Key Post Should I overpay my SVR mortgage?

This relates to owner occupied homes only. There is a discussion relating to investment property here

Updated for current deposit and mortgage rates June 2014

If you have a Standard Variable Rate mortgage, it nearly always makes sense to pay down the mortgage instead of keeping the money in a savings account.
If you have a cheap tracker, the decision is more difficult. Check out this Key Post: Should I overpay my tracker mortgage?

If you pay €100,000 off your mortgage, you will save €4,500 per year in interest.
If you keep €100,000 on deposit in the best deposit account, you will earn about €1,000 a year in interest after tax and USC.

So paying off your mortgage makes you better off by around €3,500 per year.

Other reasons for paying down your mortgage instead of keeping it on deposit

  • There is a small risk that the bank holding your deposit could go bust. Paying it off your mortgage eliminates this risk completely
  • If you are on a means-tested Social Welfare payment, having it on deposit could reduce your allowance.
  • If you are more likely to spend money if it's available, then paying it off your mortgage is a good idea.
Should I reduce the monthly repayment or the term?

Always reduce the monthly repayment and not the term.

Some people have reduced the term of their mortgage and kept the same monthly repayment. They subsequently got into difficulty with the mortgage and had to apply to have the mortgage rescheduled.

If you keep the same term, your contractual mortgage payment will be reduced. But you can overpay your mortgage without penalty at any time. So keep the same term, but set up a standing order to make the full payment if that is what you want to do.

If you do pay a capital sum off your mortgage...

Make sure to get a letter in writing from the lender saying that this is a payment of repayments in advance. So, if you need to take a payment break at some stage in the future, you will be able to do so as of right, and not at their discretion.

Some reasons why you might not pay capital off your mortgage

  • You have other debts e.g. credit union or credit card which are more expensive
  • If you have the lump sum as a result of losing your job, you may wish to keep the money to fund your living expenses while you are unemployed
  • You may need the money in the near future for something else e.g. a car, children's education, moving house, etc
  • If you are in negative equity, and thinking of moving, it's better to hold onto the cash as you have a better chance of getting a negative equity mortgage if you have a deposit.
Some alternatives to consider to paying off your mortgage


While it is almost always correct to pay down a Standard Variable Rate mortgage instead of keeping it on deposit, there are alternatives you should consider.

  • Contribute to a pension fund. If you are getting the maximum tax-relief on pension contributions, then you should consider this.
  • Invest in property or the stock market. Ask yourself if you would borrow at 4.5% to buy shares or property. This is risky and it's unlikely that the return after taxation will exceed the 4.5% cost of mortgage interest

If you have a fixed rate mortgage ...
You probably will pay a penalty for paying it off early. If you can get a fixed rate on deposit to match the term of the mortgage, then it is worth considering.


This post applies to home loans only...
The principle is the same for residential investment property loans, but the tax relief on the interest paid would be higher which should result in a much lower net cost. So it is more likely that the owner of a residential investment property would be far better off putting the money on deposit. This is discussed further here.
 
Re: Should I use a lump sum to reduce my mortgage?

I don't have a lump sum, but I can afford to overpay my mortgage?

The same principles apply. If it's a Standard Variable Rate mortgage you should probably overpay it.

If it's a cheap tracker, you probably should not overpay it.
 

DXB

Registered User
I have a mortgage with KBC and have made lump sum deposits with them which they say (in writing and verbally) can be withdrawn at 24 hours notice whenever I want up to the value of the total overpayments.

That way I have access to my money but incentive to not touch it unless absolutely necessary.

Essentially saving at the same rate of interest as KBC variable rate (I think... someone tell me if this is incorrect!)
 
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sheffo

Guest
Am I being over simplistic here, but why would a person use their savings to pay off a chunk of their mortgage for fear of the euro collapsing and all saving going automatically to Punt Nua thus reducing their value? Is it not the case that all mortgage balances would also be transferred to Punt Nua which would reduce the balance of the mortgage also?
 

serotoninsid

Frequent Poster
Is it not the case that all mortgage balances would also be transferred to Punt Nua which would reduce the balance of the mortgage also?
I stand to be corrected, but my understanding (from what other AAM'ers have posted on this subject in the past) is that mortgages will stay in euro but deposits would most likely be converted to punt nua.
 

Laramie

Frequent Poster
I have had 3 x 20 year mortgages on each house that I owned one after the other. I always paid down my mortage with lump sums, bonuses, spare cash. I effectively turned each one in to 10 to 12 year mortgages as a result. The present house that I live in was paid down over 7 years. For me it was the fact that I was getting a low rate of interest on my savings but paying higher interest on my mortgage. So in effect I was getting (saving) the mortgage rate on my savings by transferring it to my mortgage. It was only spare cash that was used.
 
