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Take off principle or save?

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  • 11-04-2010 10:34am
    #1
    Ozziej
    Registered Users Posts: 175 ✭✭


    Hi,
    I have come into some inheritance. Will be 55k after tax. I am wondering what to do. I took out a 345000 mortgage 3 years ago . Due to lump sums and regular payments we currently owe 269k on it. We have a variable rate of 4.15% with TSB. I would estimate the house is worth around 260 k (bought it for 375k) now.

    We will hope for something bigger (its a 3 bedroom terrace) in next 4-5 years.

    Do you think I should take the full amount off the principle now or save it in preparation for a deposit in years to come? I may be able to save around 500-700 a month till then. Does anyone know that with the house out of negative equity, would I be able to try and get a better rate with the bank?


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    #2
    spoonface
    Registered Users Posts: 339 ✭✭spoonface


    Ozziej wrote: »
    Hi,
    I have come into some inheritance. Will be 55k after tax. I am wondering what to do. I took out a 345000 mortgage 3 years ago . Due to lump sums and regular payments we currently owe 269k on it. We have a variable rate of 4.15% with TSB. I would estimate the house is worth around 260 k (bought it for 375k) now.

    We will hope for something bigger (its a 3 bedroom terrace) in next 4-5 years.

    Do you think I should take the full amount off the principle now or save it in preparation for a deposit in years to come? I may be able to save around 500-700 a month till then. Does anyone know that with the house out of negative equity, would I be able to try and get a better rate with the bank?

    It won't feel very satisfying to do it (you'll still have 214k on the mortgage) but I think you should go ahead and pay it all straight off the mortgage. This will bring down your monthly payments allowing you to save more and ultimately reducing the years before you are mortgage-free. It might be optimistic to expect to move within 5 years unless you're okay with selling for a lot less that you paid for it. Alternatively you could look at expanding out at the back (i.e. use the 55K for a conservatory) to give yourself that bit more space.


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    #3
    Ozziej
    Registered Users Posts: 175 ✭✭Ozziej


    Thanks for the quick response. I'm leaning towards taking it all off the principle alright. The last time I did take a large sum off I took it off the term rather than reduce the monthly payments. This time I think I'll just take it off payments and this will allow me to save more as you said.

    At least I'll be out of negative equity.


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    #4
    spoonface
    Registered Users Posts: 339 ✭✭spoonface


    Ozziej wrote: »
    Thanks for the quick response. I'm leaning towards taking it all off the principle alright. The last time I did take a large sum off I took it off the term rather than reduce the monthly payments. This time I think I'll just take it off payments and this will allow me to save more as you said.

    At least I'll be out of negative equity.

    Wow I've learned something there - I didn't realise you get a choice between reducing the payments or reducing the length of the term. When I pay lumps off my mortgage it just automatically reduces the payments they take from then on.


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    #5
    Alun
    Registered Users Posts: 21,464 ✭✭✭✭Alun


    spoonface wrote: »
    Wow I've learned something there - I didn't realise you get a choice between reducing the payments or reducing the length of the term. When I pay lumps off my mortgage it just automatically reduces the payments they take from then on.
    Reducing the payments is usually the default action when they receive the overpayment, but if you send them a letter at the same time requesting it, they'll recalculate the end date of the mortgage keeping the monthly payments the same (or as near as is possible due to rounding etc.).

    It's a PITA to have to send the letter every time to be honest, I'd prefer it if we could just have a standing arrangement with them that any overpayment we make would be handled in the same way, but unfortunately they won't accept that. We're with the AIB BTW.


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    #6
    Ste.phen
    Registered Users Posts: 2,808 ✭✭✭Ste.phen


    If it were me I'd spend 2-5K on a nice fancy holiday, keep a similar amount in a savings account in case of a rainy day, and pop the rest off the mortgage principal. Check with a mortgage calculator what the figures are for you, but dropping 40K off the principal now will save you a lot more than 40K over the life of the mortgage (assuming you reduce the term, not lower the payments)


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    #7
    Plus 10
    Registered Users Posts: 137 ✭✭Plus 10


    Ozziej wrote: »
    Hi,
    I have come into some inheritance. Will be 55k after tax. I am wondering what to do. I took out a 345000 mortgage 3 years ago . Due to lump sums and regular payments we currently owe 269k on it. We have a variable rate of 4.15% with TSB. I would estimate the house is worth around 260 k (bought it for 375k) now.

    We will hope for something bigger (its a 3 bedroom terrace) in next 4-5 years.

    Do you think I should take the full amount off the principle now or save it in preparation for a deposit in years to come? I may be able to save around 500-700 a month till then. Does anyone know that with the house out of negative equity, would I be able to try and get a better rate with the bank?

    In my view from an interest perspective you are best to repay it off your mortgage (you are effectively getting a rate of 4.15% on the €55K with no DIRT - which you woudln't beat). If you intended staying here for the long term then definetely thing to do.

    However I am wary of your hope to move in 4/5 years - pay off this €55K and you probably will struggle be able to access this amount of cash again if you needed to do say an extension/renovation, etc.


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    #8
    Satts
    Registered Users Posts: 816 ✭✭✭Satts


    Reducing your monthly payments is a waste of time unless you have cash flow problems.
    Reducing your monthly payments will not shorten your morgage. (But you probably know this anyway).

    As Plus 10 said :
    Plus 10 wrote: »
    In my view from an interest perspective you are best to repay it off your mortgage (you are effectively getting a rate of 4.15% on the €55K with no DIRT - which you woudln't beat).

    And also if you repay it off the term and take a couple of years off the mortgage, you will also have a couple of years less to pay in Life Insurance for the property. ( Only if you don't move ).

    You may want to move in 5 years, but if you are saving 500-700 per month,
    say an average of 600 per month for 5 years = 36,000e.
    You will just have to ask yourself if this will be enough cash to help with the move.

    I would take it off the principle.

    It might be worth going for professional advice to an accountant.


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