Moneymakeover Managing pension versus savings versus mortgage - advice please

Personal details
Your age: 44
Your spouse's age: 47
Number and age of children: 10 and 12

Income and expenditure
Annual gross income from employment or profession: 135k
Annual gross income of spouse/partner: 110k

Monthly take-home pay: 11k

Type of employment: Employees
Employer type: Private Sector, both of us

In general are you: (b) saving
We save approx. 3k per month, sometimes more.

Summary of Assets and Liabilities
Family home value: approx. 750k
Mortgage on family home: 227k
No other loans or debts, car is fully paid.

Cash:
€115k in savings, distributed across various savings accounts in BOI Regular Saver, N26 savings.

Value of pension fund:
Four funds total, 2 due to ex-employers.
I'm contributing 10%, employer is contributing 5%
Not sure what my husband is paying but it's similar.


Family home mortgage information:
Lender: PTSB
Interest rate: 3.35%
Type of interest rate: We're at renewal now so in the process of setting this up at 3 years fixed from next month.

We are currently overpaying the mortgage by 1k a month - if we continue as is, we're due to clear it in 2032. We'd love to bring this to 2029, but would need to drop in savings and overpay by 2k per month. As it is, we'll be paying 2890 from July including the 1k overpayment.

Other borrowings – car loans/personal loans etc
None

Help Requested
Thanks for reading. I'm fully aware that our approach to finances and savings is rather lax but we're both fairly sensible with spending. The temptation to overpay our mortgage and clear it off asap is huge, but I know this is not necessarily wise. Our savings are not working well for us despite trying to chase high interest savings (but low risk) accounts. We're both fairly risk averse but would be open to longer term savings plans.

With our new 3 year mortgage term, now feels like the right time to put some manners on our financial planning - what would you do in our situation considering access to savings, pensions and mortgage?

Thank you kindly.

Monstera said:

what would you do in our situation considering access to savings, pensions and mortgage?

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Monstera said:

We are currently overpaying the mortgage by 1k a month - if we continue as is, we're due to clear it in 2032. We'd love to bring this to 2029

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You don't seem to be saving for anything specific so why not use a chunk of the €115K savings to knock the mortgage down from €227K and thus reduce the effective remaining term significantly?

Why are you fixing given that you don't really need the predictability of a fixed rate? What rate are you going to fix at?

Clubman, thanks. We had a chat with a mortgage advisor and this is what they recommended, we're fixing at 3.35 for 3 years which will allow us to reuse our BER cert when the term is up, fixing for 5 will mean we'll have to get a new CERT.

What chunk of that 115k would you recommend we use?

The interest you're getting on the savings (guessing c. 2.25-3%) is less than your mortgage, plus factoring in DIRT, you might be better off using the full 115k to clear that off your mortgage. That leaves you with a small mortgage of just over 100k, and given your sals, could likely pay off in a few years.

I feel you kind of answered that by saying you want to pay it off in 2029. Once you've cleared the mortgage, you can build up the savings quickly.

Best of luck, you've obviously worked hard to get where you are and I'd love to be in your position.

Ps. Your finances are not lax imo, you're simply risk averse, as am I. Once mortgage is cleared and saving pot restated you could take a %, e.g. 5-10% and try investing?

I'd say Pay down mortgage and start maxing pension contributions, I think you could both put 25 % of salary up to 115k in

Maybe pay 100k off mortgage and keep 15k cash

Unless you have a specific objective to save outside a pension fund, e.g education it's much more tax efficient to max pensions

Remember pension money can be accessed at 50 in certain circumstances, (e.g. pots in reespect if previous empmoyment)

Assuming you can max out pension contributions first, I'd suggest paying child benefit into a separate account to allow for future education, we didn't but know lots who did, it's more psychological but works well as a means of saving

I'd recommend reviewing all your existing pension fund too, mainly with a vew to making sure you have plenty of equities

Monstera said:

if we continue as is, we're due to clear it in 2032. We'd love to bring this to 2029

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Why? You have a very comfortable mortgage, so you are not under any pressure to pay it off early.

