Lump sum to reduce mortgage payments?

mysteryman

I bought a house in 2000, and took out a 20 year, variable rate mortgage of approx 130K,
my current mortgage balance is approx 96k and i have come into some cahs recentlya nd was wondering if I should consider paying off a portion of my mortgage (eg 20K) to reduce either the repayments ir the term of the mortgage.
Or should I invest this money (dodgy stockmarkets at present) or put into a savings account?

TwoShedsJackson

Put it against your mortgage. Your mortgage is the worst-value loan you will ever take out in your life (unless you go to the Mafia), you will pretty much pay double what you borrowed over the life of the mortgage. This will also take months off the mortgage and save you a decent amount in interest.

Compare it to the piddling interest rates available on savings accounts and the state of the stockmarket at present and it's a no-brainer, I think.

The_Conductor

mysteryman wrote: »

Or should I invest this money (dodgy stockmarkets at present) or put into a savings account?

You're paying the guts of 5% on your mortgage. The max you will get after DIRT on a savings account is about 3.8% (after tax) which doesn't even cover inflation. The best possible return you can get is to make a down payment on your mortgage.

S.

beeno67

TwoShedsJackson wrote: »

Put it against your mortgage. Your mortgage is the worst-value loan you will ever take out in your life (unless you go to the Mafia), you will pretty much pay double what you borrowed over the life of the mortgage. This will also take months off the mortgage and save you a decent amount in interest.

quote]
Nonsense. A mortgage is probably the best value loan you will ever get. At the moment especially when interest rates are lower than inflation.

beeno67

smccarrick wrote: »

You're paying the guts of 5% on your mortgage. The max you will get after DIRT on a savings account is about. 3.8% (after tax) which doesn't even cover inflation. The best possible return you can get is to make a down payment on your mortgage.

S.

First active are offering 5.22% on savings up to 15,000 which is 4.1% after dirt. You can get mortgages for about 4.75 so the difference is very small especially after interest relief. If you are sure you will not need the money in the future to buy a car, holiday etc you are better off paying off the mortgage otherwise save the money elsewhere. For what it is worth I would go the stocks and shares route.

um7y1h83ge06nx

Could I just add my query as it's very similar, rather than starting a new thread.

I have a mortgage for about 2 years now, but with a bump in pay due to a job change I'm savings over €1000 a month.

It's currently being put into an AIB Online Savings account.

My girlfriend reckons that I should put it towards the mortgage, but I'm considering looking to buy a site out in the country in another 2 to 3 years and put the savings towards that.

Once I'd have planning permission for a house I'd probably hang on another 3 or 4 years before I'd start the build.

So, should I stick to my idea or change to my girlfriends idea?

(By the way the mortgage is solely mine, the girlfriend has no financial interest in it, she was just making a suggestion.)

The_Conductor

I'd be inclined to agree with your girlfriend on this one. Regardless of how good a rate AIB give you- after DIRT and inflation it can hardly be better than knocking capital lumps off your mortgage. You could remortgage down the road or take out a seperate loan to finance the purchase of the site- when you have a better idea of what you're doing.

um7y1h83ge06nx

smccarrick wrote: »

I'd be inclined to agree with your girlfriend on this one. Regardless of how good a rate AIB give you- after DIRT and inflation it can hardly be better than knocking capital lumps off your mortgage. You could remortgage down the road or take out a seperate loan to finance the purchase of the site- when you have a better idea of what you're doing.

Thanks for the reply.

I better sit back and do the sums.

K_P

mysteryman wrote: »

I bought a house in 2000, and took out a 20 year, variable rate mortgage of approx 130K,
my current mortgage balance is approx 96k and i have come into some cahs recentlya nd was wondering if I should consider paying off a portion of my mortgage (eg 20K) to reduce either the repayments ir the term of the mortgage.
Or should I invest this money (dodgy stockmarkets at present) or put into a savings account?

I'd pay a lump off your mortgage. Managed to do it last year and a relatively (in terms of the total mortgage cost) small amount - €80k - knocked 17 years off my mortgage.

Using a fairly standard mortgage calculator thing here:
http://www.charcol.co.uk/knowledge-resources/calculators/flexible-mortgage/

and assuming a 5% interest rate, paying €20k off your mortgage now will take 3.3 years off the term of your mortgage and save you €13.5k. There aren't many savings plans out there that will net you €13.5k from an investment of €20k so I say go for it.

TwoShedsJackson

Nonsense. A mortgage is probably the best value loan you will ever get. At the moment especially when interest rates are lower than inflation.

You do realise that the high value and extremely long repayment period actually makes it the worst-value loan right?

