To clear mortgage or not

martingriff

McGaggs wrote: »

Using the 2.8% loan over 20 odd years (which is in effect what using the cash for it is doing) would work out more costly than 5% over 5 years.

Agree with this 100% and its compound interest. If I was the OP I would clear the mortgage. Just 1 thing wait until you are on variable rate and not on your fixed rate as you will have to be extra.

fxotoole

podge018 wrote: »

Quick summation of what is happening in our life.

Married with 2 kids under 2 and a half.

My income appox 60k, wife 50k.

Mortgage outstanding of 170k, 25 years left, repayments 800p.m. fixed for 5 years @ 2.8% I think, since September.

Creche fees 600p.m, doubling soon when youngest starts but reducing a bit in September when eldest starts the ECCE pre-school scheme.

Mortgage protection (serious illness cover) recently paid out to us and not the mortgage provider. So we now have 170k and unsure what do with it. First thoughts were to clear the mortgage - what else, but most people we've talked to says that would be crazy. Health isn't a concern now, fingers crossed.

Spoke with somebody in financial services and he was talking about buying 5/10 year bonds, which I know little about, but that there's a risk involved. There's An Post too, which should be okay.

We would like to build an extension on the house now while kids are young and my wife would ideally like to take career break until youngest starts school proper in September 2022. One of us wouldn't get further mortgage approval for 5 years due to the serious illness diagnosis.

Finding this all very overwhelming and know it's going to be a decision we have to live with for the rest of our lives.

If this happened you what would your gut tell you? Have to say mine was to just clear the mortgage, but then I know we'll never have so much money at our disposal ever again in our lives.

My own personal advice is to clear the mortgage. The sooner you clear the capital, the less interest you pay in the long term. If you clear the mortgage, you will no longer be paying interest on the loan. Plus you’ll have eliminated the largest monthly expense from your outgoings. It will mean you’ll now have 800€ pm extra in your budget from now on out.

Stovepipe

Clear it, no question. Your greatest, long term debt in your life and you have the opportunity to get rid of it. Do it now. Worst thing is they will try and sting you for a big fee to allow you to pay off early.

Trish56

Firstly I would ask the bank for a redemption figure and see how much of a penalty you will pay to get out of the fixed term. If there is a big penalty to redeem find out if you can pay a lump sum off (some lenders allow up to 10%) without penalty.

Secondly if you need and want an extension now - go for it and pay from the lumpsum as it doesn't make sense to clear a mortgage at 2.80% and then borrow to build at 8%/9%. Also who is going to lend 80k to you without life cover and I'm presuming the person who claimed wont be able to get life cover in the future.

If there is a sizeable penalty and you can't pay off anything off the principal without penalty then perhaps you should consider putting the balance into Prize Bonds until such time as the 5 years are up and then pay the lump sum off the mortgage. In the meantime should you need to change the car then cash in the prize bonds rather than borrow.

I would also encourage your wife to take that career break when your children are young as you will never get back those years which fly saving €600/€1200 monthly on creche fees and giving you peace of mind and avoiding stress when they are ill.

As civil servants you're both in secure, permanent and pensionable employment with good incomes. Once both your children are in School your disposable income will increase hugely and you can then increase your monthly mortgage repayments to pay off your mortgage sooner.

Henry Ford III

Seve OB wrote: »

What?
You make no sense
He is talking about upgrading the car out of a windfall. Not getting a top up in the mortgage to pay for the new car!

A car is a rapidly depreciating asset and shouldn't be paid for out of capital.

In actual fact cars are a day to day expense so should be paid for from day to day funds.

I know someone who remortgaged to clear lifestyle debts. That was madness. Imagine paying for your holiday over 25 years?

Blackjack

Henry Ford III wrote: »

A car is a rapidly depreciating asset and shouldn't be paid for out of capital.

In actual fact cars are a day to day expense so should be paid for from day to day funds.

I know someone who remortgaged to clear lifestyle debts. That was madness. Imagine paying for your holiday over 25 years?

