paid at end of each year would yield 1891 ( open to correction took 3 years as I did not want to be manually compounding all day ) in interest while your mortgage would cost you 3450x3=10350 in "unsaved interest" by not taking adavantage of the over payment. this is basically yields the "prudent saver" taking ,advantage of a banks special interest accout a loss of 8459 on 3 years. Carry this over a 14 year period and you would be shocked.

The banks have no interest in you reducing their profit by doing this, they much rather you continue to deposit your 508 to a savings plan!

 

[BigM]

Not quite - if you put the SSIA 508pm into a deposit account @ 3% (instead of into your mortgage) you'll end up with around €108k after 14 years in your deposit a/c and a mortgage balance of around €115k.
With a deposit rate of 4% you end up with breakeven - €115k in your deposit a/c with which to redeem your mortgage in full.
(ignoring inflation etc...)

 

[beaky]

Am I wrong in suggesting you need only compare the mortgage interest rate and the deposit interest rate to see which one will yield the best return, eg. earn 4.5% on deposit or save 4.15% on the mortgage. The best in this example would be to earn 4.5% on deposit. The use of AER and APR should give you the exact result. No???

 

[monkeyboy]

Am I wrong in suggesting you need only compare the mortgage interest rate and the deposit interest rate to see which one will yield the best return, eg. earn 4.5% on deposit or save 4.15% on the mortgage. The best in this example would be to earn 4.5% on deposit. The use of AER and APR should give you the exact result. No???

No, because the interest calculate don the deposit acc is based on your principal of 508x12 wheras the principal onn which the interest calculated on the mortgage is 300k, huge difference.

Year 14 end:
105,411.49 ( total in acc @4%)- 85,344.00( monthly lodgements 508x12x14)= 20,067.49 (Interestearned)

So interest saved 48,315 ( from mortgage calculator on line ) less interest earned 20,067 shows that 508 p/m on the mortage is much better than in any savinvgs acc.

This is 20k lost by the bank and they also do not have your 508 p/m in a depoit acc to use. This is obviously why no one from the banks pushes this. Indeed it was Eddie Hobbs who pointed this out recently and the difference is huge!
Big bouns is that the house is yours 6 years early and the mortagege payments therfore dont exist! Another grand plus odd back into your pocket and not the banks.( inflation ignored )

I would love someone in the industry to verify the above but if it is all accurate enough, its not in their interest!

 

[Brendan Burgess]

This analysis is seriously flawed. Saying that you save 48315, is wrong. You are adding up interest saved in different years. The value of €100 saved today is a lot more than €100 saved in twenty years' time.

This expression is particularly misleading:

Anual Effect of 508e per month over payment:
=48315/14=3450pa

All calculations should be looked at on a one year basis only when you are making your decision. The factors may be different next year or after five years.

If you pay €6096 off your mortgage this year, when the mortgage rate is 4%, the "annual effect" this year will be a saving of €121 and not €3450.

To simplify it, consider that you have a lump sum of €10,000 and you want to do something with it. Leave taxes out of this for simplicity.

You can spend it on a holiday.

You can pay it off your mortgage. If you are paying interest of 4%, you will save €400 this year, so you will be €10,400 better off at the end of the year than if you went on the holiday.

You can put it on deposit at 3%. You will have €10,300 at the end of the year, so you will be €100 worse off than had you paid it off your mortgage, but you will have access to the money if, for example, you then need to buy a car or go on a holiday.

You can put it in the stockmarket for an uncertain return, but a return which over the longer term, should exceed 4%. If this year, you get 10%, you will have €11,000, so you will be €600 better off at the end of the year than paying it off your mortgage. Of course, if the stockmarket goes down by 10%, you will be €1400 worse off at the end of the year.

If it applies to you, you can put €17241 into a pension scheme. In ten years, your mortgage will not be paid off, but you will have a huge additional amount in your pension scheme.

At the start of next year, you review the decision you have made.

 

[onekeano]

Feel free to!
If one holds onto their lump sum for more "interesting/exciting/glamorous" investment I fail to see any way that 508 e per month can be used in a better way.

What about maxing out your AVCs on your pension and getting Brian Cowan to ontribute 44% of the cost?

Roy