What (if anything) Should I Change?

fungie20

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Age: 31
Spouse’s/Partner's age: 32

Annual gross income from employment or profession: 130k (100k salary with approx 30k in bonus and shares)
Annual gross income of spouse: 50k (took a decent pay decrease recently but long term will be higher)

Monthly take-home pay: not 100% sure but probably between 6-7k combined

Type of employment: e.g. Civil Servant, self-employed: Private sector, partner public sector

In general are you:
saving:
Approx 2k/month and partner approx 1k/month

Rough estimate of value of home: 500k
Amount outstanding on your mortgage: 420k with 29 years to go
What interest rate are you paying: 2.8%
We bought our house just under a year ago by taking a 5 year fixed term with Bank of Ireland taking the 3% cashback offer (2% already received and 1% if we see out the fixed term). We overpay the max amount per month allowed, 10%.

I recently enquired about moving from the 2.8% rate (4 years left) to their 2.3% 5 year fixed rate. I worked it out that the savings in interest would be approx 4.5k over the next 4 years and the break fee was about 4.6k. They did say that this rate wasn't available to existing customers but I haven't been able to find anywhere where it says this online, but that's a different story.... Either way, it doesn't make sense to do it currently.

Our plan would be to pay off a large chunk of the mortgage when the fix rate ends or we break. Ideally, we would get to a lower LTV band to avail of lower interest rates, i.e. Avant's lower rates or similar. I'm not one to predict future house values or interest rates but will get the best deal available at the time.

My question is: is this a reasonable course of action or is there a better way I'm not thinking of?

Other borrowings – car loans/personal loans etc: None

My car is 15 years old at the moment so probably will only get another 2-3 out of it before it makes more sense to get another one. I wouldn't take a loan out though, probably buy second hand 3-5 year old car.

Do you pay off your full credit card balance each month? I have a student credit card still but don't use it often but always pay it off when I do
If not, what is the balance on your credit card? N/A

Savings and investments: Approx 60k cash total, this includes: 25k rainy day fund, 10k will come off for wedding which was covid'ed and 5-10k honeymoon in 202X. So free cash is a good bit less than 60k.

Do you have a pension scheme: Approx 40k, I only started working about 4 years ago so this is lower than I'd like. My partner works in public service and also has an PRSA (~25k). They intend to max out contributions each year.

The company I work for give 8% of salary if I contribute 2%, I give an additional 8% via AVC's at payroll. I maxed out 2019 personal contribution limit with a lump sum recently. I plan on doing this every year from now on (the remaining 10%) if circumstances allow. The reason I don't do the full 20% via payroll is

I started a new job and need to decide which fund to invest pension in. Ideally, due to my age, I'd like to invest it in a 100% equity, passive fund with low fees but this isn't open to me. I've 2 options:

1) 100% equities actively managed with expense ratio of 0.56%, I believe it invests in 50 companies, in several sectors, at any one time (or something like that)
2) 70% equities, 15% equity alternatives, 15% bonds, passive fund with expense ratio of 0.31%

I'm not sure which is the best one to pick, any insights would be great!

Do you own any investment or other property?
No other investments. I looked into putting some money into ETFs but due the the high taxes, I think maxing out pension and clearing mortgage would be better but feel free to suggest otherwise.

There's a small chance we would move to where my partner is from in rural Ireland so there is a chance we would buy a house there but not in the medium term.


Ages of children: No children

Life insurance: Mortgage protection, 650k life policy (39 years left) and 4x salary life policy via work. My partner works in public sector so whatever they get, if any.


What specific question do you have or what issues are of concern to you?
I asked some questions throughout that I hope can be answered.

Long term, we'd like to ability to retire early if we choose to do so.
 
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Brendan Burgess

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The break fee is €4,600 on a mortgage of €420,000 - so roughly 1%.

If you are both in secure jobs, you do not need a rainyday fund. When you want to buy a car, start saving in advance for it. You will have €20k available for your wedding anyway which you can use if a rainy day appears suddenly.

So that leaves you with about €40k
You should pay this off your mortgage. You will pay a penalty of €400 but save yourself €1,100 a year.

At your age, you should only contribute enough to the pension to max your employer's contributions.

You should aim for an LTV of 60% or €300k. So focus on achieving that first.

Then worry about pensions.

Brendan
 

Sarenco

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The LTI on your mortgage is only 2.3 times your joint income, which I would regard as very reasonable.