You have €400k in your pension funds which is fine. But why not max your pension contributions?

In your 40s, you can contribute a max of 25% of your salary up to a limit of €115k each year - so roughly €29k each.
You are contributing 10% of €135k already - so €13,000
You can contribute a total of about €29k
You can contribute another €16k on which you will get 40% tax relief, so a net cost of about €9k
So you should do this.
Your husband should do likewise.

Monstera said:

Mortgage on family home: 227k

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Monstera said:

Cash:
€115k in savings, distributed across various savings accounts in BOI Regular Saver, N26 savings.

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Monstera said:

We save approx. 3k per month, sometimes more.

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You are due to clear your mortgage by 2032.
But you might as well clear it quicker as you don't need the money for anything else.

So pay the full €115k off the €227k which would leave you with a mortgage of €112k.

Ideally you would go for a variable rate for the remaining term, so you could overpay it without penalty.
But ptsb has very high variable rates compared to fixed rates.
The fixed rate is 4.4%
It sounds as if you qualify for the three year fixed green rate of 3.45%?

1) Reduce the balance to €112k
2) Reduce the term to 3 years
3) Fix @3.45%

This will give you repayments of €3,200 a year, which you can easily afford.
Then no need to overpay in the meantime.

Have you an up to date statement from ptsb?
When does the fixed rate end?
PTSB has a peculiar way of doing things.
Your statement might show something like
Mortgage balance: €327k
Less overpayments in credit: €100k
Net balance: €227k

Apparently if you try to clear a fixed rate mortgage early, they charge you a break fee based on the €327k
So before you refix the rate, you will default to variable.
While it is a variable rate, set the overpayment of €100k against the mortgage balance, so that there is no penalty.

Then pay the cash off it.

And fix the remainder for 3 years.

Brendan Burgess said:

Ideally you would go for a variable rate for the remaining term, so you could overpay it without penalty.
But ptsb has very high variable rates compared to fixed rates.

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You can overpay a PTSB fixed rate to your heart’s content, plus it’s held as a credit so it doubles as a portion of your reserve fund as it allows you to cover mortgage payments from the credit in the event of a rainy day.

It’s a DIRT-free guaranteed 3.35% return on your rainy day fund.

Sorry I'm not sure how to quote here Brendan but is the suggestion to use ALL our savings a bit of a risk in itself? I'd be happier with some sort of cushion be it 30 or 40k.

Monstera said:

Sorry I'm not sure how to quote here

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Monstera said:

Sorry I'm not sure how to quote here Brendan but is the suggestion to use ALL our savings a bit of a risk in itself? I'd be happier with some sort of cushion be it 30 or 40k.

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Check your previous employer pension schemes, but you may be able to tap them in an emergency from age 50. Between that and the fact that with PTSB you can use mortgage overpayments to cover future repayments in an emergency, you should be fine to reduce your rainy day fund to a few months worth of non-mortgage essentials.

Monstera said:

what would you do in our situation considering access to savings, pensions and mortgage?

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You are in a healthy financial position and have 2 good incomes. Your mortgage has an LTI <1. In your circumstances, clearing the mortgage is the wrong thing to do.

Your pensions are good but neither of you are maxing them. Based on your current 10% contributions, there is about €33k in unused AVCs for last year and this year. Make the lumpsum contributions for both years now. You will need the full €66k to do this but will then get ~€26k back from revenue in tax relief.

This leaves you with €87k in savings.

Keep €15-20k available to you in savings but use €67k to bring your mortgage down to €160k. It looks like your remaining term is around 12 years so your monthly payment drops to €1350.

