Views on our financial position please

[Brendan Burgess]

Wouldn't it be safer to have €300,000 in cash and still owe €700,000 in the event of a crisis?

No, you have got this the wrong way around.

Whatever happens you will still owe the banks the money.

If a bank crashes, you could lose your all your savings.

If the world comes crashing down, it would be very nice to own your house outright with no debt.

Brendan

 

[Barbara Bunter]

Sorry Brendan, I understand you.

My point is that if someone loses their job, they're probably better owing €700,000 and having €100,000 in cash rather than owing €600,000 and having no cash?

thanks

 

[Brendan Burgess]

That would be right.

But you would be better off again having no mortgage if you lose your job.

Brendan

 

[Barbara Bunter]

That's all good. What I meant about the children was their future education needs and related expenses, that was all. Others on here have given better advice than anything I can offer and your husband's father seems to have a good outlook on life.

Thank you for taking the time to respond. We will send them to national primary schools and private secondary schools, so you are right - We need to factor in €10-15,000 per year (or more) for that in around 8/9 years time. And then with college, who knows what the funding model will be by then? But we should have sufficient set aside and coming in. My earnings will never set the world on fire, but my husband's seem to be on an upward trajectory thankfully.

 

[Sarenco]

Logic being that if the world goes to hell in a handbag, it makes no odds. Yes, you pay 3.1% extra per year but is it worth it to have the flexibility?

That's the issue in a nutshell.

Maintaining a liquid cash reserve to address any emergencies is effectively a form of self-insurance and, like any form of insurance, it comes at a cost. Your plan to build and maintain a cash reserve equivalent to six months of core household expenses seems entirely reasonable to me but anything beyond that seems excessive in your circumstances (with two earners, one of whom is in the public service).

 

[gnf_ireland]

This is really important and you will probably ignore the advice. But your husband should sell the shares as soon as they are realisable. It is wrong to have so much of your earnings and wealth tied up with the fortunes of one company. You can't diversify your earnings. But you can diversify your wealth.

If the company does well, your husband's earnings will continue. If the company falters, he may lose his job and his shares become worthless. It's probably hard for you to imagine that now. But many bankers saw their earnings hit as their shares in their employer became worthless.

Absolutely going to second this - it was a very good lesson I learned shortly after leaving university just before the dot com bubble. We all made lots of money on paper due to share prices doubling in short windows (tech stocks), but very few realised the gains and for most they became worthless pieces of paper.

I had a rule ever since - never to invest my own money in the general industry I work in.

I would even go so far as to 'short' some of the share options depending on their current prices as you can offset them with the shares once vested. Alternatively you can sell a future in them. All depends on their current value and how confident you are of them keeping this value for the next year. I would say derisk in any event!

 

[gnf_ireland]

With a gross income of €180k, it is not crazy to spend €4,000 a month.

With E10K nett pay and 3 outstanding mortgages, I respectfully disagree. However, I hold this view as I hate debt so perhaps others will not share this view.

I am going to side with @username123 here. I do think 4k a month is high spending with 2 young kids, especially when childcare is taken out of it. I know lots of people on similar incomes who would average between 50-60% of that after mortgage & childcare, and still live a very comfortable life.

If the couple were debt free, I would say by all means enjoy the hard earned money, but personally I would be looking to reduce that 700k mortgage a faster. Cutting the household running costs by 25% [1k a month] and putting it against the mortgage would save 140k in interest and cut 10 years off the mortgage. Its also worth noting that their current mortgage brings them to 66/67 respectively, and there is no guarantee that they would be in a position to service that level of debt at that age. They can afford to pay off the mortgage by 60, and believe they should strive to do this.

 

[gnf_ireland]

my husband's view is "invest 1/3, pay down debt with 1/3, and fritter away 1/3" (his Dad told him this is sensible and what he did over the years!)

