When to overpay mortgage?

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faketales

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I'm 6 months in to a 25 year €265k KBC mortgage at 2.4%. I am allowed overpay by 10% of the mortgage value within the 5 year period. As far as I understand it is a KBC policy not a condition of the mortgage so BOI may not allow.

So I am able to over pay by €26,500 within the next 4.5 years (subject to BOI). That could be a lump sum or x extra per month, in both cases it comes off the principle as far as I understand.

My question is, is there any difference financially between paying the €26.5k today, spread over monthly repayments or at the end of the 5 years before I sign up for a ne fixed rate.

If there is not we will probable wait for the end of the 5 years.
 
Assuming you have no other higher priority uses for the money (e.g. higher interest loans, topping up pension, imminent large purchase, just enjoying yourself etc.) and making an accelerated mortgage repayment is definitely the right thing to do in your specific personal circumstances, then the sooner you pay it in full off the mortgage, the more bang for your buck (in terms of interest costs avoided) you achieve. Making smaller accelerated repayments monthly doesn't make much sense. Any of the many decent mortgage calculators available online and linked from other threads should allow you to model this.
 
ClubMan said:
Assuming you have no other higher priority uses for the money (e.g. higher interest loans, topping up pension, imminent large purchase, just enjoying yourself etc.) and making an accelerated mortgage repayment is definitely the right thing to do in your specific personal circumstances, then the sooner you pay it in full off the mortgage, the more bang for your buck (in terms of interest costs avoided) you achieve. Making smaller accelerated repayments monthly doesn't make much sense. Any of the many decent mortgage calculators available online and linked from other threads should allow you to model this.
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Cheers. I did a bit of a dive and now understand it better. Need to weigh up options between mortgage overpayment and pension contribution.
 
If your pension needs topping up then that's almost certainly a better use of spare funds. However, without more detailed info about your overall financial and personal circumstances (such as the Money Makeover forum deals with) any advice is speculative.
 
@faketales To restate what @ClubMan said above, overpaying your mortgage may not be the best use of your money. Your priorities should usually be:
  • Paying off expensive debt (credit cards, personal loans, car loans, etc.)
  • Building up an emergency fund in a savings/current account (3 to 6 months' living expenses)
  • Saving money for any expenses you will have over the next few years (kids; childcare; adult children going to college, etc.)
  • Maxing out your pension contributions (very large tax relief is given)
  • Overpaying your mortgage
in approximately that order.

Have a look around the Money Makeover forum:

Money makeover

Budgeting and dealing with debt moved to Mortgage Arrears and Debt Forum .
www.askaboutmoney.com
 
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ClubMan said:
If your pension needs topping up then that's almost certainly a better use of spare funds. However, without more detailed info about your overall financial and personal circumstances (such as the Money Makeover forum deals with) any advice is speculative.
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Paul F said:
@faketales To restate what @ClubMan said above, overpaying your mortgage may not be the best use of your money. Your priorities should usually be:
  • Paying off expensive debt (credit cards, personal loans, car loans, etc.)
  • Building up an emergency fund in a savings/current account (3 to 6 months' living expenses)
  • Saving money for any expenses you will have over the next few years (kids; childcare; adult children going to college, etc.)
  • Maxing out your pension contributions (very large tax relief is given)
  • Overpaying your mortgage
in approximately that order.

Have a look around the Money Makeover forum:

Money makeover

Budgeting and dealing with debt moved to Mortgage Arrears and Debt Forum .
www.askaboutmoney.com
Click to expand...

Thank you both. Yes currently just trying to get my head around each option to decide the best use which might be a combination. No CC or loan debt, some emergency fund (prob needs topping up), need to thing about future costs a bit and yes I think pension may be the better option. Will read and post something in money makeover.
 
Paul F said:
@faketales To restate what @ClubMan said above, overpaying your mortgage may not be the best use of your money. Your priorities should usually be:
  • Paying off expensive debt (credit cards, personal loans, car loans, etc.)
  • Building up an emergency fund in a savings/current account (3 to 6 months' living expenses)
  • Saving money for any expenses you will have over the next few years (kids; childcare; adult children going to college, etc.)
  • Maxing out your pension contributions (very large tax relief is given)
  • Overpaying your mortgage
in approximately that order.

Have a look around the Money Makeover forum:

Money makeover

Budgeting and dealing with debt moved to Mortgage Arrears and Debt Forum .
www.askaboutmoney.com
Click to expand...
Do you have any maths on pension contributions being a superior usage of your money than overpaying a mortgage? Trying to figure it out myself
 
settlement said:
Do you have any maths on pension contributions being a superior usage of your money than overpaying a mortgage? Trying to figure it out myself
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Well, each €1 that you contribute to a pension can cost you as little as €0.60 due to tax relief (assuming a high rate taxpayer) so it's hard to beat that for a start. (As ever, assuming that contributing to your pension is the highest priority for your specific personal/financial circumstances).
 
