Overpay 1.95% mortgage or not?

C

Cantillon

Registered User
Messages
25
Personal details

Age: 48
Spouse’s/Partner's age: 40
Number and age of children: Two, both under 15

Income and expenditure
Annual gross income from employment or profession: approx 95k, since recent pay rise
Annual gross income of spouse: SAHP
Monthly take-home pay = 4800 approx, but this is after two insurances (income protection and extra life cover)
Type of employment: = public servant

In general are you:
(a) spending more than you earn, or = not saving each month, children are involved in activity that costs 700 some months
(b) saving?

Summary of Assets and Liabilities
Family home worth €500k with a €110k mortgage
Deposits = 29k
Deposits (wife) = I think 30-35k
Other financial assets = 26.5k
of which shares = 13k, ETF = 9k, Govt bonds = 4.5k


Family home mortgage information
Lender = AVANT, 120k mortgage, started 2022, for 12 years
Interest rate = 1.95% fixed for seven years from 2022
Remaining term: 10.5 of 12 years remaining
Monthly repayment = 935

Other borrowings – car loans/personal loans etc

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

Buy to let properties = NONE

Other savings and investments:
Do you have a pension scheme? = YES, PS scheme
Do you own any investment or other property? = NO

Other information which might be relevant

Life insurance:
  • MPP on current mortgage
  • 4x life cover in PS scheme
  • Spouse has life cover
  • Income protection

What specific question do you have or what issues are of concern to you?
Over the past few years, we have over paid mortgage each year.
Should I do so again? Mortgage is 1.95%

I have 55k in financial assets, but I want to keep some liquidity, (to buy car, etc)


Separate question, about asset allocation:

I have put 8,900 into an ETF called: iShares Core MSCI World UCITS ETF USD (Acc), on DeGiro.

Having read about the tax treatment of ETFs in Ireland, I am reconsidering this.

I do not want to go picking shares, I have been burnt in the past.

What is better? Buy Berkshire Hathaway? Or buy investment trusts?

I have some past capital losses to carry forward.

THANKS.
 
Why does a civil servant need income protection?
Where is the spouse pension
Everything is reliant on your salary.
Does your pension pay a spouse in the event of your death.
That mortgage is low and a great rate so no need to overpay it. Can you put the money somewhere else to get a better return.
No clue about shares but I seem to remember a rule that we couldn't discuss individual shares.
 
So you are borrowing €90k @ 1.95%. You have €60k of this on deposit. And €30k in shares.

If the interest on the deposit is in excess of 3%, then you are making a profit on it after tax.
If it's earning only 2%, then you are paying DIRT so you are losing on it. That might be ok for the "safety" of having €60k available.

Either way it's not too far wrong.

Not sure about borrowing €30k to invest in equities though. You can well handle the risk though if the shares collapse. So again, it's not too far wrong.

Brendan
 
Bronte said:
No clue about shares but I seem to remember a rule that we couldn't discuss individual shares.
Click to expand...

Just to clarify. People often recommend Berkshire Hathaway as an alternative to an investment trust. I suppose it's a technical breach of the Posting Guidelines not to discuss individual shares, but we make an exception for it. If someone posts "Sell BH because they are facing enormous losses on their media investments" then that post would be deleted.
 
Cantillon said:
Summary of Assets and Liabilities

Deposits = 29k
Deposits (wife) = I think 30-35k
Other financial assets = 26.5k
of which shares = 13k, ETF = 9k, Govt bonds = 4.5k
Click to expand...
Total 85K

Why are you unsure of how much is in your wife's deposit account.

You are saving by paying down your mortgage. But you should allocate a monthly amount for savings. The amount you were going to overpay by would be a starting point.

If you've been burnt before on shares than why would you risk that happening again.

I'd also look at all your insurances and see that they are good value for money and that they are needed. (there were discussions on here about a civil service type of insurance, Cornell or something, that is a hard sell)
 
Brendan Burgess said:
Not sure about borrowing €30k to invest in equities though. You can well handle the risk though if the shares collapse. So again, it's not too far wrong.
Click to expand...
Did he mentioned borrowing? I would have thought borrowing to buy into shares was a very bad idea.
 
Brendan Burgess said:
If you have a mortgage while you have shares, you are borrowing to invest in shares.
Click to expand...
Well I have to say I triple checked the OP to see if my aging sight made me miss the borrowing bit ! That's great logic though.

Is his money on deposit borrowing too?
 
Brendan Burgess said:
Just to clarify. People often recommend Berkshire Hathaway as an alternative to an investment trust. I suppose it's a technical breach of the Posting Guidelines not to discuss individual shares, but we make an exception for it. If someone posts "Sell BH because they are facing enormous losses on their media investments" then that post would be deleted.
Click to expand...
Hoping this isn't against the rules, but it's important to realise that Berkshire Hathaway's investment portfolio has less diverse investments than a lot of ETFs or investment trusts.
 
The mortgage rate you have is amazing and is basically free money given inflation. You are in your early 40s with an LTV of 20%. Your mortgage is not high! I wouldn’t be in a hurry to pay it off, but instead to use the cheap financing to fund other objectives.

Cantillon said:
Do you have a pension scheme? = YES, PS scheme
Click to expand...
Are you both on track for full pensions at age, 65? If not I would prioritise AVCs or purchase of notional service. The big positive here is that investment gains are tax free and you are not getting this with equity products.

