Doing the maths on mortgage terms (vs investing / pension)

spalpeen

I'm using karl's mortgage calculator to assess whether I'm better off taking a 30 or 20 year mortgage term.

House price: 700k

Deposit: 275k.

Loan: 425k

Assuming an interest rate of 3%, over 20 years there is a payment of 2357 per month and a total 566k paid.

Over 30 years, this would be a payment of 1791 per month and a total 645k paid.

In the 20 year case, I would then have 10 years to compound 2357 per month. This amount to 356k at 5% (roughly going by 7% return - 333% for cgt = 5% return)

In the 30 year case, the extra 566 per month invested by the same rate, not contributed to mortgage, amounts to 451k.

So, in the end, option a involves 566k paid but - 356k in profits = negative 210k

Option b involves 645k paid but - 451k in profits = negative 194k

I know these are very rough maths with problematic presuppositions, and without the knowledge of how pensions are really taxed, as I am doing this as if they were normal stock investments subject to CGT, but option B, the longer option seems to win out here, and I'm guessing it would look even better if that 566 were put into a pension.

Does anyone have thoughts on this?

walterking

I'd go for the shorter term as in a way your house can be part of your pension planning as it is easy to downsize in later years.

Then once the mortgage is paid off maximise your pension contributions.

I myself don't like trying to combine two different financial products to guess an outcome as there are too many variables. The 3% interest rate average is probably right, however a 7% return might be on the high side.

As earnings grow / spare cash is there, start increasing pension and then when house is paid off, increase further.

The other thing that many people forget is potential inheritance and the affect that has on calculations.

I'm guessing that your are a youthful early/mid 30's person. I wouldn't be overly concerned about pension at this point especially as your earning power is obviously good and you'll have plenty of time to make larger contributions as you skelter past the 50 mark

Q&A

Have both. You need a pension for when you retire but you also need to live long enough to get to retirement age - so avoid unnecessary stress.

On the mortgage take out the longest contractual mortgage you can but pay it back as fast as you can. While you might want to aim to repay over the 20 years who knows what the next 20 years will be kind. Better to overpay when you can rather than have to deal with the stress of wondering how you will afford higher repayments in bad times or have to put parts of your life on hold to meet a mortgage repayment.

All going well you'll still pay it off in 20 years but with the flexibility of taking longer if needs be.

The J Stands for Jay

https://www.boards.ie/discussion/comment/119955306#Comment_119955306

DO the opposite of everything here. Start your pension early, and you get away with paying less.

Your home as a pension? Madness. Imagine someone suggesting this investment to you:

There are large upfront transaction costs; No diversification in asset, asset type or location; a large loan is required to purchase the asset; there are regular payments to service the debt; the asset requires regular costly maintenance; it generates no cashflow to offset the outflows; the asset is illiquid, selling can take months and there are large selling costs; you can't sell part if it to meet your cashflow needs; you'll live inside it and likely become emotionally attached to it.

If your financial advisor suggested this as an investment, you'd think they were crazy

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Drumpot

Get professional advice.

Remember, for somebody to earn an extra €566 per month (for the lower term mortgage option) , they have to earn prob about €1100 per month gross salary (40% tax plus USC + PRSI) .

If you instead decide to invest your net €566 into a pension you can gross that up to maybe €1000 (40% tax credit) a month for the same cost. That’s basically 33% top up of savings and tax free growth over 20-30 years.

After year 20, you’d prob have maybe 300k (depending on return) and you could plough more into your mortgage at that stage (as at least you have a pension pot), or use tax free cash from pension to clear off some of mortgage.

The mortgage is the heart option, the pension is the head one. I get why people don’t want mortgage clear but it seldom makes financial sense when the most reasonable and realistic considerations are factored in.

And your house is not an investment, don’t make that a factor in your retirement plan.