Pay lump sum off Mortgage or Invest

pavb2

Hi all

I'm going to speak to a financial advisor but thought I would ask the question here.

I have £100k sterling lump sum and wonder if I should now pay a off part of my mortgage and reduce the term. The mortgage is a tracker mortgage 1.25% interest rate and there is 175k Euro owing with 10 years left to run. Total per month is 1500 euro of which approx 1300 pays of the capital sum and 200 euro is interest.

I could put the cash into a savings account but interest rates are poor, buy property which I'm reluctant to do or invest.

I have no other debt such as credit cards, no future education costs for kids etc

The biggest issue for me really is the sterling euro exchange rate as if it was in my favour I would probably just convert and pay the mortgage. I know you can't predict the market but if I exchanged today I would get 110k euro but earlier in the year I would have got £120k euro.

Any advice much appreciated I'm really just trying to make sure I've looked at all the options.

Your calculation doesn’t add up, 8 years at 1500 per month won’t clear 175k.

Personally I’d probably do a mix. Put half into the mortgage and half into an investment or something along those lines.

antimatterx

Pension

Bubbaclaus

With the mortgage interest rate so low I'd be inclined to go the investment route (or put a chunk into pension).

Only issue with investing right now is that the stock market is at an all time high in the middle of a pandemic and economic turmoil. Not sure if investing right this instant will work out the best for you.

pavb2

Virginia Handsome Battery wrote: »

Your calculation doesn’t add up, 8 years at 1500 per month won’t clear 175k.

Apologies 10 years

Q&A

Tracker mortgages are like homestore and more.. Once they're gone there gone. Are you confident you don't want to move property, build an extension/renovation etc? No point paying down a loan @ 1.75% now only to borrow in the future at a higher rate.

Other things to consider:

How's the car looking? Will it need replacing
Is the 100k excluding any rainy day fund you have for emergencies? Always helps to have a buffer in case something bad happens.
How's your pension looking? It's easy to focus on your mortgage as it's an expense right now but if I were you I'd be looking at maximising what's best over three rest of your life not just current expenditure.

antimatterx

antimatterx wrote: »

Pension

The advantage of a pension is tax relief this money won’t benefit from that and will get locked away. I wouldn’t think pension would be a good idea at all for it.

PHG

Hi OP,

Few of these threads on here but general consensus is (if not in place already):

- Emergency Fund: Have 3 months expenses in a current account that you can get access to instantly e.g. say 10k
- If not Pension, start that and max it out for this year (Depending on age that could be 15k)
- Throw the rest at the mortgage (75k)

Points 3 and 4 can go either way but best to clear any debt, you will feel a lot more comfortable when you have no mortgage payment each month!

As nox said also, your mortgage payment numbers don't add up either

Irishphotodesk

If you are not going to miss the money why not put it in a post office savings account ... like an ssia thingy.

Save for 12months(max 1k per month) and leave it for 5yrs, interest rate after 5yrs is 5.5%

Or lump sum put aside for 5/10yrs ,can't remember the return on it, bit might be worth looking at.

cruizer101

Virginia Handsome Battery wrote: »

The advantage of a pension is tax relief this money won’t benefit from that and will get locked away. I wouldn’t think pension would be a good idea at all for it.

No but you could max out your contributions to you pension that do benefit from tax relief and make up any shortfall in your take home from the lump sum.

Henry Ford III

Virginia Handsome Battery wrote: »

The advantage of a pension is tax relief this money won’t benefit from that and will get locked away. I wouldn’t think pension would be a good idea at all for it.

Tax relief is available against income subject to limits.

From whence you pay it is of no importance.

So if the op is paying the higher rate of tax it should be a consideration.

Pacifico

Irishphotodesk wrote: »

If you are not going to miss the money why not put it in a post office savings account ... like an ssia thingy.

Save for 12months(max 1k per month) and leave it for 5yrs, interest rate after 5yrs is 5.5%

Or lump sum put aside for 5/10yrs ,can't remember the return on it, bit might be worth looking at.

If you saved €1000 a month into this account for 5 years (total €60,000) what € interest would you receive after 5 years?

Bubbaclaus

Irishphotodesk wrote: »

If you are not going to miss the money why not put it in a post office savings account ... like an ssia thingy.

Save for 12months(max 1k per month) and leave it for 5yrs, interest rate after 5yrs is 5.5%

Or lump sum put aside for 5/10yrs ,can't remember the return on it, bit might be worth looking at.

Umm...you should probably run the numbers on that 5 year state savings suggestion.

Irishphotodesk

Bubbaclaus wrote: »

Umm...you should probably run the numbers on that 5 year state savings suggestion.

This is a screenshot from the website, I can take a photo of the paper documents if you would prefer.

Bubbaclaus

Irishphotodesk wrote: »

This is a screenshot from the website, I can take a photo of the paper documents if you would prefer.

My point is that the return on that is lower than the interest savings you would make just paying a lump off the mortgage. So it makes absolutely no logical sense to suggest that as an option.

Irishphotodesk

Bubbaclaus wrote: »

My point is that the return on that is lower than the interest savings you would make just paying a lump off the mortgage. So it makes absolutely no logical sense to suggest that as an option.

Oh right... Didn't see that, I thought you were saying my numbers were off.

Yes, paying off the capital should be a better idea, especially if the person won't need the money for anything in the future,so from a straight forward concept of which is financially better, paying it off the capital would be ideal.

Alternatively if you consider that lump sums may be needed in the future, it may be more productive to have the money tucked away earning money.