I have rewritten this Key Post and would welcome a proof reader.

It's amazing that when it was first written tracker, the difference between mortgage rates and deposit rates was very small and the decision was finely balanced.

Since 2009, mortgage rates have risen while deposit rates have fallen.
 

itsallwrong

Frequent Poster
Q - Always reduce the monthly repayment and not the term.

Is this always a choice you can make or do some lenders keep you on the same payment and reduce the term?
 
Probably not obliged to give it.

If you need to reduce your repayments some time in the future, let us know how you get on.

Brendan
 
Q - Always reduce the monthly repayment and not the term.

Is this always a choice you can make or do some lenders keep you on the same payment and reduce the term?
I have never heard or anyone being forced to reduce the term.

It wouldn't make much sense. You have a contract to pay your mortgage over a particular term.
You have a right under the Consumer Credit Act to make a capital repayment.
I think that the default is to reduce the amount of the payment.
 

Marlucat

Registered User
Rather than creating a new question on this topic, I wondered if, Brendan, you would give the same advice with a much lower lump sum. I have about €15,000 to invest. My mortgage currently is €287,000 with 19 years remaining at a rate of 3.7%. I wondered if I should try to reduce the payment or keep it in a savings account. Thanks.
 

44brendan

Frequent Poster
In making this decision you should factor in your cash-flow position. I.e. If you reduce your mortgage by paying in this lump sum you will lose all access to these funds until the mortgage is fully redeemed. On the positive side your monthly payments will reduce and you are saving €555 annually in interest charges. You are unlikely to achieve a net return anything like this with any other investment of these funds.
 

Dweller$

Registered User
I have 5K that I can currently afford to pay into my mortgage. I possibly might Need 5K in the near future. Would I be better paying 5K off mortage and getting a loan of 5K if and when I need it, or just keep the 5k?
 

Gordon Gekko

Frequent Poster
I have 5K that I can currently afford to pay into my mortgage. I possibly might Need 5K in the near future. Would I be better paying 5K off mortage and getting a loan of 5K if and when I need it, or just keep the 5k?
Just keep the €5k...purely on the basis that you have indicated that you may need it in the near future.
 

Sarenco

Frequent Poster
So it would be better to pay that back as a mortage than say take a short term loan out for 5k?
No, the interest rate on the unsecured, short-term, loan would higher.

As Gordon says, if you might need the money in the short term then just keep it on deposit.
 

garbanzo

Frequent Poster
A very helpful thread from which i have learnt a lot.

I get the idea, if paying a lump sum off the mortgage you should a) reduce the monthly payment (not the term) and b) but to also overpay the monthly payment so you continue to make the original monthly payment. This gives you flexibility if you run into difficulties as your contracted monthly payment is reduced. There is no real difference in interest savings between doing this and instead shortening the loan term. The key thing is the flexibility it gives you. I get that.

What if in addition to that I overpay by €400 per month. What instructions do i give the building society to do with that monthly overpayment?

If i ask to reduce the contracted monthly payment each time as a result that means there will be incremental monthly reductions in the contracted monthly amount i pay. It will mean incremental monthly increases in the overpayment. It sounds like it could get complicated and the building society will get a pain in the ass with me. Plenty of scope for confusion.

Am i overthinking this...? What is the ‘smarter bear’ approach to this scenario?

Thanks a mill....great thread, great site.

garbanzo
 

LS400

Frequent Poster
I get the idea, if paying a lump sum off the mortgage you should a) reduce the monthly payment (not the term)
You should not reduce the monthly payments, unless you are having difficulty meeting these repayments....

What if in addition to that I overpay by €400 per month. What instructions do i give the building society to do with that monthly overpayment?
In paying down your mortgage with extra payments. What I would do it to have a separate account building up these funds. For the likes of your extra €400 per month, wait until your fund reaches 6 months worth giving you €2400 to pay in one payment, and instructing the bank to make this an out of course payment to you Mortgage account. This just reduces the balance but keeps the original monthly mortgage payments the same.

So, in that way you retain full flexibility with your repayments, without the complications of changing the structure of your loan, ie, less complications
 

elcato

Moderator
What I would do it to have a separate account building up these funds. For the likes of your extra €400 per month, wait until your fund reaches 6 months worth giving you €2400 to pay in one payment, and instructing the bank to make this an out of course payment to you Mortgage account
Maybe so but the interest on the mortgage is calculated daily so you are paying a bit more interest by holding off for the 6 months.
 
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