As such, I would prioritise maximising you tax-relieved pension contributions before paying down your mortgage ahead of schedule.
1) 100% equities actively managed with expense ratio of 0.56%, I believe it invests in 50 companies, in several sectors, at any one time (or something like that)
2) 70% equities, 15% equity alternatives, 15% bonds, passive fund with expense ratio of 0.31%

I'm not sure which is the best one to pick, any insights would be great!
Personally, I would go for Option 2 (although I don't know what "equity alternatives" means). The lower expense ratio would tip the balance for me.
I looked into putting some money into ETFs but due the the high taxes, I think maxing out pension and clearing mortgage would be better but feel free to suggest otherwise.
I agree. Our tax code is such that I don't think it makes sense to invest outside a pension wrapper while carrying a mortgage.
Our plan would be to pay off a large chunk of the mortgage when the fix rate ends or we break. Ideally, we would get to a lower LTV band to avail of lower interest rates, i.e. Avant's lower rates or similar
That sounds like a good plan to me. You might as well collect the extra 1% cashback before switching to whatever is the best deal at that time.
 

Brendan Burgess

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The LTI on your mortgage is only 2.3 times your joint income, which I would regard as very reasonable.
Agreed that 2.3 times income is reasonably comfortable.

However, a 60% LTV allows the borrower to avail of the lowest rates and as they are just 32 years old, so achieving that really should be the priority.

Also at aged 32, they might want to trade up or move at some stage in the future, so building up equity gives huge flexibility. Their Loan to Value at present is 84%, so even if you think that aiming for 60% is wrong, getting it below 80% is really the highest priority. It would take only a 16% fall in house prices to push them into negative equity. In theory this is not a problem if they are in their forever home, but it's a very uncomfortable place to be.

Given their high salaries and young age, they will have plenty of time to build up a pension fund.

Brendan
 

Sarenco

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However, a 60% LTV allows the borrower to avail of the lowest rates and as they are just 32 years old, so achieving that really should be the priority.
Not really Brendan.

The difference between the rates charged at different LTVs is pretty modest.

On the other hand, pension contributions operate on a “use it or lose it” basis.

In my opinion, the only reason to prioritise paying down a mortgage ahead of schedule over maximising tax-relieved pension contributions is where the mortgage is uncomfortably high, having regard for a borrower’s income.

That is clearly not the case here.
 

NoRegretsCoyote

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It would take only a 16% fall in house prices to push them into negative equity. In theory this is not a problem if they are in their forever home, but it's a very uncomfortable place to be.
Yes but house prices won't fall overnight and they are reducing their LTV by 2pp a year or so.

In 95% of the country €500k buys a pretty comfortable house.

I agree that pension overpayment is a priority but they will face expenses when kids come.
 

Brendan Burgess

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I have set out the full argument in this Key Post


Since it was written, there have been a few developments which tilt the balance further towards paying down the mortgage
  1. There has been a greater move to lower mortgage rates for LTV lending. Avant now has the lowest rates but it's for <60% LTV mortgages
  2. Covid has made the future a bit more uncertain. While I don't speculate on house prices, the chances of a fall in house prices have probably increased. So building up equity is important for that reason also.
Brendan
 

Brendan Burgess

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I have updated that Key Post


Updated October 2020

In uncertain economic times, paying down a high LTV mortgage becomes more important.

For example, someone who bought a house recently with a 90% mortgage, who now has an 85% LTV mortgage will move into negative equity if house prices fall by 15%. That is a very uncomfortable position to be in.

It just seems very clear now that people should be prioritising reducing their mortgage over contributing to a pension.

  1. The returns on equity investments in pension funds in the medium term are much less certain.
  2. Paying down your mortgage gives you a tax-free and risk-free return equal to the mortgage rate
  3. The outlook for house prices is uncertain - this matters if you are aiming for a lower LTV mortgage rate. If the value of your home falls, your LTV will rise.
  4. Your employment and income may be less certain. If you run into difficulty paying your mortgage, it will be much easier for the lender to restructure a smaller mortgage and lower LTV than a large mortgage in negative equity.
Of course, the opposite is true. When the economic uncertainties have reduced and the outlook is more predictable, then the pendulum swings towards prioritising your pension over your mortgage.
 
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Sarenco

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By accelerating mortgage repayments, the OP will (a) incur significant break costs and (b) reduce the value of the Year 5 cash back payment.

I really don’t see how that would be a sensible approach.

I still think it makes more sense to prioritise pension contributions in this case.
 

Brendan Burgess

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Hi Sarenco
The break cost is 1% of the amount repaid. It certainly is a factor, but I don't think it should be significant enough to sway him from getting his LTV down to 80%, if not 60%.

Assuming the cash back is 1% of the balance remaining after 5 years, I think that would be a factor closer to the end of the 5 years.

Brendan
 

ArthurMcB

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Is there an arguement that in times of stock mkt volatility and when markets are down - that is the time to increase pe sion contributions? I.e buy in at better value.?
 

fungie20

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Thanks for all the comments and suggestions. Plenty of food for thought. Like most things, no right or wrong way of doing things, just trade offs.