Not disagreeing with anything you say but there’s a small Irony if you pointing out that a car is a depreciating asset with a username like that!

Seve OB

Henry Ford III wrote: »

A car is a rapidly depreciating asset and shouldn't be paid for out of capital.

In actual fact cars are a day to day expense so should be paid for from day to day funds.

I know someone who remortgaged to clear lifestyle debts. That was madness. Imagine paying for your holiday over 25 years?

couldn't agree more with the bit in bold and I think that was basically your original point.

but if I have spare money in the bank i'm not going to go out and get a loan to buy a car with.

ELM327

Seve OB wrote: »

couldn't agree more with the bit in bold and I think that was basically your original point.

but if I have spare money in the bank i'm not going to go out and get a loan to buy a car with.

But you should, as the opportunity cost of having the cash in capital vs the low (or sometimes 0%) interest rates on car finance is moreoften than not higher than spending the capital.

PhoenixParker

podge018 wrote: »

I know, that's the quandary. There is the option there for the other person to take out mortgage protection cover for the amount and term left though.

I would do this or spme form of life insurance anyway, no matter what route you go with the mortgage. Your kids need some security in case something happens.

I think i would clear the mortgage minus the cost of the extension. That should give you enough financial space for your wife to give up work.

Tombo2001

ELM327 wrote: »

But you should, as the opportunity cost of having the cash in capital vs the low (or sometimes 0%) interest rates on car finance is moreoften than not higher than spending the capital.

Who is offering 0%? I've never taken a car loan, but a 60 second internet search is suggesting rates of circa 7%.

Seve OB

ELM327 wrote: »

But you should, as the opportunity cost of having the cash in capital vs the low (or sometimes 0%) interest rates on car finance is moreoften than not higher than spending the capital.

says who? have you seen interest rates offered on deposits these days?

Tombo2001 wrote: »

Who is offering 0%? I've never taken a car loan, but a 60 second internet search is suggesting rates of circa 7%.

lol

I would absolutely take a car loan at 0%. but are they really 0%?
I would be really surprised if someone tried to sell me a car for lets say 20k at 0% finance, who wouldn't knock 500 or so off for paying in cash. plus a sign up document fee, plus a sign off document fee etc etc.

cash will always be cheaper

Tombo2001

Seve OB wrote: »

says who? have you seen interest rates offered on deposits these days?



lol

I would absolutely take a car loan at 0%. but are they really 0%?
I would be really surprised if someone tried to sell me a car for lets say 20k at 0% finance, who wouldn't knock 500 or so off for paying in cash. plus a sign up document fee, plus a sign off document fee etc etc.

cash will always be cheaper

Had another look at this.

As far as I can see, 0% finance only available if you buy a new car, and then at a particular price.

And as you say, a higher price than if you pay cash upfront.

As such the 0% is offset (from the vendors point of view) by the higher price they are selling at.

Henry Ford III

Seve OB wrote: »

couldn't agree more with the bit in bold and I think that was basically your original point.

but if I have spare money in the bank i'm not going to go out and get a loan to buy a car with.

Is it "spare money" though? I'd argue it isn't. It's a one off receipt of a lumpy bit of money you'd never save, and that might take you 25 years to repay.

So my view is revenue stuff gets paid out of revenue (ongoing earnings) and a capital receipt should be used for capital expenditure.

mycro2013

Firstly approach your mortage provider to establish how much it would cost to clear your mortgage upfront.

They may offer you a discount going by the present value formulae.

ELM327

Henry Ford III wrote: »

Is it "spare money" though? I'd argue it isn't. It's a one off receipt of a lumpy bit of money you'd never save, and that might take you 25 years to repay.

So my view is revenue stuff gets paid out of revenue (ongoing earnings) and a capital receipt should be used for capital expenditure.

+1million to this

Remouad

podge018 wrote: »

Quick summation of what is happening in our life.

Married with 2 kids under 2 and a half.