It's not just a matter of looking at the interest rate and going, 'oh it's less than inflation, must be great'.

beeno67

TwoShedsJackson wrote: »

You do realise that the high value and extremely long repayment period actually makes it the worst-value loan right?

It's not just a matter of looking at the interest rate and going, 'oh it's less than inflation, must be great'.[/QUOTE
yes it is. The high value has nothing to do with it. It always astounds me that people fail to understand this. They pay off their 5% mortgage then get a car loan for 10% and think they are doing well

radioactiveman

Hi mysteryman,
I think if you look at the choice between a downpayment and investing the money in terms of the return you would get from each one, investing the money could actually be a better choice.
You will 'earn'/save 5 or 6% on the money if you pay it into the mortgage but by investing it even medium term (e.g. 5 years) you are likely to outstrip that. Long term (e.g. 10 years) your chances are much better again - it's worth investigating. A high yielding account vs short term investing in the stock market at the moment is a no brainer though..
You could knock years off the life of the mortgage if you pay now. But if the money is invested well it will still be there after 10 years (unless you are very unlucky) And you will still have the choice whether to pay it into the mortgage at that stage, and the same number of years could be knocked off the mortgage in the same way. The stock markets are dodgy at the moment but if you diversify well and get good advice it could pay off. Long term:D

The_Conductor

radioactiveman- its all relative. Its a 6% return by making a down payment on your mortgage, moderated only by changes in interest rates. Longterm returns (over a 100 year period) from the New York stockmarket average 4.8%. Investing in a shedload of timber, or an oriental rug, over a 10 year period, will likely vastly outstip (going by historic averages) the return from the stockmarket, never mind paying a lumpsum off your mortgage.

You cannot loose money by paying a lumpsum off your mortgage (unless real interest rates enter negative territory, as they admittedly did in Japan- however the net result of this was also a wipeout of the major Japanese bourses- the constituent companies of the Nikkei Index are even now only a little over 1/3 the level they were at in 1988. )

There is a lot of risk involved in investments. I do not think that 5 years or even 10 years is a reasonable length of time to consider as medium or longterm. I use discount tables on a daily basis- normally discounting over 40 years as longterm, or 15-20 years as shortterm (it depends on the investment type- I use discount tables for forestry which go as far as 200 years).

There is a very real risk associated with taking a gamble on the stock market. Over the longterm it does average out a fairly decent return (of just under 4.8%) which is why pension funds had a love affair with them (note: the most prudent pension funds have moved into particular sectors (notably food) but mostly secure bonds).

OP- you can take radioactiveman's advise. You might win bigtime- or you might loose your shorts. Any investment is a gamble. The odds of loosing by paying back a lumpsum from your mortgage are vastly lower than to those of investing in the stockmarket however.

S./

beeno67

smccarrick wrote: »

radioactiveman- its all relative. Its a 6% return by making a down payment on your mortgage, moderated only by changes in interest rates. Longterm returns (over a 100 year period) from the New York stockmarket average 4.8%. Investing in a shedload of timber, or an oriental rug, over a 10 year period, will likely vastly outstip (going by historic averages) the return from the stockmarket, never mind paying a lumpsum off your mortgage.

You cannot loose money by paying a lumpsum off your mortgage (unless real interest rates enter negative territory, as they admittedly did in Japan- however the net result of this was also a wipeout of the major Japanese bourses- the constituent companies of the Nikkei Index are even now only a little over 1/3 the level they were at in 1988. )

There is a lot of risk involved in investments. I do not think that 5 years or even 10 years is a reasonable length of time to consider as medium or longterm. I use discount tables on a daily basis- normally discounting over 40 years as longterm, or 15-20 years as shortterm (it depends on the investment type- I use discount tables for forestry which go as far as 200 years).

There is a very real risk associated with taking a gamble on the stock market. Over the longterm it does average out a fairly decent return (of just under 4.8%) which is why pension funds had a love affair with them (note: the most prudent pension funds have moved into particular sectors (notably food) but mostly secure bonds).

OP- you can take radioactiveman's advise. You might win bigtime- or you might loose your shorts. Any investment is a gamble. The odds of loosing by paying back a lumpsum from your mortgage are vastly lower than to those of investing in the stockmarket however.

S./

In the last 25 years since its inception the ISEQ has gained about 1500%.
Your figures above also fail to include dividend yields on stocks which should add 1-2%per year to growth in stocks. But even if you exclude all this and accept that you will only gain 4.8%a year it is still better than the 4.75 you will get by paing off the mortgage.
If you are sure you won't need the money for the next 15 years or so you should also consider investing in a pension (perhaps over a few years to maximise tax relief)
Basically there are lots of options.

radioactiveman

Alternatively you could pay the money back into the mortgage and invest what you save?:D
Nothing will be as tax efficient as a pension though, agree 100% there