Risk-Free Method of Receiving €1,075 (for mortgage holders only)

R

ronaldo

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Let's say you have a mortgage and your house is valued at double your mortgage or more, i.e. You are mortgaged at <50% LTV. The current rate on offer by NIB is 3.75%. Therefore, in order to profit by paying into a savings account as opposed to paying off your mortgage, you need to be earning 3.75% net - which equates to 4.8% gross.

If you look at the best buys tables:

http://www.askaboutmoney.com/showthread.php?t=20747

You will see that there are three accounts paying in excess of this. Therefore, you can profit nicely if you open any or all of these accounts and pay into them as opposed to paying off your mortgage.

The maximum benefit that can be derived from this technique is in the scenario below (although anyone with a mortgage can benefit from it):



Let's assume you are:
  • a married couple,
  • your mortgage is over €135,500,
  • your house is worth more than double your mortgage,
  • you can afford to save €2,050 per month on top of whatever your mortgage would cost if it was interest only.
You should now transfer your mortgage to NIB who offer the best rates at 3.75%. Your TRS allowance as a married couple is €5,080 per year. Therefore, the first €135,500 of your mortgage is only costing you 3% in interest (as you get a refund of 20% from the taxman).

€2,050 per month savings equates to €24,600 per year. The first €5,080 of this is costing you 3% and the remaining €19,520 is costing you 3.75%. Therefore, the total cost of this money is €152.40 + €732 = €884.40.

You can save €300 per month @ 6.34%, €750 per month at 6.2% and €1,000 per month @ 6%. After DIRT, these figures are as follows:
  • €3,600 p/a @ 5.1%
  • €9,000 p/a @ 5.0%
  • €12,000 p/a @ 4.8%
The total interest received in the 3 accounts will therefore be €183.60 + €450 + €576 = €1209.60.

This means that, as the money cost you €884.40 and you received €1209.60, you have made €325.20.

During year 2, you will make the €325.20 on the money invested in year one as well as another €325.20 on the money invested in year 2 - or €750.40. This is a total saving in two years of €1075.60.

Assuming high interest savings accounts are still available at this stage, you could repeat the process.

If you think that you could do better than these savings accounts by investing in the stockmarkets, you can use the same technique. See the following thread for details:

http://www.askaboutmoney.com/showthread.php?t=41034
 
  • €3,600 p/a @ 5.1%
  • €9,000 p/a @ 5.0%
  • €12,000 p/a @ 4.8%
The total interest received in the 3 accounts will therefore be €183.60 + €450 + €576 = €1209.60.
Click to expand...
Incorrect figures here for starters as you assume that this is the total you have in the account at all times during the year. For simplicity the middle figures should be around 5% of 4,500 as thats the average amount you would have in the account for the year. I'd say halve the 1209 to around 600 and you would be nearer correct.
 
Sorry never copped onto that one. The figures should be halfed to get the average over the year. Therefore, the money is costing you circa €440 and you are getting circa €605 in interest making €165 in year one. However, in year 2 you do get the full interest for year 1's money as well as the additional €165. Therefore in year 2, you should get around €490.

The savings using this are marginal and probably not worthwhile to open the three accounts. I would probably advise the stockmarket method over this method:

http://www.askaboutmoney.com/showthread.php?t=20747
 
You state in your assumptions that you are considering a married couple.

Surely if this is the case, you would open 2 of each of the top paying accounts (Mr and Mrs), allowing you to save €600 per month @ 6.34%, €1500 per month at 6.2% and the rest @ 6%.

Makes more sense...

JR
 
You will save money from day 1 but the amount saved isn't very much. To give more accurate workings, let's assume a married couple. After DIRT, they can save the following amount each:
  • €300 monthly @ 5.1% - Account A
  • €750 monthly @ 5.0% - Account B
  • €1,000 monthly @ 4.8% - Account C
The interest received on these savings will be as follows:

.................Account A....Account B....Account C
Month 1........€01.28.........€03.13.........€04.00
Month 2........€02.56.........€06.26.........€08.02
Month 3........€03.84.........€09.41.........€12.05
Month 4........€05.13.........€12.58.........€16.10
Month 5........€06.43.........€15.76.........€20.16
Month 6........€07.70.........€18.95.........€24.24
Month 7........€09.04.........€22.15.........€28.34
Month 8........€10.35.........€25.37.........€32.45
Month 9........€11.67.........€28.60.........€36.58
Month 10......€13.00.........€31.84.........€40.73
Month 11......€14.33.........€35.10.........€44.89
Month 12......€15.66.........€38.37.........€49.07
TOTAL.......€101.02......€247.51......€316.62

Therefore, the grand total of interest earned per person saving the maximum of €2,050 into each of the above three accounts is €665.15. This means that a married couple could open one of the accounts each and save €4,100 per month earning €1330.30.

If their mortgage is €135,500 or less, they are paying 3% interest on their borrowings (as TRS is refunded). Otherwise, they are paying 3.75% (assuming < 50% LTV). Lets assume now that you could, as a married couple save €4,100 per month on top of the interest of your mortgage (most people can't do this but this is just to show the maximum that can be saved using this technique). The interest paid on the mortgage will be as follows:

.............Mortgage < €135,500......Mortgage > €135,500
Month 1.........€10.13..........................€12.66
Month 2.........€20.28..........................€25.35
Month 3.........€30.45..........................€38.09
Month 4.........€40.65..........................€50.86
Month 5.........€50.88..........................€63.68
Month 6.........€61.13..........................€76.53
Month 7.........€71.41..........................€89.43
Month 8.........€81.71..........................€102.36
Month 9.........€92.04..........................€115.34
Month 10.......€102.40........................€128.36
Month 11.......€112.78........................€141.41
Month 12.......€123.18........................€154.51
TOTAL..........€797.03......................€998.59


Summary:
Compare the above amounts of interest paid with the amount earned by saving €4,100 per month and you will, as a couple, save either €533.27 or €331.71 depending on how much your mortgage is. These savings will, of course increase in subsequent years. These savings are quite small compared to the potential the stockmarket offers. Nevertheless, if you have a mortgage at < 50% LTV, you should be switching to NIB anyway (provided you are on a variable rate at the moment). This will offer additional savings. Then it's just a matter of asking NIB to switch your mortgage to interest only, opening the savings accounts and setting up direct debits. All-in-all, probably half a days work.


Additional Note:

I'll not show the workings for this one but after two years of saving the €4,100, the total savings amount to €2105.53 or €1312.63.

Now, let's assume that you, as a couple, can't afford to save the €4,100. The following is the potential savings after two years based on smaller amounts of savings each month:

  • Saving €600 per month - you should open two AIB accounts and save €300 each per month. You would save €331.78 or €214.31 depending on the value of your mortgage.
  • Saving €2,100 per month - you should open two AIB accounts two BOS accounts and save €1,050 each per month. You would save €1121.20 or €710.07 depending on the value of your mortgage.
Please note that these savings are the amounts you need to save each month in addition to paying yuor mortgage on an interest-only basis.
 
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