Single guy - move savings to mortgage or pension?

[V2stone]

Age:
40
Spouse’s/Partner's age:
n/a, single

Annual gross income from employment or profession:
E45,000
Annual gross income spouse:
n/a

Type of employment:
Private sector employee

Expenditure pattern:
Saver

Rough estimate of value of home
E250,000
Mortgage on home
E150,000 - 24 years left.
Mortgage provider:
EBS
Type of mortgage: Tracker, interest only, fixed rate
Variable
Interest rate
3.5%. Letter recently received from EBS offering fixed at 3.15% for 3 years.

Other borrowings – car loans/personal loans etc
None

Do you pay off your full credit card balance each month?
Yes

Savings and investments:
E20,000 savings. Currently paying €1,000 into a regular savers account with EBS at 3%, and €80 per month into the credit union. Will probably be putting about €10k into house in the next year.

Do you have a pension scheme?
I pay €20.00 per month into a PRSA with Irish Life, my employer matches this (employer will match pension contribution up to 5% of salary).

Do you own any investment or other property?
No.

Ages of children:
None.

Life insurance:
Just the mortgage protection.

What specific question do you have or what issues are of concern to you?
When I took out the mortgage 10 months ago, I was still paying into a regular savers account that was paying less than 1%. When the regular saver came up for renewal late last year, I closed it & took out a new account to avail of the 3% offer. It has only occurred to me recently that instead of putting €1,000 into that each month, I should be putting it into the mortgage or pension. Most of the banked 20K savings are in either the current account or the credit union so earning diddly squat.

The pension contribution is at a very small amount because before I bought the house I wanted to maximise my savings towards buying the house. The intention was to increase the pension once I got settled into paying a mortgage, but only getting around to looking at it now.

My instinct at the moment is to go with something like this:

1. Overpay mortgage by €400 per month (the Extra mortgage payment calculator on ccpc.ie suggests this will cut my cost of credit by 50%, & reduce the term by 10 years).

2. Increase pension contribution to €400 per month.

3. Reduce regular savers to €200 per month (I can dip into the 20k for the house & rainy day stuff, but would like to keep something going into a reasonably accessible fund).

Would appreciate any thoughts or suggestions. Is there anything obvious that I'm not thinking of?

Thanks.

 

[RedOnion]

2. Increase pension contribution to €400 per month.

I'm assuming you mean 400 net to add back to the 1000 per month you're currently saving?
Gross that'd be over 700 per month - a decent contribution on your salary.

Overall your plan looks good - I like the plan to both pay mortgage earlier, and also contribute to pension.

Don't forget you can make an AVC to your pension back dated to last year to get the tax benefit.

The only other thing I'd look at is to see if you can get a better mortgage rate elsewhere. You've got a 60% LTV, so shouldn't be a problem switching. Have a look at the best buys posts in the mortgage switchers forum.

 

[odyssey06]

Rather than over-paying the mortgage directly, if you setup a regular savings account then on maturity you can use that as a once off capital repayment on the mortgage to reduce the term. This gives you more flexibility to access the money and decide whether to use it for the mortgage, or perhaps you might need a new car, depending on your circumstances at the time.

 

[Sarenco]

Hi @V2stone

You should definitely contribute at least 5% of your salary to your pension to maximise your employer match - that's pretty much a no-brainer.

Beyond that, I think you should prioritise maximising your pension contributions, ahead of paying down your mortgage, at least to the extent that get tax relief at the higher rate on those contributions. Could you stretch to contributing around 20% of your gross salary to your pension?

Any (after-tax) savings over and above a reasonable emergency fund (€20k should be plenty) should certainly be thrown at the mortgage.

I also agree with @RedOnion that you should be able to materially reduce your mortgage rate if you shop around.

Hope that helps.

 

[Steven Barrett]

Putting €20 a month into a pension is a waste of time. Even with your employer matching it, you can expect €13,000 (in today's money) when you retire.

I realise that you just bought a house and needed to reduce your pension, but you need to get it back up so you are making a meaningful contribution.

I'd start with getting the pension up. Then overpaying into your mortgage a bit.

But also remember to live. If you put your money into a pension or mortgage, you won't be able to access it, so ensure you have enough money to do some fun things too.


Steven
www.bluewaterfp.ie

 

[MrEarl]

Hello,

If you are confident that your job is safe for the next 12 months or more, then I would take €10k from the savings right now and put it against the Homeloan. That will have a superior impact on the overall cost of your credit, than increasing the Homeloan repayments over the next 12 months.