Both options have their merits.

domrush

Virginia Handsome Battery wrote: »

The advantage of a pension is tax relief this money won’t benefit from that and will get locked away. I wouldn’t think pension would be a good idea at all for it.

That's not how pension tax relief works.

domrush

domrush wrote: »

That's not how pension tax relief works.

It is how it works.

Someone suggested putting the money directly into a pension. There would be no tax relief on putting this already clean money into a pension.

Now you could contribute more from your salary and spend the cash etc as indirect ways to put it into a pension while getting tax relief but putting it in directly gains you nothing from a tax relief perspective and locks the money up for decades.

28064212

Virginia Handsome Battery wrote: »

It is how it works.

Someone suggested putting the money directly into a pension. There would be no tax relief on putting this already clean money into a pension.

Now you could contribute more from your salary and spend the cash etc as indirect ways to put it into a pension while getting tax relief but putting it in directly gains you nothing from a tax relief perspective and locks the money up for decades.

Either they're already maxing out the pension contributions eligible for tax relief for the year or they're not. If they're not, they can now choose to max it out. The source of the money used to max it out is irrelevant

domrush

Virginia Handsome Battery wrote: »

It is how it works.

Someone suggested putting the money directly into a pension. There would be no tax relief on putting this already clean money into a pension.

Now you could contribute more from your salary and spend the cash etc as indirect ways to put it into a pension while getting tax relief but putting it in directly gains you nothing from a tax relief perspective and locks the money up for decades.

You can claim the tax relief back, it doesn't matter whether the money comes from your salary or from other sources. Your salary is just the measurement used to decide your max contribution and the amount of tax relief available. I work in the industry.

It's called an Additional Voluntary Contribution - Lump Sum.

28064212

28064212 wrote: »

Either they're already maxing out the pension contributions eligible for tax relief for the year or they're not. If they're not, they can now choose to max it out. The source of the money used to max it out is irrelevant

domrush wrote: »

You can claim the tax relief back, it doesn't matter whether the money comes from your salary or from other sources. Your salary is just the measurement used to decide your max contribution and the amount of tax relief available. I work in the industry.

It's called an Additional Voluntary Contribution - Lump Sum.

How can you get tax relief on money already sitting in your account that was either tax free or already taxed?

You get tax relief when you contribute from your salary as you pay into your pension pre-tax and draw down some tax free and some/the rest at the lower rate of tax (assuming you being taxed at the higher rate in your employment).

If you have 100k sitting in your bank account and put it into your pension how exactly are you getting tax relief when you already have the money and no more tax is due on it?

Now as I said you could max out your contribution from your employment and use the cash sitting in your account to spend day to day to compensate for putting more into your pension - this would get tax relief but indirectly.

domrush

Virginia Handsome Battery wrote: »

How can you get tax relief on money already sitting in your account that was either tax free or already taxed?

You get tax relief when you contribute from your salary as you pay into your pension pre-tax and draw down some tax free and some/the rest at the lower rate of tax (assuming you being taxed at the higher rate in your employment).

If you have 100k sitting in your bank account and put it into your pension how exactly are you getting tax relief when you already have the money and no more tax is due on it?

Now as I said you could max out your contribution from your employment and use the cash sitting in your account to spend day to day to compensate for putting more into your pension - this would get tax relief but indirectly.

I'm sorry you're incorrect on this. It's the same as claiming tax back on medical expenses etc. Here's a description by Irish Life on how to do it:

https://www.irishlifecorporatebusiness.ie/top-your-pension-savings-and-get-tax-back

Most people with private pensions outside of their employers will store up their after-tax earnings and make the pension contribution at the end of the year (usually around October).

28064212

Virginia Handsome Battery wrote: »

How can you get tax relief on money already sitting in your account that was either tax free or already taxed?

By claiming the relief in your yearly tax return.

Virginia Handsome Battery wrote: »

You get tax relief when you contribute from your salary as you pay into your pension pre-tax and draw down some tax free and some/the rest at the lower rate of tax (assuming you being taxed at the higher rate in your employment).

That's one of the ways of contributing to your pension. Their are plenty of others. For example, my employer's pension scheme doesn't suit my needs, so I started my own PRSA. I put a figure of 20% of my annual salary straight into that pension at the start of the year. That means I maxed out my full year's tax-relief-eligible contributions in January - it obviously didn't come from this year's salary.

I did the same last year, and claimed my tax relief for last year in January of this year.

Ok, thanks I wasn't aware of this. I was only aware of the standard way of contributing from your monthly gross salary in order to avail of tax relief. Similar I thought an AVC came out of your pre-tax salary and not as a lump sum contribution.

I don't currently have a pension but will be looking to start one when I can reduce my monthly savings towards a house build so will be looking at options in more detail then (my employer does not offer a pension plan).

pavb2

OP here thanks to everyone that replied certainly gives food for thought but to give a bit more info:

I've got rainy day money put aside for car etc

I did have a private company (my own) pension but can't pay into this as I sold the business, the money is now in ARF and AMRF funds. I'm 56 now so reluctant to set up a new pension scheme.

My immediate problem is at what rate I'm willing to convert the £ sterling to Euro, its at about 1.10 Euro per pound sterling at the moment. if I can at least get the money changed to Euro at a decent rate I can take my time and have a long think about it, ultimately its a nice position to be in.

PHG

What are you defining as a decent rate?


For best rates do not use high street banks e.g. HSBC in UK or BOI in Ireland. You will have to use something like Revolut (they will give you the market rate) or Transferwise, because it is a larger sum.

At 56 you have a few years left until retirement (assuming retirement at 65) so for tax purposes and building wealth it is still a good option.