Pay down mortgage or save - future mover

haventabreeze

New Member
Messages
6
We currently use any extra cash we have to overpay our mortgage. We plan on moving to a bigger house at some stage in the future - within the next 5 to 10 years.

My question is knowing that we’re going to be moving at some stage, does it make more sense to build up a cash deposit or continue to overpay the mortgage & build up the equity?

We currently have 305k outstanding on a house valued at 460k. My thinking has been we owe the bank that money no matter what happens so might as well clear it ASAP and save on interest/bring down the repayments in case of a rainy day.

However, if the market drops again, there could be a missed opportunity if we have no cash to hand for a deposit if it’s all tied up in our current house, which will also have devalued.

Would appreciate any advice. Thanks
 

NoRegretsCoyote

Frequent Poster
Messages
630
It depends on your earning capacity at the time you move.

If it's too low the bank might not re-lend you what you've paid back early.

You could talk with the bank already to see what the boundaries are.
 

Brendan Burgess

Founder
Messages
37,836
A very interesting question.

You should only hold onto cash if you will be able to buy your second home without selling your first

Case ACase B
Current house value€300k€300k
Current mortgage€200k€100k
Equity€100k€200k
Savings€50k€50k
Target house value€500k€400k
Earnings€100k€200k

To buy the target house in Case A, you would need a mortgage of €450k to buy the house without selling your existing house. With an existing mortgage and a salary of €100k, you will not get this mortgage, so you will have to sell your house to buy. So pay down the mortgage.

In Case B...
You will need a deposit of €80k to to buy the house, so don't pay off your mortgage.

If you buy the house while keeping your current house, you will have a mortgage of €450k which is easily achievable on earnings of €200k.

(Note: I am not recommending that you keep your existing house. I am just saying that you would be able to do so if you wish. In most cases, you should sell your existing house, even if you can afford to keep it.)

If you have a cheap tracker mortgage with an active bank, then you should not pay it down.
You can transfer the tracker to a new house paying about 1% extra. (Exceptions - not applicable if only 10 years or less to go on the tracker mortgage or if the tracker margin is high e.g. ECB + 1.5%)

Why you should pay down a non-tracker mortgage in Case A

Assuming you are paying a mortgage rate of around 3.5%, paying off a mortgage is the equivalent of getting a tax-free, charges-free, guaranteed investment return of 3.5%. At the moment, you have it in a deposit account, where you are getting a return of close to zero. If you pay off €100 now, you will owe €140 less than you would otherwise have in 10 years.
 

haventabreeze

New Member
Messages
6
Thanks for the detailed reply

In Case B... Can you explain why it would be better to save the cash for the deposit rather than avail of the same interest savings as Case A? Is it case of having somewhere to live while you complete the sale of the second house?

In our scenario, we won’t be able to buy second house without selling our current one as we won’t have the salaries needed. We will be receiving a number of lump sums over the coming years due to shares vesting so that’s where the extra cash for saving or paying down the mortgage will come from to make up the difference. Obviously subject to the markets behaving.
 

Brendan Burgess

Founder
Messages
37,836
In Case B... Can you explain why it would be better to save the cash for the deposit rather than avail of the same interest savings as Case A? Is it case of having somewhere to live while you complete the sale of the second house?
Yes. to buy a house for €400k , they will need a deposit of €80k cash. They have €50k so they need to save up.

As you fit into category A, if you do not have a tracker mortgage, then you should pay down your mortgage. You "get the money back" when you sell your house.

Brendan
 

Andrew365

Registered User
Messages
80
I note that you say you will be getting some lump sums over the coming years. A more cautious approach would be to on a monthly basis split it 50/50 for example if you have 500 a month available to pay off the mortgage, pay off 250 and save 250. This way you aren't at the fully exposed to a dip in the property market, once you receive the lump sums based on the prevailing market at that time you can decide whether to save it or pay off the mortgage.

This isn't the most efficient option but if you are concerned with the property market falling and you essentially losing what you have paid off due to devaluation this option could work.

Might help to know what the value of the home you would like to buy in future would be roughly.
 

haventabreeze

New Member
Messages
6
I note that you say you will be getting some lump sums over the coming years. A more cautious approach would be to on a monthly basis split it 50/50 for example if you have 500 a month available to pay off the mortgage, pay off 250 and save 250. This way you aren't at the fully exposed to a dip in the property market, once you receive the lump sums based on the prevailing market at that time you can decide whether to save it or pay off the mortgage.

This isn't the most efficient option but if you are concerned with the property market falling and you essentially losing what you have paid off due to devaluation this option could work.

Might help to know what the value of the home you would like to buy in future would be roughly.
Yeah, I had considered that and it’s definitely a good option. We’re with UB so we could pay off the 10% allowance with no break fee each year and save the rest, should our funds keep performing well.

However, we’d lose out on significant interest savings.

We’ll be looking at houses around the 650k mark.
 
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haventabreeze

New Member
Messages
6
Yes. to buy a house for €400k , they will need a deposit of €80k cash. They have €50k so they need to save up.

As you fit into category A, if you do not have a tracker mortgage, then you should pay down your mortgage. You "get the money back" when you sell your house.

Brendan
Thanks Brendan.
 

Brendan Burgess

Founder
Messages
37,836
This way you aren't at the fully exposed to a dip in the property market, once you receive the lump sums based on the prevailing market at that time you can decide whether to save it or pay off the mortgage.
Hi Andrew

Either you are making no sense at all or else I don't understand what you are saying.

I cannot see how a fall in the value of property changed this strategy at all. There is no advantage in paying off half and putting half on deposit. The full amount should be paid off.

If there is some point I am missing, could you please illustrate it with an example.

Brendan
 

Andrew365

Registered User
Messages
80
Hi Andrew

Either you are making no sense at all or else I don't understand what you are saying.

I cannot see how a fall in the value of property changed this strategy at all. There is no advantage in paying off half and putting half on deposit. The full amount should be paid off.

If there is some point I am missing, could you please illustrate it with an example.

Brendan
I was basing it on them selling the house in x years and clearing the mortgage. An example, house is bought for 400k with a mortgage of 360k, owner wants to sell the house in 3 years. To simplify normal mortgage repayments total 10k and owner has 5k per year in excess to pay off or to save. The owner uses the 5k to pay off the mortgage so after 3 years the house was bought for 400k and now has 315k mortgage left resulting in 85k equity. If the house drops in value to 385k you still owe the 315k mortgage but Equity has reduced.

The op mentioned they are concerned about this situation and also not having the cash to take advantage, they are no worse off as theoretically if their property has devalued so should the others but from a liquidity point of view. Given that the Op mentioned over the course of the next few years they will receive lump sums due to share divesting. My suggestion is to split the monthly amount between over paying mortgaging and building the liquidity pool and once lump sums are received the Op can decide whether it is best to increase the liquidity pool or pay off the mortgage further.

I agree that this will not be the most efficient in interest savings but due to the lump sums being received it has the potential to even itself out over the period.

My view is that when planning to trade up whilst paying the current mortgage of quicker is ideal you should also be building up a pool of liquid assets.
 

Blackrock1

Frequent Poster
Messages
384
Unless i am missing something it wont matter what cash someone has on hand, if they are planning on trading up, unless their circumstances have changed drastically, they will have to sell anyway so whether you have it in cash or equity it all amounts to the same thing you cant move any quicker on a property. So better pay down the mortgage and save the interest.
 
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