Overpay Mortgage Best Option?

mojoask

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We're lucky enough to have between 25 -30k a year to "invest". However we can't see that there's any better use for this cash than to overpay the mortgage, even if our LTV is already relatively healthy.
  • Home value: 825-850k
  • Mortgage outstanding: 415k, 27 yrs
  • Rate: 2.6%
  • Age: 38 (both)
  • Combined earnings: 210k
  • No other debt
What we've already done:
  1. Emergency fund in place (6 months)
  2. Maximising pension AVCs (both at 20%)
Are there any other obvious choices we may be missing, and would you do the same, if in our shoes?
 

fayf

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203
For starters, You should be able to get a much better mortgage interest rate with an LTV <50%, i know Avant Money have a rate of 1.95%, and some others, have rates just above 2.00%. Just by switching, and continuing your current payment amount, you will reduce the term. I am guessing but possibly a reduction of 2 years plus, by moving to a 1.95 % rate.

If switching mortgage providers, you could also use that opportunity to reduce the term, but, bear in mind, having a longer term, can offer flexibility for cashflow, and from other threads, a general consensus is keep the longer term, and make lump sum payments, can make more sense, as it offers more options.

There are many investment options out there, all have some degree of risk. Others may have suggestions.

I would also consider EII, which does carry risk, as many are startup companies, but gives 40% tax relief in the year of investment. Eg, if you invested 20k in say October 2021, you could have the 8k tax relief, refunded to you in January 2022, if you have completed your tax return promptly.

 

Gordon Gekko

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Avant don’t facilitate large overpayments on that 1.95% rate, so they’re not always the best option.

EIIS is a terrible investment in most cases. People get blinded by the tax relief. If anyone wants to give me €100,000 now, I’m happy to give them €40,000 back in October of this year. The more the merrier.
 

RedOnion

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With combined earnings north of 200k, do you really have time to be worrying about possibly making an extra 500 or 1,000 a year on investments that carry risk?

While your LTV is low, 400k is a chunky mortgage by any standard.

Keep it simple. Overpay your mortgage, and switch to a better rate when you can.
 
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mojoask

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193
Seems the consensus is that the mortgage overpayment is the best way to go. We're locked in anyway for another couple of years at that rate & were we to switch, the cost is north of 5k (break free plus the solicitor). As has been pointed out, while Avant is very tempting, there's little or no ability to over pay & while we could shorten the term to achieve the same effect, we would then lose the flexibility we have today.

What do people think about really going for it? As no doubt some of you have worked out, we're with UB & so have the ability to overpay 10% of the outstanding capital balance every year. We could probably get it down to 300k in 2 years with a little bit of effort.
 

fayf

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203
Agree, overpay the mortgage, and switch when its feasible, and while switching, knock a few years off by reducing the term. We did that on two switches, and knoched 2.5 years off per switch, it was only a small increase, as each time we got a better rate, so only a modest increase in outgoings.

Some providers also give a legal fee contribution, but the best rate, is the most crucial factor.

Also bear in mind, in two years, yee hit 40, so be sure to increase pension contributions up to the 25% limit, for those aged 40.
 

RedOnion

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5,989
and switch when its feasible
Just on this, some of the best rates available to the OP are with his current lender, so the 'switch' is very simple. I'd be grabbing the 5 year high value rate at 2.2% if I didn't want to go through the process of switching lenders.
 

mojoask

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Absolutely, go for it if you don't need money for any planned expenditures.

Even if you exceed the 10%, you only pay a break fee on the extra bit you're overpaying so you'll still save money.
I hadn't realised that, thanks for pointing it out!
 

mojoask

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Just on this, some of the best rates available to the OP are with his current lender, so the 'switch' is very simple. I'd be grabbing the 5 year high value rate at 2.2% if I didn't want to go through the process of switching lenders.
Simple, also expensive though, 3700 to break at the moment. With UB exiting the market, hard to know what the future holds.
 

RedOnion

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I hadn't realised that, thanks for pointing it out!
You need to read more of my posts about fixed rates! ;)
The other option to overpay without a break fee is to shorten the term, but you're tying yourself in contractually.

Simple, also expensive though, 3700 to break at the moment. With UB exiting the market, hard to know what the future holds.
Absolutely, I meant if you were going to switch. Keep an eye on the break fee every few months, you'll get to a point where it'll make sense. You're probably nearly there - saving 0.4% on 400k is 1,600 per year! So if you've 3 years left on the rate you'd save money breaking & refixing.
 

mojoask

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You need to read more of my posts about fixed rates! ;)
The other option to overpay without a break fee is to shorten the term, but you're tying yourself in contractually.


Absolutely, I meant if you were going to switch. Keep an eye on the break fee every few months, you'll get to a point where it'll make sense. You're probably nearly there - saving 0.4% on 400k is 1,600 per year! So if you've 3 years left on the rate you'd save money breaking & refixing.

Clearly I do, that's another interesting angle re: overpayment without a break fee, will keep it in mind for the future!
As we've two years left, that's a 3200 interest saving. vs 3700 break fee up-front. I'll be keeping a close eye on that interbank rate though.
 

mojoask

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....Also bear in mind, in two years, yee hit 40, so be sure to increase pension contributions up to the 25% limit, for those aged 40.
At least some compensation for hitting that age! Open to correction on this, but I believe we can actually contribute 25% of the full year's earnings, in the year we turn 40, rather than from the day we turn it, if you follow me.
 
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mojoask

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Just run the numbers for comparison purposes, I've outlined our potential balance two years from now, in each of the following scenarios:
  1. No overpayment, 392k
  2. €6k pa / €500 pm, 379k (already doing this)
  3. €30k pa / €2.5k pm, 332k
  4. Max overpayment, 299k
Have made the first additional overpayment towards scenario 3 (and who knows, maybe even scenario 4) this evening. Thanks for taking the time to respond, and help us make the decision. The journey has begun.
 

mojoask

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I've done more detailed calculations, and my initial figures were slightly off for 3 and 4, they should read 337k & €304k respectively.

One other thought occurred to me, we don't necessarily need to make monthly overpayments, we could save up the cash and overpay the whole amount in December, unless I'm mistaken?

The benefit being we keep our assets liquid for longer, a large emergency/opportunity fund, so to speak. We would move the funds into a separate account every month, to keep things clean. The main con though is that it would cost us €500 in additional interest charges this year, and a little less next year if we did the same thing. There are no reasons we know about today, nor anything we're planning, which would require us the have these funds available either.
 
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