Solid advice for someone in their 20's and early 30's before the serious commitments kick in. Think it may not be as relevant now, but depends on what you call fritter away

Fritter Away 1/3 - Personally I would use this to do an experience with the kids that they will remember forever - so maybe a Lapland trip to see Santa, Orlando when they are a little older, safari in Africa (again a little older) etc. Given the kids ages, and your income level, I would seriously consider a trip to Lapland next Christmas and go back then again in maybe 4-5 years again depending on when the magic ends. I can also strongly recommend an extended holiday to Martinhal in Sagres (Portugal) - the best adult friendly holiday location around (kids are the main guests here, adults are tolerated).
While you are at it, treat yourselves to a nice weekend break in the Cliff House in Ardmore or Monart

Pay down debt with 1/3 - no arguments on that. Pay the 3.1% debt first

Invest 1/3 - I agree with another poster here regarding investing outside a pension vehicle. I have just had to hand over 41% tax on some EFT profits I made last year + cover the same for next year's preliminary tax bill. I ended up making a pension contribution instead to eliminate the tax bill. Given the risks involved in investing, the tax is simply too high at the moment and the reward simply does not offset the risk in my view. Deposits make no interest (lose real value against inflation).
You would have to make greater than 5% guaranteed to beat your 3.1% saving net against the mortgage. I am not sure anywhere that can provide you those returns in the short term.

Is it sensible to have a holiday home while you still have a €700k mortgage on your PDH?

It depends on how much use you get out of it, both now and in the future. How often do you get to stay there and is it 'good for the soul'? How much of a hassle is it to run/maintain and do you believe it is giving you 'value'. A holiday home is only as good as the time you spend in it
I know people who have an apartment in the Cape Verde Islands - they have been there twice in 12 years.
I know people who have an apartment in Spain - they are there at least once every month for a long weekend.
I also know people who have a place in Ireland and they spend nearly 100 days a year there.
If you are not using it yourself for holidays, its a property investment and think you may be over leveraged here.

The de-risking you talk about Sarenco makes sense, but we're also conscious that we could try and repay the main mortgage early and die in the meantime!

Same applied with having 100k in the bank and passing away. At least the state will be happy with the inheritance taxes they receive

There is a balance to be had between a decent quality of life and living like a miser to pay down your mortgage early. I don't think many on here will suggest the latter (although some will), but I do believe you have scope to cut back on the household expenses a bit and clear the mortgage by 60

 

[gnf_ireland]

my husband's seem to be on an upward trajectory thankfully.

I think this point is also key. Your husband is the main breadwinner. While you understand his income is on an upward trajectory, how 'stable' is his industry and role? In times of recession, middle management can quickly become 'surplus to requirements' and no industry is fully recession proof.

How prone is your husbands company to a takeover? This can have untold impacts on a workforce. How global is the company for example etc etc.

I have not been working that long [1998] (work in the technology domain), and I have already seen two major events in my working life, which has impacted the industry generally. The dotcom bubble bursting saw the industry go into lock-down globally with large numbers leaving it to pursue other careers and the financial crises which saw a large number of major projects/programmes cancelled and wages/contract rates reduce dramatically.

I expect to see another 2-3 more of these types of events during the remainder of my working life - and I am only a few steps ahead of yourselves.

You appear to be 'banking' on his salary staying the same or rising in the future - and over 30 years that's quite a gamble in my view.

 

[Barbara Bunter]

Thank you all for taking time to respond. In relation to the shares/share options, it has always been his intention to sell them immediately. His role is very stable and he has plenty of options both here and further afield.

In relation to what's left on our mortgage at 65/66 as someone mentioned, I can't see that being an issue. Even if we don't overpay there would only be around €150,000 owed at that stage. I will have received my tax free lump sum of at least €90,000 at that stage (assuming no wage inflation) and he will have received his pension lump sum of €500,000. The mortgage should be a moot point. Thinking it through, at 65 we should be in an extraordinarily good position. And we don't believe in people factoring in inheritances, but that's a reality also.

In any event, we have decided to overpay the mortgage to the tune of €12,000 a year once we have a €60,000 cash reserve built up. I like gnf_ireland's ideas about holidays. That is how we fritter away money to be honest - Some of the €4,000 a month goes on holidays already as does 1/3 of my husband's bonus.

 

[Bronte]

What happens if your husband loses his job? You won't be able to pay the home mortgage on your income.

Your home mortgage remaining term is way too long as it ends in your sixties. Considering your high salaries I'd tackle this, and live a little later.

I'm not doing the maths but cashing in the 50k shares, taking it off the mortgage while keeping the repayments at the current level or higher would seem a sensible idea.

 

[Gordon Gekko]

There seems to be an obsession with early mortgage repayment and the OP having a mortgage in her 60s.

Pension is more important, and these people are doing the right thing on that front. They'll have the money to clear the mortgage two or three times over when they're in their 60s.

If the husband loses his job, whether they owe €700k or €600k won't be relevant. The repayments will be the same. And they have €550k of equity in their home.

Brendan's earlier comment is valid; the advice for these people should not be the same as the advice given to people who are struggling.

