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.