Mortgage overpayment/possible inflation increase

peacock20 · 10-11-2021 12:15pm #1

Hi all. I am in a fixed rate with my mortgage, and currently overpay monthly, with no penalties. A work colleague has mentioned to me that due to a possible increase in inflation, it would be pointless making any over payments, would be better off just paying the mortgage as normal. My overpayment all goes to the capital, so reduces the interest paid back and the term of the mortgage. I don't quite get where he is going with this, and there is a small bit of a language barrier, so I'm sure something is missing, or I'm missing something. If inflation rate increases, making overpayment on a mortgage is wasting money, something like that. Does this make sense? Would really appreciate any advice or thoughts on this, as it won't leave my mind now!

Supercell · 10-11-2021 12:34pm

Your work colleague is clueless, you are paying off the principal early which is the smart thing to do, taking his advice in an inflationary environment where interest rates very likely follow you would end up paying even more for longer (as you had stopped overpaying the mortgage and therefore not shortening the term left to pay anymore).

His assumption is that your fixed rate remains fixed at that rate for the rest of your mortgage and that inflation therefore devalues the fixed amount you have to pay in time assuming your salary grows at the same or greater than inflation whilst your taxes remain the same.

For this to be realistic, think South America/Africa dictatorship type inflation, you had a long term fixed rate and your salary sky rocketed as a result making payments relatively easier than now, thats very, very unlikely to happen. In that scenario you would have bigger issues.

cruizer101 · 10-11-2021 12:45pm

The logic is that because of inflation the amount you pay on your mortgage effectively reduces.

Say you have 30 year one which with overpayment you will pay off in 20 years. In 20 yrs the lets say 1200 mortgage repayment will be in effect much smaller compare to your income where as the overpayment you make now is worth more to you now.

What that neglects is the overall interest saved by overpaying.

There is a balance to be struck between overpaying and using spare money on other things but in general overpaying is a good idea.

TheRef · 10-11-2021 1:05pm

Overpaying is generally an excellent idea and trumps almost every other form of investment, apart from possibly investing in your pension.

peacock20 · 10-11-2021 1:53pm

Ah I see. Thanks for all that folks, clears it up. I suspected/knew I was doing the right thing. For clarity, I have about 7 yrs left of a 10 Yr fixed. Should be only about 1 year remaining on the mortgage when the fixed rate expires. The reason i went with 10 Yr is that I am paying over "the allowable overpayment", with no further penalties. This made sense to me/us at the time, just want to be sure nothing really impacts it.

Thanks for the input everyone, very helpful

dotsman · 10-11-2021 2:52pm

https://www.boards.ie/discussion/comment/118145613#Comment_118145613

I'm sorry, but that has to be one of the worst things I have read on this forum. It is not a good idea at all except in very unique circumstances, and represents a terrible form of investment.

Overpaying your mortgage stopped being good financial advice 20 years ago. Other than ignorance, I can't understand why so many people still do it.

peacock20 · 10-11-2021 3:02pm

Thanks for replying Dotsman.

Can you expand on that? What can be considered "very unique circumstances"? Only other info I can give is that is that according to BOI website, a maximum of 10% overpayment of a monthly mortgage, topped at €65 per month can be paid without penalties. I am paying 33% per month extra with no penalty. This sounds good no? I have no other loans at all, not paying interest to anyone anywhere. Have begun picking up some shares, small change, nothing crazy. Not in cryptos, can't quite grasp it!

Can that overpayment be considered unique circumstances?

CPTM · 10-11-2021 3:09pm

https://www.boards.ie/discussion/comment/118146185#Comment_118146185

Unless they have high levels of debt elsewhere like on credit cards or personal loans, or are under financial pressure in some way as it is, it absolutely is good advice. For example if a person with a 300k mortgage repays 1500 per month instead of 1200 per month, they'll save over 45k in interest, not to mention the return they'll get from whatever they invest in after the mortgage has been paid off nearly 10 years early.

Being debt free early also grants the person more personal freedom at an earlier age. Maybe they can go back to college, switch profession or reduce hours at work allowing more personal time.

I'd agree with you though if they have other debts or don't have the surplus cash to over pay.

dotsman · 10-11-2021 3:13pm

In terms of the op, yes, with inflation rising, it makes overpaying (for now) an even worse decision than normal.

Let's assume you are paying 3% interest. If you overpay 1 euro this year, you are saving 3 cent next year. However, if inflation is 3%, then you haven't saved anything, and if inflation is higher than that, then you are actually making a loss.

If you are looking to make/save money, then you should be looking to invest that money in profitable investments that offer good-excellent returns.

I'd advise you to take a look at the investment forum here and get a feel for what options appeal to you, learn how they work and see what sort of returns people are getting on their investments. And start making your money work for you.