We wouldn't be without a emergency fund and are willing to pay for it, via from not gaining from using it elsewhere and low interest rates. I could lose my job tomorrow, like almost anybody in the private sector.

In terms of the mortgage overpayment vs pension contributions, why not do both:

@Brendan Burgess I'll look into an overpayment of 30-40k, it makes sense to me to clear some of it sooner rather than later. I just need to make sure, by making an 'unscheduled' overpayment, I'm not forfeiting the 1% cash back at the end of the fixed term (@Coldwarrior yes, it's 1% of the original amount). It may still make sense to pay it off even if it is gone but got to get confirmation either way first.

In terms of pensions, we've both already maxed out 2019's contributions so there is nothing left to give there, so the 30-40K is free for mortgage repayment, assuming it makes sense to do so. For 2020's pension contributions, it looks like I'll have to give 4-5k (net of any revenue refund) to max out my contributions from 2021. This will be very achievable by Oct/Nov next year. My partner would be in a similar boat.

Long term, I think we'll try max out pensions and then use any unrequired excess cash to pay off chunks of the mortgage, paying any break fees, once it makes sense or wait until end of fixed period, whichever is cheaper (i.e. pay off 10k each year extra rather than wait 5 years to pay 50k).

@Sarenco For which pension fund to pick, I should say, it isn't an either or but rather I can mix between them (and several other lower risk funds but don't want to do that). I could do a 50/50 or 60/40 split between them, what do you think of that? The 2 funds are:

1) Irish Life Diversified High Growth Fund (ES35)
2) Zurich Life 5 Star 5 Global Fund

@NoRegretsCoyote Yes it is a lot of insurance but one is through my job, they come and go. My policy predates the mortgage and I have it for a very specific reason that I won't go into here but it makes sense.

One more question: If I was to overpay the amounts said above, do my repayments change or does the term automatically change to keep repayments static or does term and repayments stay the same but the principal/interest ratio of each repayment change, e.g. mortgage repayments will pay proportionally more off the principle after the overpayment than before?
 

Blackrock1

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Looks good at the moment but lots to consider like :

Will you have kids ?
If you do will the house you have work or will you need to move / extend
Will you both work will full time once you start a family ?
How do you not know your combined net income ?
 

fungie20

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@Blackrock1 Jury is still out on children but either way the house is suitable for the rest of our lives if we have to, that includes room 2 children. We tend to be flexible with finances and not stick rigidly to any plan just for the sake of sticking to a plan. Pension and overpayments can be reduced/dropped for a few years if income will go down due to those reasons.
 

Blackrock1

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If the house will work then that’s great and makes planning all the easier.

the only advice I’ll give you re kids is not to sleepwalk into it and make a decision one way or the other. Life can be great either way but it’s one of those decisions you both need to be fully invested in .
 

NoRegretsCoyote

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Yes it is a lot of insurance but one is through my job, they come and go. My policy predates the mortgage and I have it for a very specific reason that I won't go into here but it makes sense.
If I read you correctly your partner will cash in over a million on your death.

This is overinsurance by any measure and is costing you money. Particularly large given she has her own job and you have no dependents.

One more question: If I was to overpay the amounts said above, do my repayments change or does the term automatically change to keep repayments static or does term and repayments stay the same but the principal/interest ratio of each repayment change, e.g. mortgage repayments will pay proportionally more off the principle after the overpayment than before?
The term always stays the same. The monthly repayment will reduce and the principal:interest ratio is unchanged.

In your position I wouldn't be in such a hurry to put the cash out of reach by paying off mortgage. We had a 5-figure inheritance a few years back and I wanted to put all of it off the mortgage. Mrs NRC talked me into holding on to about half in cash. This turned out to be the right decision as we needed a new car soon after and we had a chance to trade up as well and the cash made the conversations with the bank much easier. The opportunity cost of holding €30k is about €1k which might make sense if you don't have other sources of cash (like relatives) to draw on if you have a sudden need. Credit union or bank borrowing (for something like a car or a new roof) is often more expensive than your mortgage.

While I don't speculate on house prices....
Also Brendan Burgess said:
.....the chances of a fall in house prices have probably increased.
Am not sure I can reconcile these two statements @Brendan Burgess :)
 

NoRegretsCoyote

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Would it help if I said "I don't speculate about share prices, but the chances of a fall in stockmarkets have probably increased"?
I think it's functionally equivalent to a claim that your expected outcome is a fall in share prices :)

FWIW I am not an efficient markets hypothesis zealot, but a local housing market can remain out of equilibrium much longer than an equity market for, as it takes much longer to adjust.
 
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