From here you should both start maxing your regular pension contributions up to 25% of salary. If you still have budget left over, continue overpaying the mortgage but it doesn't have to be the €2850 that you currently contribute. Maybe €1.5-2k

This is the important bit...in 6 years just as 3rd level starts, you should stop (or significantly reduce) your mortgage payments and take advantage of PTSB's unique credit facility. This will be a huge cashflow bonus for you allowing you to continue maxing pensions and comfortably afford university from income. You don't need a mountain of savings for this.

In the event that university is more expensive than expected, you can comfortably cut back on pension contributions safe in the knowledge that you have maxed them for the previous 6-7 years

If you focus on clearing your mortgage in the next 4-7 years I think you will miss out on a lot of pension contributions and ultimately make things tight during the university years for no good reason

Monstera said:

I'd be happier with some sort of cushion be it 30 or 40k.

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It's quite natural to want a cushion.

But for what emergency?

You are both big earners and big savers.

You do not need a big lump of cash. If some emergency does arise, you can get an overdraft or use your credit card and pay it off quickly from your monthly savings.

Brendan Burgess said:

In your 40s, you can contribute a max of 25% of your salary up to a limit of €115k each year - so roughly €29k each.
You are contributing 10% of €135k already - so €13,000
You can contribute a total of about €29k
You can contribute another €16k on which you will get 40% tax relief, so a net cost of about €9k

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So, you need 18k net for last year, and €18k net for this year, or €36k

_OkGo_ said:

Your pensions are good but neither of you are maxing them. Based on your current 10% contributions, there is about €33k in unused AVCs for last year and this year. Make the lumpsum contributions for both years now. You will need the full €66k to do this but will then get ~€26k back from revenue in tax relief.

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OK, so we are near enough to agreement on this although I had forgotten about contributing for last year as well.

But next year, it will be €18k which you can pay comfortably out of your excess income.

So just clear

Monstera said:

Cash:
€115k in savings, distributed across various savings accounts in BOI Regular Saver, N26 savings.

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€115k - €36k = €80k - pay that off your mortgage.

_OkGo_ said:

This is the important bit...in 6 years just as 3rd level starts, you should stop (or significantly reduce) your mortgage payments and take advantage of PTSB's unique credit facility.

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I don't think that there is any need for this. You have enough income to max your pension contributions and clear your mortgage by then and you should do so.

I am a great believer in simplifying one's finances. And clearing your mortgage is a good way to simplify them.

When you face the cost of education, you will have no mortgage payments. You should be able to fund the education costs from your income, but if you are not, then, you will have a good enough pension fund which will allow you to stop overcontributing.

Brendan Burgess said:

€115k - €36k = €80k - pay that off your mortgage.

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Nobody would do this. At a minimum they need a monthly float for spending. And it would be a bit ridiculous that a family with their income would be living paycheck to paycheck for a few months to build back up reserves. The interest saved on €20k is not significant enough to justify using it all.

Brendan Burgess said:

I don't think that there is any need for this. You have enough income to max your pension contributions and clear your mortgage by then and you should do so

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As of today, they save ~€3k, spend ~€3k on mortgage and have €11k coming in so their lifestyle costs about €5k per month.

Once they start maxing pensions, take home pay will drop to about €9k. So there is still plenty of scope to overpay the mortgage.

However, lifestyle will probably increase with secondary school. School trips, a few bigger holidays when they are teenagers, ad hoc spending on home improvements and cars etc. Plus they can increase their pension contributions to 30% each at 50 which starts in 2/3 years for the spouse

If the mortgage gets cleared before 3rd level starts then great. But it shouldn't be a target at the expense of their lifestyle considering their income

_OkGo_ said:

But it shouldn't be a target at the expense of their lifestyle considering their income

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Fully agree and was not suggesting that.

They should enjoy their income and their lifestyle.
With what is left over they should max their pension.
They will still have a lot left over if I follow the numbers correctly and they should use that to pay down the mortgage.

On that basis, they will have paid off in three to five years. But maybe I have misunderstood the numbers.