Should I save or pay my mortgage?

Y

youngc

Guest
I would be grateful for your considered opinion on matters below.
Situation:
Mortgage of €250K @ 4.85% variable Tracker
Pension from last week @ €260 p/m
Max SSIA €20K this month
Current Account: €5K with AIB and €10K with RaboDirect
I intend to convert the attic
Could afford to contribute an extra €100 p/m
I do not have any loans or Credit Card Bills outstanding.

Options:
Should I fix my mortgage: 3 yrs @ 5.05% or 2 yrs @ 4.99%, I do not have a problem with the current rate rises but the previous rates quoted by the bank are better than the current ECB rises
Should I consider increasing my repayments by the €100?
I am considering putting the SSIA €20K towards the mortgage and reducing the term by 4.5 years.
I cannot renovate the house until next year so I am presume that RaboDirects @ 5% is better than Anglo-Irish 4.11@ (1yr fixed)

Questions:
If DIRT Tax is 20% then is the Net interest rate for RaboDirect (5%) 4% and AIB Regular Saver (7.1%) 5.68%?
Would I be better off putting money into AIB Regular Saver or Increase my Mortgage repayments?
If I profit more from putting money in AIB Regular Saver rather than paying back more on my mortgage, will this be diminished by inflation (5.1% today).
Outside of Shares, does anything beat the mortgage rate?
 
Re: Should I save or pay my morgage?

I think you are in a lucky situation.
Your ssia matures so you should actually have money per month freed up...I'd consider boosting your pension payments. Knocking off years from your mortgage is another great option I would veer towards in your situation
 
Re: Should I save or pay my morgage?

Fixed Mortgage
I have always presumed that before a lender offers a fixed interest rate, that they have look at the likely increases over the fixed rate period and determined a rate of interest that will ensure that they do not make a loss, and in fact make an additional profit. To me the only advantage of fixing your mortgage is that you know that you will always be able to make the repayments, even if they are higher than you would pay on a variable rate. It appears that in you case, you have the capacity to deal with in any likely increase. Therefore I am not sure that a fixed rate is any advantage to you. Also as far as I know once you go the fixed rate route, you will not be able to increase you repayments or pay off a lump sum.


Increase mortgage/save/invest
There is a line of thought that you should have savings of between 3 and 12 months of you after tax income, depending on you number of dependants (if any). With that in mind creating that nest egg and then paying off the mortgage would be my choice. Once you egg is in place, either increasing the mortgage and/or investing in higher return (and risk) investments would appear to be the logical choice. By leaving additional savings in deposit accounts you are at best matching the interest you are paying on the mortgage.
 
Re: Should I save or pay my morgage?

I think you would be mad to fix if (as it seems) you are in a comfortable financial situation and your mortgage is no great burden on you. Only fix if you need the stability that fixed repayments bring - e.g. because if rates rose further you might be under pressure to service the mortgage. Certainly don't fix in an attempt to second guess the institutions, time the market and gamble on saving over a low margin variable/tracker rate over the medium/long term.
 
Re: Should I save or pay my morgage?

I disagree. I think the 2 year fixed is attractive and i would be tempted by the 3 year fixed. Fixed rates are priced off the CURRENT cost of money for that particular time period, not some arbitary guess by the bank as to how to milk customers the most. Normally the yield curve slopes upwards from left to right( shortterm money is cheaper to borrow than longterm money). So yes in general an adjustable rate mortgage is generally better than a fixed rate.
But right now the yield curve is flat and interest rates, in particular shorterm rates, are rising. In this environment a fixed rate may offer a better deal.
One of the effects of joining a low inflation area( or at least an area with a reputation for low inflation) should be a flatter yield curve. This should mean a smaller spread between fixed rate and floating rate mortgages. Also the greater depth and liquidity of the single currency fixed income market, the increased competition between mortgage providers and the ability to resell mortgages in the marketplace should mean a lot better deals on fixed rate mortgages. i think they will become a lot more popular in the future.
In the end it comes down to a guess about IR. One more 1/4% is a certainty and I think that there's at least another after that this year. That would put the tracker rate well above 5%.
 
Re: Should I save or pay my morgage?

I also made the same assumption as you that the bank would always want its fixed rate to stay at least one step of the ECB rate, however, I was very surprised with the fixed terms. Essentially, the question is: do I expect ECB rates to rise within 12 months and are they lightly to follow the recent pattern of 0.25% increments and if so then the one year fixed (4.99%) would be a slightly better bet. Similarly, considering that the rates have risen consistently over the last 15 mts and there is nothing significantly positive in the European Economic Horizon then I think that it is unlightly that rates will reduce in within a two year period (or is todays discussion over the dollar a matter of concern?). I confirmed with the bank that I can go back on the same rate tracker at the end of the fixed rate period.
I think that I will put an extra €100 p/m in AIBs Regular Saver Account, at least until January when the rates may change and hope that they will still stay above the mortgage rates.
 
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