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settlement said:
Do you have any maths on pension contributions being a superior usage of your money than overpaying a mortgage? Trying to figure it out myself
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ClubMan said:
Well, each €1 that you contribute to a pension can cost you as little as €0.60 due to tax relief (assuming a high rate taxpayer) so it's hard to beat that for a start. (As ever, assuming that contributing to your pension is the highest priority for your specific personal/financial circumstances).
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That's how I see it too. And when you retire, you get to take a lump sum out of your pension pot tax free.

So if you have €100 in gross income, if you contribute it to your PRSA you pay PRSI (4%) and USC (8%, say) on it, but not income tax. Then it grows (hopefully) at 5% or 6% per year (on average) tax free, and that's after annual fees. When you retire, you get to take a tax-free lump sum, and a chunk that is only taxed at the lower rate, and the remainder taxed at the high rate (as I understand it).

To make a fair comparison, we must remember that we need €113.64 (100/((100-12)%)) in gross income to cover the taxes (4%+8%) in the above scenario.

If you don't contribute the €113.64 to your PRSA you pay PRSI, USC and income tax on it (52%, say). Then you use what's left (€54.55) as a mortgage overpayment and that is like a tax-free, risk-free investment with a return of 2.5% per annum (assuming your mortgage interest rate is 2.5%).

So it's
  • Pension: €100 growing at 5% or 6% (hopefully) per annum tax free (after fees), and then being taxed at the end, versus
  • Mortgage: €54.55 yielding a return of 2.5% per annum tax free and risk free
for somebody paying tax at the highest rate. And because compound interest is a form of exponential growth, the money will grow much faster in the pension.
 
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Paul F said:
That's how I see it too. And when you retire, you get to take a lump sum out of your pension pot tax free.

So if you have €100 in gross income, if you contribute it to your PRSA you pay PRSI (4%) and USC (8%, say) on it, but not income tax. Then it grows (hopefully) at 6% or 7% per year (on average) tax free. When you retire, you get to take a tax-free lump sum, and a chunk that is only taxed at the lower rate, and the remainder taxed at the high rate (as I understand it).

To make a fair comparison, we must remember that we need €113.64 (100/((100-12)%)) in gross income to cover the taxes (4%+8%) in the above scenario.

If you don't contribute the €113.64 to your PRSA you pay PRSI, USC and income tax on it (52%, say). Then you use what's left (€54.55) as a mortgage overpayment and that is like a tax-free, risk-free investment with a return of 2.5% per annum (assuming your mortgage interest rate is 2.5%).

So it's
  • €100 growing at 6% or 7% (hopefully) per annum tax free, and then being taxed at the end, versus
  • €54.54 yielding a return of 2.5% per annum tax free and risk free
for somebody paying tax at the highest rate.
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Wow when you put it like that...it's nearly twice as good as overpaying mortgage!
 
settlement said:
Wow when you put it like that...it's nearly twice as good as overpaying mortgage!
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More than twice as good: you get to put your pre-tax income into the pension (versus net income into overpayments), and we can reasonably expect the pension to have a higher return than current mortgage interest rates.
 
Paul F said:
More than twice as good: you get to put your pre-tax income into the pension (versus net income into overpayments), and we can reasonably expect the pension to have a higher return than current mortgage interest rates.
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I'm sure glad I don't have to figure this stuff out for myself.
Now I'm off to learn about pensions, public vs private etc
 
ClubMan said:
What do you mean by public versus private?
Public service versus private?
Or something else?
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It's a good question clubman as I don't really know as I haven't started investigating. What I meant was that I assumed pension rules are different depending on whether you are public service employee or privately employed. But I don't have a clue as yet
 
The Pensions Authority have lots of useful info about pensions:

Welcome to the Pensions Authority - pensionsauthority

The Pensions Authority regulates occupational pension schemes, trust retirement annuity contracts (RACs) and personal retirement savings accounts (PRSAs). Our website provides you with access to a comprehensive range of information and guidance material to help you understand pensions. The...
www.pensionsauthority.ie www.pensionsauthority.ie
The Irish Civil Service Pensions Information Centre have info about public/civil service pensions:

 
Hi faketales

This is covered comprehensively in this Key Post:

Key Post - Overpay mortgage or contribute to pension or do something else?

This comes up in a lot of different threads, so I will set out some principles here to kick off the discussion. I will edit it in the light of feedback. There are many options with your savings in excess of your emergency cash fund Pay down your mortgage Build up a fund to enable you to trade...
www.askaboutmoney.com
 
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