Moneymakeover Pay off mortgage?

Personal details

Your age: 44
Your spouse's age: N/A

Number and age of children: One, age 6


Income and expenditure
Annual gross income from employment or profession: PAYE €98000, have reached top of scale this year public sector
Annual gross income of spouse/partner: N/A



Summary of Assets and Liabilities
Family home value: €390k
Mortgage on family home: €85k
Net equity: €305k


Family home mortgage information
Lender BOI
Interest rate 2.25%
Type of interest rate: Fixed, ending on 01 Aug 2025 and will roll on to variable rate of 3.25%

Remaining term: 19 years
Monthly repayment: €460, will be €507 on higher rate in August 2025

Other borrowings – car loans/personal loans etc

None

Pension information
Public sector pension, max contribution since last 2 years


Other savings and investments:

€105k stocks (gross subject to CGT)
€22k in cash-emergency fund

Other information which might be relevant

Co parent, no maintenance as 50/50 childcare
No childcare as have family support

Looking to get income protection policy over next few weeks

Top of scale in public sector, permanent role. Currently applying for next step in career ladder (Principal Officer)

Will need to change cars in next 2-3 years, will get second hand family car


What specific question do you have or what issues are of concern to you?

• Low fixed mortgage rate coming to an end on 01 August, should I just sell my shares and pay off mortgage? Or leave in shares?
• Considering also sale of shares and use as deposit for rental property. Not under pressure with mortgage payments so could continue to pay higher month if it makes sense to pursue other options.

Any advice appreciated, or if i need to add anything please let me know.

Isabel S said:

should I just sell my shares and pay off mortgage?

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I would say yes as the effective alternative of borrowing at 3.25% to invest in shares doesn't make much sense. What's the net value of your shares after accounting for CGT?

Isabel S said:

Considering also sale of shares and use as deposit for rental property.

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Why do you think that this is the most suitable investment for your needs?

It's a very common and worrying trend here on Askaboutmoney for many people to blithely assert that they want to buy a rental property without properly assessing the "business plan", crunching the numbers, ascertaining the worst/likely/best case gross/net yield, understanding the possibly onerous responsibilities of being a landlord and adhering to RPZ and RTB regulations, being cognizant of the fact that they're concentrating most of their net worth in a single asset class/geographic region (PPR and rental property = Irish residential property), and properly weighing up and assessing alternative investment options.

Pay off the mortgage first & then reassess.

Pay off the mortgage and continue to max pension contributions.

You’ll be saving about 2500 pa in interest payments if you pay off the mortgage. If you’re saving something each month, you should be able to increase emergency fund after clearing mortgage, great piece of min having no mortgage too

If it were I'd keep my shares and not pay off my mortgage. Having flexibility of having the shares available to sell in the future would be of more value to me than saving money on the interest.

Things might change in the future and you might want that chunk of money available for something. The shares might continue to increase. You're only 46.
Once you've sunk a pile of available cash into the mortgage it's gone. Just another perspective.

sadie said:

If it were I'd keep my shares and not pay off my mortgage. Having flexibility of having the shares available to sell in the future would be of more value to me than saving money on the interest.

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How exactly do you think that effectively borrowing at 3.25% to invest in shares is a good idea?

sadie said:

Having flexibility of having the shares available to sell in the future would be of more value to me than saving money on the interest

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To me paying off the mortgage is the best use of the shares at the moment.
Been 46 and mortgage free will allow the OP to save and build up a nice rainy day fund or a stock portfolio in a relatively short time period should she wish
And if the need arose and the OP needed the money they can then borrow without the encumberment of a mortgage

Simple sum:

Calculate X = ((Cost of borrowing €85k annually @ 2.25% (3.25% in 60 days) compound interest minus mortgage interest relief, plus annual cost of mortgage protection policy that doesn't convert to a simple life policy) multiplied by 19 remaining years), plus early surrender charges

Calculate Y = (Income earned on (€105k stocks minus CGT) plus (€22k minus DIRT, if applicable) multiplied by the same 19 years)

Subtract X from Y = Z

If Z is a positive number
then
otherwise
End of Decision making.

I'm with the "pay off the mortgage" voters here. Why enrich others at your expense?

Experts, if any of the above is wrong, feel free to correct it.

mathepac said:

Calculate Y = (Income earned on (€105k stocks minus CGT) plus (€22k minus DIRT, if applicable) multiplied by the same 19 years)

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This can only be speculated about whereas the "return" in terms of interest/other costs saved on reducing/clearing the mortgage is guaranteed.

Are your shares a diversified basket or a limited number of specific stocks?

Isabel S said:

will roll on to variable rate of 3.25%

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Where are you getting this rate? There does not appear to be a standard variable rate of 3.25% with BOI. In fact it's 4.15%

Fixed rates start from 3.3% depending on BER and fixed term

Isabel S said:

Considering also sale of shares and use as deposit for rental property

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It really doesn't take a lot of effort to figure out that this is a bad idea.

By using the shares/cash, essentially you are borrowing from your PPR for the deposit.

You will borrow 70% at BTL rates of ~6%.

The 30% deposit is effectively borrowed at double your PPR mortgage rate (to make it comparable) because you are a high tax player. So 30% at at least 6.5%

You've now borrowed 100% at >6%. There are costs and expenses involved so even if you get a gross rent of 8%, you are barely breaking even.

As it would be break even or loss making from an ongoing income perspective, it means you are fully relying on capital gain to get any return. There are significant costs involved to buy/sell to access any gain you might make.

It should be obvious that you are very exposed to a drop in property prices with this investment.

Keep things simple, clear the mortgage and then start rebuilding your investment portfolio.

A very simple thought experiment; would you re-mortgage your home to buy a portfolio of shares? A person with the means to pay off a mortgage is effectively doing that.

jpmackey said:

A very simple thought experiment; would you re-mortgage your home to buy a portfolio of shares? A person with the means to pay off a mortgage is effectively doing that.

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While I don’t agree with the idea to purchase a rental property, I really, really don’t agree with this perspective. I think it’s perfectly fine to hold a long-term, affordable PPR mortgage at ~3% and invest spare income into a diversified basket of equities that history has shown is likely to yield 6-8% after inflation over the long-term, rather than focus solely on paying down the mortgage. If nothing else, you’re over-concentrated in one item (never mind one asset class or one geography!) that has very limited capacity to support other necessities in life (food, energy, education, etc.) without seismic upheaval, I.e. selling up!

I think your view greatly undervalues optionality and also liquidity.

Ongoing liquidity is improved by clearing debts - including PPR mortgage.

conor_mc said:

I think it’s perfectly fine to hold a long-term, affordable PPR mortgage at ~3% and invest spare income into a diversified basket of equities

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There is absolutely nothing wrong with what you suggest here but the question been asked here is not what to do with "spare income",
But rather I have enough funds built up now, should I pay off my mortgage or invest elsewhere
And to me it's a no brainer, why are you continuing to pay interest on a loan when you don't have to

I would sell shares and clear the mortgage. Save the €460pm and you can change your car in 2-3 years time, without either borrowing or using up your rainy day fund.