Once the above has been done, then I agree 100% with Red Onion, see if you can get a better mortgage deal from another lender. Just make sure that the cost of moving the loan, is more than offset by the future savings. Watch out for some of the cashback offers as there may be short term gain, for long term pain.

Based on your current arrangements, you will have the €20k back in your EBS savings account within 10 months.

I appreciate that you have mentioned that you intend putting €10k into your house over the next year - does that all have to happen within that time frame and if so, in the short term, or in a year's time ? Your savings in the credit union may play a part here, depending on how much you have, or again, the EBS account may fund the expenditure in close to a year's time.

Subject to circumstances and planned expenditure on the house, I would be looking to replicate the action of paying an additional lump sum against the homeloan each year, for the next 3-5 years.

I agree in principal with some of the other posters here that you need to be saving more into your pension, but that is a long term objective. For a single person, getting the debt down on your homeloan would be my first priority at age 40, because if you lose your job you want to ensure that you have a roof over your head. I would be reviewing the decision on an annual basis, with intention to refocus my efforts on the pension in a few years time (max 5, and subject to keeping an eye on loan rates, tax breaks on pension contributions etc.).

Any additional funds that you earn in the next couple of years, such as bonuses, could go into the pension by way of AVC so as to maximise the tax benefits, without having any impact on your monthly cashflows.

 

[V2stone]

Thanks for the replies all. Plenty to ponder.

I'm going to look into switching the mortgage. I'm with BOI for the day-to-day banking & their switcher offer looks appealing on the face of it, but I'll have to research that a bit more. Also, I hadn't really considered AVCs, and again that's something I need to research. I have a few more questions if anyone has the time.

I'm assuming you mean 400 net to add back to the 1000 per month you're currently saving?
Gross that'd be over 700 per month - a decent contribution on your salary.

I'm not entirely sure what you mean here? The plan would be to pay €400 per month into the pension, which is just over 10% of monthly salary.

Hi @V2stone

Beyond that, I think you should prioritise maximising your pension contributions, ahead of paying down your mortgage, at least to the extent that get tax relief at the higher rate on those contributions. Could you stretch to contributing around 20% of your gross salary to your pension?

Sorry, the tax relief stuff really confuses me. Would I not get tax relief at the higher rate regardless of how much I'm contributing, or do I have to contribute a certain percentage to get relief at the higher rate?

Hello,

If you are confident that your job is safe for the next 12 months or more, then I would take €10k from the savings right now and put it against the Homeloan. That will have a superior impact on the overall cost of your credit, than increasing the Homeloan repayments over the next 12 months.... I would be looking to replicate the action of paying an additional lump sum against the homeloan each year, for the next 3-5 years.

So if I went down that route, would there be any point in simultaneously overpaying the mortgage on a monthly basis? Or would that decision come down to whether I can get a regular savers that pays a higher interest rate than my mortgage interest rate?

 

[RedOnion]

I'm not entirely sure what you mean here? The plan would be to pay €400 per month into the pension, which is just over 10% of monthly salary.

Say if you contribute 400 per month to your pension. You'll get tax relief at the higher rate on this, so the 'cost' to you (drop in tax home pay) is only about 240. (I'm sure somebody will have the more accurate figures).

A contribution of about 660 per month would be 400 after tax.

 

[MrEarl]

...If you are confident that your job is safe for the next 12 months or more, then I would take €10k from the savings right now and put it against the Homeloan. That will have a superior impact on the overall cost of your credit, than increasing the Homeloan repayments over the next 12 months.... I would be looking to replicate the action of paying an additional lump sum against the homeloan each year, for the next 3-5 years.....

....So if I went down that route, would there be any point in simultaneously overpaying the mortgage on a monthly basis? Or would that decision come down to whether I can get a regular savers that pays a higher interest rate than my mortgage interest rate?

Hello,

Sure, the rate you get on your deposit (and the rate you pay on your loan) are considerations, but for me the bigger considerations are:

• Get the debt down quickly, because there's only one salary to rely on.
  
• Minimise the amount of loan interest that you pay on the existing loan (paying an immediate €10k lump sum benefits you more than paying it in over say 12 installments).
• See if you can get a better deal by moving your mortgage to a cheaper lender than EBS (once the €10k has been paid in)

Again, keeping in mind that you rely on one source of income, I would be anxious to get your savings back up quickly - hence I propose that you keep saving the €1k pm, to get your savings back to €20k asap (and likewise, keep the Credit Union savings going). Depending on your circumstances, you might repeat the same lump sum repayment again next year, however if you need the money for something else in 12 months time, or you are less confident that your job is safe, then you might elect to keep the cash on deposit instead.