Lump Sum, Low Rate Mortgage - Reduce Mortgage, Pension, Save or Invest

S

salvidor

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Personal details
Age: 44
Spouse’s/Partner's age: 48
Number and age of children: 3 children - 15, 12 & 4

Income and expenditure:
Annual gross income from employment or profession: €56k
Annual gross income of spouse: €80k
Childcare: €270 p/m (ECCE + additional 10 hours p/w)

Type of employment:
Me: Self Employed (3 days p/w)
Wife: Private Sector (4 days p/w)

We both work part time for work/life balance and avoid childcare costs - this is not something we are looking to change in the near term

In general we save some each month - nothing formal

Summary of Assets and Liabilities
Home: ~€900k - A2 rated house, no plans to move
Cash: €210k

Pension:
Me: none
Wife: private pension with work - 10% of salary and employer pays 6%

Family home mortgage information
Lender: Avant Money
Balance: -€366k
Interest rate 1.95%
Monthly repayments: €2325.88
5 years remaining

Other borrowings – car loans/personal loans etc - None
Do you pay off your full credit card balance each month? Yes

Buy to let properties – N/A

Other savings and investments:
Do you own any investment or other property? No

Other information which might be relevant:
Life insurance: Mortgage Protection & €275K Dual Life Cash Cover (Block) till 2028 with option to extend by 10 years
Health Insurance: VHI through my wife's work

Main queries:
Should we use savings to:
- save €200k (raisin or similar €100k each)
- reduce our mortgage (5 years remaining on fixed but breakage is probably 0)
- start a pension (me)
- invest

The best mortgage rate I can see atm (granted only looking on bonkers) is 3.65% 4 year fixed, to me it doesn't make sense to break our current fixed term even though the interest we are currently paying is more than we can get on deposit (€7656 last year, €~5150 in 2028) @1.95%

We have never invested before, I have a very low risk tolerance and can get anxious easily :)

My instinct is just to put it on deposit for a year and then see again

Thank you for your time and I appreciate any and all input

S
 
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salvidor said:
We have never invested before, I have a very low risk tolerance and can get anxious easily :)

My instinct is just to put it on deposit for a year and then see again
Click to expand...

I'm always surprised when people with a low risk tolerance don't see the risk of money deflating away in a deposit account.

What do you think will be worth more in 15/20 years? Your 200k in a pension or deposit account?
 
You don't outline the extent of your spouse's pension cover. But you having none jumps out at me. I agree with the previous poster. Putting some sort of plan in place to plug this gap should almost certainly be a priority.
 
salvidor said:
The best mortgage rate I can see atm (granted only looking on bonkers) is 3.65% 4 year fixed, to me it doesn't make sense to break our current fixed term even though the interest we are currently paying is more than we can get on deposit (€7656 last year, €~5150 in 2028) @1.95%
Click to expand...
Just to clarify, but I think you already understand this. You do not need to break & refix. You can pay part of all of the 200k off your mortgage balance, and keep your current rate for the remainder. That's a guaranteed 1.95% after tax return on your money. There would be no break fee at the moment.

I would:
Reduce mortgage by 200k. If you keep term unchanged (c. 15 years?) your repayments would reduce to c. 1,050
Start a pension for yourself, and your spouse maximise their contributions - the reduced mortgage payments will allow you plenty of free cashflow to maximise both of your tax allowable contributions.

Reassess where you are after those changes made, and possibly reduce the mortgage term.
 
salvidor said:
Post updated, she pays 10% of salary and employer pays 6%. Thanks for your reply
Click to expand...
But what's the current value of the pension?
It's quite possible that she also needs to increase her contributions towards or all the way up to her age related tax relief limit.
 
salvidor said:
Main queries:
Should we use savings to:
- save €200k (raisin or similar €100k each)
- reduce our mortgage (5 years remaining on fixed but breakage is probably 0)
- start a pension (me)
- invest
Click to expand...

My thoughts.. I would avoid investing. Over the long run yes you might outperform the alternatives but 5 years is not long enough.

After that it comes down to where you feel your own priorities should lie: right now, 5 years time, 20ish years time. Hint: they're all important

It's easy to (over)focus on your immediate liabilities (mortgage) and discount your future needs. The lack of a pension is a consideration. What is your plan for funding your retirement?

Though to counterbalance the pension argument there's no point losing a home now to fund your future retirement. First thing I would do is work out what your mortgage balance will be in 5 years and stress your finances to see what you can afford given you'll eventually face higher mortgage rates. You may also be college fee territory as well .

Right now you're in the lucky position where your mortgage rate is such that saving rather than repaying may make sense but again don't forget your future needs and make sure you're providing for your old age. If you do end up going down the deposit route there are a few other points worth considering.

Better to save than to overpay a low fixed rate mortgage in some instances?

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...
www.askaboutmoney.com

Something else to consider/support the deposit case is how stable will your two incomes be going forward? Have you thought about what level of a rainy day fund may be appropriate.

Finally it doesn't have to be black or white. A mix of pension and deposits would start you on the route to having a retirement plan while also giving you short term resilience and the ability to knock a large chunk off your mortgage ahead of your mortgage rate reset.
 
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If I were you OP I would:
  • Set up and contribute the max amount to pension.
  • Retain some savings for emergency fund / college.
  • Use the rest to reduce mortgage.
  • Enjoy life.

Pretty much the same advice for most / many similar money make-over posts.
 
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