If you don’t want or need to fund pension I think it makes sense to keep equity type assets while carrying a mortgage of this amount. But I wouldn’t an increase my exposure very much.
 
Last edited:
You've one of the lowest fixed rate mortgages that was on the marke in recent years. I know Avant offer the capacity to overpay by 10% each year without incurring an overpayment/break fee. That's moot as given where interest rates have gone there is unlikely to be a break fee on any overpayment.

The question becomes should you overpay or do something else. With such a large gap between your low mortgage rate and current deposit rates it means savings rather than overpaying your mortgage makes sense.

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
 
Bronte said:
Is his money on deposit borrowing too?
Click to expand...

Yes. And much worse.

A lot of people have difficulty understanding this.

Imagine if the OP came on and said

I have a €500k house with a €20k mortgage.

I am thinking of borrowing €90k to invest as follows:

I want to put €60k on deposit and €30k in a mix of shares and bonds.
Click to expand...



You might or might not say "go ahead" but you would not deny that he is borrowing to invest in deposits, shares and bonds.
 
Cantillon said:
Lender = AVANT, 120k mortgage, started 2022, for 12 years
Interest rate = 1.95% fixed for seven years from 2022

Over the past few years, we have over paid mortgage each year.
Should I do so again?
Click to expand...
No. Pay the instalment and nothing more. You have one of the lowest interest rates of any mortgage in Ireland.

If you want to overpay by €X this year, then you are almost certainly going to be better off putting it into some other investment like pension contributions or even just a deposit account. If interest rates are high in seven years time, your mortgage balance will already be quite low.
 
Brendan Burgess said:
Yes. And much worse.

A lot of people have difficulty understanding this.

Imagine if the OP came on and said





You might or might not say "go ahead" but you would not deny that he is borrowing to invest in deposits, shares and bonds.
Click to expand...
Definitely a lot more common - you've mentioned it many times how people compartmentalise their finances and don't think about leverage.

But I wouldn't say much worse. In this case borrowing fixed to invest fixed is very low risk. You have near certainly on both sides of your balance sheet. It might not be profitable but that's different to risk.

You get riskier when you add variable interest rates to the mix.

Borrowing to gamble on an asset class that can loose some or all of the principle is riskier still.
 
skrooge said:
Borrowing to gamble on an asset class that can loose some or all of the principle is riskier still.
Click to expand...

OK, much different rather than much worse.

Borrowing at 1.95% to put it in a low earning deposit is going to definitely lose you money and it's much clearer that it is doing so.

Borrowing at 1.95% to invest in shares is definitely riskier. But there probably is a long-term expected return in excess of 1.95% after tax. And given his high salary and low borrowings, he can handle the risk.

Brendan
 
Bronte said:
Why does a civil servant need income protection?
Where is the spouse pension
Everything is reliant on your salary.
Does your pension pay a spouse in the event of your death.
That mortgage is low and a great rate so no need to overpay it. Can you put the money somewhere else to get a better return.
No clue about shares but I seem to remember a rule that we couldn't discuss individual shares.
Click to expand...

The public service sick pay scheme pays full salary for three months, then half salary for three months. So some public servants buy salary protection insurance, which pays 75% after six months.
In my employer, there is auto-enrolment into this scheme, so I think it is good value compared to other schemes I have seen.

As my spouse is a SAHP, as of now, she will not have a work pension, just the State Pension, assuming she returns to work after Homemakers scheme period ends

Yes, all public service pensions pay survivors benefits, so if I die in work or in retirement, my spouse gets a pension

Yes, 1.95% is great, I will not overpay
 
Dr Strangelove said:
The mortgage rate you have is amazing and is basically free money given inflation. You are in your early 40s with an LTV of 20%. Your mortgage is not high! I wouldn’t be in a hurry to pay it off, but instead to use the cheap financing to fund other objectives.


Are you both on track for full pensions at age, 65? If not I would prioritise AVCs or purchase of notional service. The big positive here is that investment gains are tax free and you are not getting this with equity products.

If you don’t want or need to fund pension I think it makes sense to keep equity type assets while carrying a mortgage of this amount. But I wouldn’t an increase my exposure very much.
Click to expand...

At 65, I will have 39 out of 40 years in PS pension scheme, so I don't intend to do AVCs or NSP at the moment.
 
Brendan Burgess said:
Yes. And much worse.

A lot of people have difficulty understanding this.

Imagine if the OP came on and said
Click to expand...
I have a €500k house with a €20k mortgage.

I am thinking of borrowing €90k to invest as follows:

I want to put €60k on deposit and €30k in a mix of shares and bonds.
Brendan Burgess said:
You might or might not say "go ahead" but you would not deny that he is borrowing to invest in deposits, shares and bonds.
Click to expand...
I would categorically say not to do that. No might about it.

Borrowing to invest in shares is a very high risk business indeed. There is no way it make sense to borrow to put on deposit since you would have to pay a very high interest rate to borrow and you'd get derisory interest on deposit, plus DIRT tax.

You're making up mad scenarios now. A lot of ordinary people got burnt with the Eircom shares, where they are actively encouraged to borrow for. After that we won't have such a mess with the government/ banks until time has made that debacle fade from memory. (ie every 20/30 years)
 
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