 

[Sarenco]

They'll have the money to clear the mortgage two or three times over when they're in their 60s.

All going well...

If the husband loses his job, whether they owe €700k or €600k won't be relevant. The repayments will be the same.

Not sure I understand how the repayments on a €700k loan could be the same as the repayments on a €600k loan, assuming a consistent loan term and interest rate.

Reducing debt obviously reduces a borrower's exposure to interest rate increases. A lot of people lost their homes in the UK when interest rates spiked after the UK crashed out of the ERM. It also increases a borrower's ability to restructure debts during a period of financial stress.

For the avoidance of doubt, I am not suggesting that the OP needs to take any dramatic corrective action given their financial circumstances. I am simply suggesting that they should concentrate on de-risking their financial position going forward.

 

[Gordon Gekko]

What good is it if you lose your job?

 

[Sarenco]

What good is it if you lose your job?

By that logic everybody should just leverage up to the maximum extent that their current income will permit. I thought that the recent financial crisis had cured us of that thinking.

The OP has a public sector job and could presumably address repayments on a lower loan amount more easily than a higher amount, at least for a period, while her husband seeks alternative employment. There is certainly more scope to restructure a lower loan amount.

Also, you don't have to lose your job to get into trouble with a loan. Lots of people lost their homes in the UK's housing crash of the early 90's without losing their jobs - the interest rate spike simply made their mortgages unaffordable.

It's worth bearing in mind that we are currently living through an era of unprecedented low interest rates. There is absolutely no guarantee that this situation will persist.

Again, I'm not suggesting that the OP needs to prioritise paying down the PDH mortgage ahead of all else. I'm simply suggesting that with a DTI ratio as high as 5:1 that the OP should concentrate on de-risking their financial position by paying down the PDH mortgage ahead of making any more risky investments (outside a pension wrapper).

 

[Gordon Gekko]

My view is that the risk they'd be seeking to mitigate is negligible.

These people are very wealthy and seem to be doing everything right.

 

[Sarenco]

My view is that the risk they'd be seeking to mitigate is negligible.

What risk exactly do you think is negligible? Rising interest rates? Another currency crisis? Recession?

The OP's family obviously have a significant net worth for their ages and I strongly agree with their plan to focus on paying down their PDH mortgage once they have rebuilt a reasonable cash reserve. I think that is an eminently sensible approach given their high DTI ratio.

 

[Gordon Gekko]

The Lord giveth them eyes, but they cannot see...

Sarenco, if you owned a house worth €1.25m and owed €700k on it, and you subsequently lost your job, would you prefer to owe €600k or still owe €700k and have €100k in the bank?

The problem with repaying a mortgage is that if the proverbial hits the fan, the money's gone!

My overarching point is that generic advice (e.g. "focus on repaying your mortgage as early as possible") is not suitable for everyone.

These people will have millions in their pension fund at retirement (assuming the asset allocation is right which nobody has mentioned). So the issue of having debt in their 60s is a red herring.

We need to be mindful of tailoring recommendations to people's individual circumstances.

 

[Sarenco]

Sarenco, if you owned a house worth €1.25m and owed €700k on it, and you subsequently lost your job, would you prefer to owe €600k or still owe €700k and have €100k in the bank?

Which is why I agree with the OP's strategy of rebuilding a reasonable cash reserve before they start paying down the PDH mortgage ahead of schedule.

Maintaining a liquid cash reserve to address any emergencies is effectively a form of self-insurance and, like any form of insurance, it comes at a cost. Your plan to build and maintain a cash reserve equivalent to six months of core household expenses seems entirely reasonable to me but anything beyond that seems excessive in your circumstances (with two earners, one of whom is in the public service).

Reasonable people can disagree on the appropriate amount of that cash reserve but maintaining a reserve of €100k while carrying debt @3.1% comes at an effective cost of ~€3,000 pa.

 

[Gordon Gekko]

Which is why I agree with the OP's strategy of rebuilding a reasonable cash reserve before they start paying down the PDH mortgage ahead of schedule.



Reasonable people can disagree on the appropriate amount of that cash reserve but maintaining a reserve of €100k while carrying debt @3.1% comes at an effective cost of ~€3,000 pa.

So what? The risk that has been highlighted is the husband losing his job. On all other fronts, they seem fine. Throwing large sums of cash at the mortgage does not mitigate the risk around him losing his job. Keeping the cash would be a far more effective hedge against the risk of losing his job. If things keep trucking along as they are currently doing, these people will be loaded and their mortgage will become an irrelevance.