Saving v mortgage

ducie

I have 5k which I can afford to take off Mr mortgage. I am 1 year into a 3 year fixed rate. Should I do it and get a loan in the future for an event that I might need the 5k, or keep it and spend it if and when I need to?

colm_c

If you have a decent emergency fund, and you've no other loans, and no other large expenditure coming up in the next 12 months and you don't get penalised by the bank for a lump sum repayment, then go for it.

catrionanic

You will get penalised for breaking out of the fixed rate early. Ring your bank and find out the actual difference in cost for you, when you pay that penalty.

ducie

Hmm. I don't currently have any other savings, and don't expect any large expenditure in the next 12 months.

Doodah7

Keep the lump sum as savings.

You haven't mentioned what interest rate your mortgage rate is but in any event it will certainly be lower than the rate would be in the event that you had to borrow money for a shorter period of time. Therefore it would be foolish to 'invest' your €5K in your mortgage at, say 3%, if you subsequently have to borrow €5K at 8%!

If you are concerned that the €5K will start to burn a hole in your pocket, I would suggest putting it into Saving Certs for three years or if that is too long, KBC do a fixed 12 month deposit account with no withdrawals.

Also it is important to note that, while you have no immediate requirement for the money now, you never know what curveball life will throw at you. Particularly if you have no savings, it is nice to have a little to fall back on.

ducie

Thank you for your reply! My concern is that although my morgtage rate of 3.6% is a lot lower than a short term loan rate, the interest I will pay on the mortage 5k will be paid for the next 30 years? Does that make sense?
Thanks

Bubbaclaus

ducie wrote: »

Thank you for your reply! My concern is that although my morgtage rate of 3.6% is a lot lower than a short term loan rate, the interest I will pay on the mortage 5k will be paid for the next 30 years? Does that make sense?
Thanks

It does not.

ducie

Bubbaclaus wrote: »

It does not.

What does not?

oEmmao

if you have no emergency fund or savings, i would suggest keeping it in a savings account, this will stop you from having to get a loan if you need to upgrade a car or pay for house repairs for example.

Doodah7

ducie wrote: »

Thank you for your reply! My concern is that although my morgtage rate of 3.6% is a lot lower than a short term loan rate, the interest I will pay on the mortage 5k will be paid for the next 30 years? Does that make sense?
Thanks

If you were comparing like with like perhaps. However the €5K borrowed doesn't stay at €5K over the next 30 years. Every month you are paying a little less than the month before as you are making repayments and thus the interest paid is a little less also.

There is also the strong element of common sense here: you put €5K into a fixed savings account for one year at, say, 0.5%. You will earn c. €15 on this amount over one year and after three years you have c. €5050. If you need to BORROW this amount over three years at say 8.5% (with the cheapest BoI), it will cost you €655.96 on top of repaying the €5K.

It is therefore over €650 more expensive to borrow €5K than it is to use savings. In addition if you don't have to use the money, you will earn €50. PLUS, by using savings, your monthly cashflow is improved as you don't have a monthly loan repayment to fund.

Finally, and absolutely NOT having a go at you OP, but do they not teach this stuff in school?

ducie

😀not when I was in school anyway! Sometimes the obvoius isnt all that clear when in a minefield of decisions.Thanks for advice.

myshirt

Doodah, no they don't teach it in school. It's a serious problem in Ireland. Severe lack of basic financial literacy. It impacts people's lives hugely.

mirrorwall14

Actually financial maths is part of the curriculum. Usually covered in 2nd year higher level maths. I know I put a huge emphasis on it due to its importance and we have great fun calculating mortgage repayment amounts and watching their faces as they realise how much tax they have to pay. Cue complete outrage!

Whether they remember it or not is a whole different ballgame however

ducie

I thought a big problem in the boom time was people borrowing more than they needed and spending it on cars/holidays...

JazzyJ

Fairly US based, but this flowchart gives some good advice on where your money should be going:

https://i.imgur.com/lSoUQr2.png

Sounds like you should be trying to build up 3 to 6 months expenses as savings, since you have none - unless you've other loans?

ducie

Thanks. Nope no other loans currently