My income appox 60k, wife 50k.

Mortgage outstanding of 170k, 25 years left, repayments 800p.m. fixed for 5 years @ 2.8% I think, since September.

Creche fees 600p.m, doubling soon when youngest starts but reducing a bit in September when eldest starts the ECCE pre-school scheme.

Mortgage protection (serious illness cover) recently paid out to us and not the mortgage provider. So we now have 170k and unsure what do with it. First thoughts were to clear the mortgage - what else, but most people we've talked to says that would be crazy. Health isn't a concern now, fingers crossed.

Spoke with somebody in financial services and he was talking about buying 5/10 year bonds, which I know little about, but that there's a risk involved. There's An Post too, which should be okay.

We would like to build an extension on the house now while kids are young and my wife would ideally like to take career break until youngest starts school proper in September 2022. One of us wouldn't get further mortgage approval for 5 years due to the serious illness diagnosis.

Finding this all very overwhelming and know it's going to be a decision we have to live with for the rest of our lives.

If this happened you what would your gut tell you? Have to say mine was to just clear the mortgage, but then I know we'll never have so much money at our disposal ever again in our lives.

Clear the mortgage and set up a standing order for the same amount as your current loan payments to go into a savings account.
Preferably this would be one that would require notice before funds can be removed.

This will hopefully prevent you from squandering the additional monthly disposable income you've freed up.

Once you have enough funds saved you can then progress with the extension.

I highly recommend use this as an opportunity for your wife to take the career break and stay home with the kids.
This will give them a great start and as a bonus would also eliminate child care costs.


Personally the peace of mind not having a mortgage would be worth more than any potential return made by investing.:)

Seve OB

Henry Ford III wrote: »

Is it "spare money" though? I'd argue it isn't. It's a one off receipt of a lumpy bit of money you'd never save, and that might take you 25 years to repay.

So my view is revenue stuff gets paid out of revenue (ongoing earnings) and a capital receipt should be used for capital expenditure.

I really am struggling to understand what you are trying to say.

a car is a capital expense. yes it depreciates quickly, but it is still a capital cost. insurance for said car though would be what you seem to be calling a revenue expense and therefore should be paid off quickly, within 1 year, or up front preferably as payment plans tend to be very expensive.

Henry Ford III

Seve OB wrote: »

I really am struggling to understand what you are trying to say.

a car is a capital expense. yes it depreciates quickly, but it is still a capital cost. insurance for said car though would be what you seem to be calling a revenue expense and therefore should be paid off quickly, within 1 year, or up front preferably as payment plans tend to be very expensive.

Depreciation is a revenue cost. Thing is that it only ever materialises when we change cars despite it totting up daily.

A car isn't really an asset in that sense. It's an expensive method of transport with substantial ongoing costs.

Don't think I can explain that any better.

Tombo2001

Henry Ford III wrote: »

Depreciation is a revenue cost. Thing is that it only ever materialises when we change cars despite it totting up daily.

A car isn't really an asset in that sense. It's an expensive method of transport with substantial ongoing costs.

Don't think I can explain that any better.

I think the argument here is whether a car should be paid for in one lump sum or in instalments.

I think there is a fair argument that its paid for in both forms ANYWAY......as the total cost of a car over say a 5 year period includes purchase, insurance, fuel, tax, repair & maintenance........only purchase is normally upfront, the others are all annual or as you go. Roughly half the costs will be pay as you go, depending on purchase price.


Much like the mortgage - a lot of people don't know how much they are paying for a car.

StupidLikeAFox

Henry Ford III wrote: »

Depreciation is a revenue cost. Thing is that it only ever materialises when we change cars despite it totting up daily.

A car isn't really an asset in that sense. It's an expensive method of transport with substantial ongoing costs.

Don't think I can explain that any better.

