Mortgage paid. What next

Discussion in 'Money makeover' started by bagpuss, Sep 19, 2016.

  1. bagpuss

    bagpuss Frequent Poster

    Age: 49
    Spouse’s/Partner's age: 55

    Annual gross income from employment or profession: 25000
    Annual gross income of spouse:30000

    Monthly take-home pay 3,000

    Type of employment: e.g. Civil Servant, self-employed PAYE worker

    In general are you:
    (a) spending more than you earn, or BREAKING EVEN
    (b) saving?

    Rough estimate of value of home 350k
    Amount outstanding on your mortgage: 10k
    What interest rate are you paying? 4.3

    Other borrowings – car loans/personal loans etc NO

    Do you pay off your full credit card balance each month? YES
    If not, what is the balance on your credit card?

    Savings and investments: 15K IN ON POST. 15K EBS

    Do you have a pension scheme? BUY OUT BOND FROM PREVIOUS EMPLOYER OF APPROX 50K

    Do you own any investment or other property? NO

    Ages of children: 13 AND 7

    Life insurance: YES

    What specific question do you have or what issues are of concern to you?
    We are going to clear our mortgage with savings from the EBS. We will then have 900 per month which we will save. We do need to do some small home improvements but these can wait until we have built up cash for them. We have lived frugally since I was made redundant in 2011 (back working part time now) and are unsure what to do. Should I start a pension or simply save what we were paying into our mortgage. We do try and save 150 every week but this is taken back most months to cover insurances, kids extra expenses, car repairs etc.

  2. cremeegg

    cremeegg Frequent Poster

    Pay off the mortgage. That will save you approx €215 per annum for the remaining term. Do that immediately, it is certainly a clear and simple win.

    Now you have the amount of your existing monthly payments to save or invest.

    €50k is not a big pension pot, are you paying any tax at the higher rate.

    With kids of that age you have a big increase in child related expenses over the coming years. The earning capacity will decline at the same time as the kids get more expensive. The older spouse will be 68 when the younger child is 20.

    You need to give more info to get a better response here, how much are you paying monthly on the mortgage, what is your marginal tax rate are the first two things that come to mind. Also what are your ambitions especially regarding the children, do you expect them to fend for themselves once they are 18 or do you expect to support them through 4 or more years of college. In a college context could they live at home during those years.

    But pay off the mortgage today or tomorrow at the latest.
  3. bagpuss

    bagpuss Frequent Poster

    Thanks cremegg.
    The repayment on the mortgage was 900.00
    My tax rate is 20%.
    We would hope to be able to support kids during college. We are going to start saving the children's allowance into a separate account for this from January 2016.
  4. cremeegg

    cremeegg Frequent Poster

    If you have freed up €900 per month, you really need to make a plan to save most of it, otherwise you will spend it on fripperies, at least I know I would.

    Does the CA come to €300 per month for 2 kids. That will give you a pot of €18,000 in 5 years when the eldest is 18. That should see one child through nearly 2 years of college. The second child would have 6 years to go to 18 that would be another €10,800.

    If neither of you is paying tax at the higher rate then the case for making pension contributions is less compelling, but it is still a good idea to put something in a pension.

    Overall of the €900, if you put €300 away for the kids and some in a pension and some in a regular saver account. You wont go too far wrong.

    There may be other posters who can give you better advice about the pension and the possibility of taking a tax free lump sum at "retirement" I think you need to investigate that further.
  5. Brendan Burgess

    Brendan Burgess Founder

    It's not that clear that you should pay off your mortgage. A mortgage is the cheapest way to borrow. If you have home improvements which you want to do, do them now. If you have money left over, pay it off the mortgage.

    You should not be contributing to a pension while you are on the 20% tax band. Save the money outside a pension scheme. If you are paying at the top tax band later in life, then run down your savings to contribute to the pension while you are getting tax relief at the top rate on it.

    If you are still on the lower tax band within a few years of retirement, it may make sense to contribute to a pension to avail of the 25% tax-free lump sum.

  6. daheff

    daheff Frequent Poster

    I'm very surprised at this advice. Saving into a pension will "gain" you 20% straight away (and more if on a higher tax bracket).

    While saving outside a pension scheme could (depending on product taken) make funds more accessible if required in the short term, you have less money to invest in the first place. As you have 18 +/- years to retirement this should be an area to focus in. Compound gains mean the sooner you start (and the more you put in at the start) the more you get out later.

    I agree with the idea of paying off the mortgage. Its not a huge sum (comparatively speaking) and its on a rate that would way out strip what you are earning in interest.

    If it were me I'd pay off the loan (assuming its not a fixed rate and you have breakage penalties) and save 600 a month. Put the remaining 300 (which then becomes around about 375 [300/(1-0.2)]) into a pension. 600 EUR would be 7600 in a year. Thats nearly the remaining value of your mortgage (which I'm guessing has 1-2 years remaining) in about a year you have your savings back.

    Once your savings are back to around the 30k mark (ie 10 times monthly takehome) then you could start investing some of your savings into longer term focused, more risky(and hopefully more return) products. Or contribute more to your pension fund (just be careful not to contribute more than the 20% tax amount as theres no extra benefit then).

    Does your current employer match any pension contributions?If so, look at how you can get the most out of these "free money" contributions.
    PaddyW, Gordon Gekko and Sarenco like this.
  7. Gordon Gekko

    Gordon Gekko Frequent Poster

    Someone paying tax at 20% should still divert money into a pension, as because of the numbers involved, he or she should end up paying tax on the pension income at the lower 20% level (or even 0% in certain circumstances).

    Consider two options:

    - Trying to invest €80 in non-pension world where income tax and capital gains tax are chipping away at your investment.

    - Instead putting your €80 and an interest free loan of €20 (i.e. tax relief) into pension world where there is no tax and your €100 is free to compound away for a very long time. Then you draw 25% of your fund out tax-free and draw an income taxed at a combination of 0% and the 20% rate (plus the lowest rates of USC) in retirement (with no PRSI).
    trasneoir, PaddyW and Sarenco like this.
  8. Firefly

    Firefly Frequent Poster

    Hi OP.

    I would pay off the mortgage and then (and I know this is not financial advice) the first thing I would do is book a once-in-a-lifetime family holiday...your kids are 13 & 7 and you never know what's around the corner (sorry don't mean to be melodramatic, but the memories of holidays and time spent with family are to me more important than almost everything else).

    Purple, tallpaul, jim and 1 other person like this.
  9. Gerry Canning

    Gerry Canning Frequent Poster

    100% with Firefly.

    Take paying off Mr Mortgage as a valid excuse to spend some me/family money.
    Few remember the (dryness) of finance sorting but remember the family times and anyway ain,t it GREAT to actually 100% own your own teach !
    When you come back; then get re-sensible !
  10. bagpuss

    bagpuss Frequent Poster

    Thanks for all the replies. Well I paid off the mortgage and it feels great!

    I am going to book a weekend away for the 4 of us and get a few small things done to the house. I realise now that my kids won't remember the mortgage payments but will remember a weekend away/decent holiday next year!
    Next year we are going to build up our savings again and then look at putting some into a pension pot or locking an amount away every month that is not easy to touch.
    Thanks again.
    gnf_ireland and PaddyW like this.
  11. username123

    username123 Frequent Poster

    Congratulations, enjoy your trip :) I'm going to remember this post and come back here when my mortgage is paid off (I don't even have one yet!). Lets hope AAM is still in action!
  12. Firefly

    Firefly Frequent Poster