Assuming the OP needs to change his car soon and is looking at a car worth 15k. He has the option of this:

Option 1. Pay 170k off his mortgage, borrow 15k for a car at 5%
Option 2. Pay 155k off his mortgage, buy car with cash, repay remaining 15k mortgage payment at 2.8%

Option 2 is cheaper all around. Running costs are irrelevant as they need to be paid whether he changes the car or not, in fact if he was to get a better car they might come down



I would argue he has the same options for the extension:

Option 1. Clear 170k off the mortgage, then save for 5 years, then build the extension for cash - the 80k extension may now cost more or less depending on the state of the economy,

Option 2. Pay 90k off the mortgage, build the extension now for cash. The price of the property has gone up due to the significant upgrade, you get to enjoy the extension now rather than saving for 5 years. The mortgage payments have halved to a comfortable 400pm or you could continue paying 800pm and have the mortgage paid off in 12 years

Personally I'd be all over Option 2

Tiddlypeeps

Henry Ford III wrote: »

Depreciation is a revenue cost. Thing is that it only ever materialises when we change cars despite it totting up daily.

A car isn't really an asset in that sense. It's an expensive method of transport with substantial ongoing costs.

Don't think I can explain that any better.

It doesn't really make sense for someone who is not a business to operate this way. A person should always go for the cheaper option, taking into consideration the cost of opportunity that giving up the capital up front incurs.

If over 5 years a car costs 20k with interest and everything factored in, and it costs 15k if paid up front then it doesn't really make much difference which way you go assuming that person is able to reliably get 5% interest p/a on the lump sum. If that person is able to reliably get a 10% p/a return then it shifts and taking the loan and paying 20k over 5 years is objectively the better choice. Or if like most people the person has no idea about investing at all and is just likely to squander the capital then paying over 5 years is objectively a poor choice.

There is no obvious answer here, it completely depends on the persons specific situation and their financial planning abilities.

The J Stands for Jay

StupidLikeAFox wrote: »

Assuming the OP needs to change his car soon and is looking at a car worth 15k. He has the option of this:

Option 1. Pay 170k off his mortgage, borrow 15k for a car at 5%
Option 2. Pay 155k off his mortgage, buy car with cash, repay remaining 15k mortgage payment at 2.8%

Option 2 is cheaper all around. Running costs are irrelevant as they need to be paid whether he changes the car or not, in fact if he was to get a better car they might come down



I would argue he has the same options for the extension:

Option 1. Clear 170k off the mortgage, then save for 5 years, then build the extension for cash - the 80k extension may now cost more or less depending on the state of the economy,

Option 2. Pay 90k off the mortgage, build the extension now for cash. The price of the property has gone up due to the significant upgrade, you get to enjoy the extension now rather than saving for 5 years. The mortgage payments have halved to a comfortable 400pm or you could continue paying 800pm and have the mortgage paid off in 12 years

Personally I'd be all over Option 2

I'd say option 1 would be cheaper all day long, with the far shorter loan term. If I get near excel today, I'll get the actual numbers.

The J Stands for Jay

StupidLikeAFox wrote: »

Assuming the OP needs to change his car soon and is looking at a car worth 15k. He has the option of this:

Option 1. Pay 170k off his mortgage, borrow 15k for a car at 5%
Option 2. Pay 155k off his mortgage, buy car with cash, repay remaining 15k mortgage payment at 2.8%

Option 2 is cheaper all around. Running costs are irrelevant as they need to be paid whether he changes the car or not, in fact if he was to get a better car they might come down



I would argue he has the same options for the extension:

Option 1. Clear 170k off the mortgage, then save for 5 years, then build the extension for cash - the 80k extension may now cost more or less depending on the state of the economy,

Option 2. Pay 90k off the mortgage, build the extension now for cash. The price of the property has gone up due to the significant upgrade, you get to enjoy the extension now rather than saving for 5 years. The mortgage payments have halved to a comfortable 400pm or you could continue paying 800pm and have the mortgage paid off in 12 years

Personally I'd be all over Option 2

I forgot that online calculators existed. Car option 1 (the 5% loan over 5 years) costs €1984. Option 2 (hold back the cash and leave €15k of the mortgage @2.8% in place) would cost €5874.

For building the extension, the availability of a new mortgage and the status of the current mortgage would be considerations that could be more important than cost.

PhoenixParker

One thing that's missing from the discussion:

The reason you get insurance tied to a mortgage is to protect your family in case of death or serious illness.
A paid off house is great security and takes a huge amount of pressure of the surviving spouse.
(It also means the bank aren't faced with reposessing a house from a bereaved family)

Your first priority needs to be making sure you have enough provision made for disaster.

cruizer101

McGaggs wrote: »

I forgot that online calculators existed. Car option 1 (the 5% loan over 5 years) costs €1984. Option 2 (hold back the cash and leave €15k of the mortgage @2.8% in place) would cost €5874.

For building the extension, the availability of a new mortgage and the status of the current mortgage would be considerations that could be more important than cost.

I'd argue that isn't really reflective of what would happen though. If you left 15k on the mortgage and paid it back over 30 years the monthly repayment would be only €60. Realistically you would increase the payment to pay it back over the same 5 years as the car loan, but retain the better rate.

Even if you said you pay it over 10 years @2.8% the cost of that credit is €2,200, quite comparable to the 5 year @5% loan, and the monthly repayment is about half.

StupidLikeAFox

McGaggs wrote: »

I forgot that online calculators existed. Car option 1 (the 5% loan over 5 years) costs €1984. Option 2 (hold back the cash and leave €15k of the mortgage @2.8% in place) would cost €5874.

If you kept the repayment at €800 you would have the loan cleared in 18 months and the total cost of credit would be €300.

alwald

I am unsure if this was suggested in the thread so far, but how about switching your mortgage provider to avail of a lower rate and after few months pay the full mortgage.
This might be cheaper and thus allowing you to have some savings towards the extension

Life is short, and loads of things can happen that financially restrict your ability to be free. The mortgage is, for most of us, the largest financial restriction on our freedom.

Imagine a world where both of you didn't have to go to work when sick children or other loved ones needed you? It may not be now, but at some stage this sort of thing happens many people. Jobs are lost, people fall into depression or other longer-term illness and so on. And it is always much harder when you have to earn enough to pay off a mortgage on top of that. Yes, jobs can give structure/routine/focus and greatly help us all but when you must do them no matter what the stress can undermine recovery.

I wouldn't listen to any of that myopic nonsense about going on a holiday or buying a fancy-schmancy new car (which loses 30% of its value as soon as you leave the car dealer). Jesus. Living mortgage free is a lifelong holiday. Having said that, if you need an actual ordinary second-hand car to get you around, the 2.8% mortgage interest might be the best you will do so you could decide to leave maybe €10,000 on your mortgage to get something essential like that (if it's needed now; otherwise saving is always cheapest).

Life is short. Clear the mortgage: it's a gift of incredible freedom to yourself.

Black_Knight

podge018 wrote: »

Another thing somebody said to me, which I think of when I read comments about saving for the extension.... you'll never save as much as you currently have to pay. So if we're mortgage free, I don't think we'd be strict about saving the 800 (or more) we'd need to build something in the next 3-4 years. To have 80k saved in 4 years means saving 1666 a month. 800 should be easily done if we're strict with ourselves, but where's the rest gonna come from?

Little bit of both maybe. A smaller mortgage to keep you decent (if you think ye would be frivolous with your expendable income), and save the difference (up to 800) for a few years until ye have enough for the extension. Say, pay off 130-140k now, and see out the 5 year fixed rate ye have (no breakage fees then) at around 180 a month, saving 620 a month for those 5 years. Tis in around 40k + the 40k left over from the payout.

Even open another account and transfer 800 into that every month to stop yourselves from dipping into it. We have a joint account and every month we put a set amount into it regardless of what bills we have.

Arciphel

Sorry to dredge up an old thread, just wanted to see what the OP decided to do in the end?