SteM · 10-11-2021 3:18pm

https://www.boards.ie/discussion/comment/118146185#Comment_118146185

Other people on this thread have given reasons why they feel it's good practice to overpay the mortgage. You've just said it's a terrible form of investment but haven't really said why. Would be great if you could elaborate so people could understand your reasoning.

cruizer101 · 10-11-2021 3:19pm

The thing about investing elsewhere is you can do better but you can also do a lot worse.

Overpaying on a mortgage is a guaranteed return on your investment, there is no other investment which is guaranteed that has a better rate.

dotsman · 10-11-2021 3:51pm

https://www.boards.ie/discussion/comment/118146349#Comment_118146349

Actually, I haven't seen any post describe why it is a good idea :). There's been numerous threads on this over the years, but in a nutshell:

the returns are tiny and often eroded by inflation
you are locking away money that you won't see until after the mortgage is paid off, when you could easily need some/all of that money between now and then.
as a long-term "investment", you should be looking for returns close to 10% as opposed to the few percent that a mortgage overpayment.

30 years ago - sure, with much higher interest rates, the returns were much better and most other investment options weren't open to Irish people, so it made sense. But not in recent times.

https://www.boards.ie/discussion/comment/118146353#Comment_118146353

But that guarantee is to make either a tiny amount of money to losing money. Not exactly attractive.

dotsman · 10-11-2021 4:10pm

https://www.boards.ie/discussion/comment/118146289#Comment_118146289

Yes, definitely, if they have other debts, they should be the priority. But if you even take your example of 300 per month. Putting that into a share trading account, over 10 years would net a far greater return on average. Plus you have the advantage of accessing that money if you need to over the 10 years as opposed to the overpayment which you can't get back if you need it 5 years later.

https://www.boards.ie/discussion/comment/118146255#Comment_118146255

Very unique circumstances might be where someone is currently in negative equity and wants to sell and move on, so they are overpaying for a year or two (or a lump sum) to get the debt below the selling price. The main points being there is a need to reduce the outstanding debt and it is very short term. For the average Joe, overpaying means they get to see the benefit only at the end of a very long period (the mortgage has been repaid).

As a long-term "investment", it offers terrible returns (S&P 500, which is always a good measures of "shares" has an average return of 10% per annum over the last 50 years). Over the long term, every single percent of a difference has a huge impact on the overall return , so 10% (assume 7% after tax) will result in multiples of a return over mortgage overpayments over a long period of time.

The other reason to avoid overpayment is that money is now "locked away" until the mortgage has finished. While most people can predict, with relative accuracy what their financial needs for the short term are, it is very hard to predict what will happen over a 10+ year period. What if you are out of work for a few years (illness/redundancy), or a dependant is ill etc, what if you find problems with your house and it needs urgent (expensive repairs) subsidence etc that aren't covered (be it partly or at all) by insurance. Ultimately ,there could be 101 reasons why you may need access to serious cash in that timeframe, and most likely for a reason you can't think of right now.

Put it another way, when breaking down all the options you have for your excess money today and comparing them, why would anyone choose "mortgage repayments"? To me, the problem is people don't think of all the various options and simply follow the traditional advice of "overpaying a mortgage" because that is what their parents did without thinking that today is a very different world (interest rates are rock bottom and we have a huge choice of investment options that weren't available 20 years ago).

Am I right in saying that you are overpaying by €65 per month? Why not add that to your broker account (Degiro I assume)? It's still small money, so you shouldn't feel uncomfortable as you get familiar with share trading and the benefits it brings to your life (from a financial security perspective). With share trading, accept that you will probably make some small mistakes at the start, but they should always be considered "cheap lessons" as you improve over time and start making serious returns (it's why I think everybody should do some share trading with small money in their 20's - so that they are good/comfortable doing it in their 30's and beyond with more serious money!)

Darc19 · 10-11-2021 4:25pm

The biggest benefit of overpaying a mortgage is the financial security it gives you and that alone can be very positive from a mentality point of view.

I have a tracker and earlier this year the outstanding balance went under €100k and it just gave me a good feeling that its nearly paid off. I overpay now and then even though its a 0.95% tracker. I've a very decent pension and a second property, so adding to pension is not really warranted, hence the plan to be mortgage free in about 3 years and sit back thinking "its all mine".

SteM · 10-11-2021 4:44pm

https://www.boards.ie/discussion/comment/118146559#Comment_118146559

Actually, I never said the words 'good idea' :)

peacock20 · 10-11-2021 5:06pm

@Dotsman, thanks for all that, and everyone else, lots to think about.

Re: the €65 you asked about. BOI allow a maximum of 10% as an overpayment per month on a fixed rate mortgage, up to €65 per month, without accruing a penalty.

I have an agreement with allows an overpayment on my mortgage of 33% per month, not capped at €65, without accruing any penalties. This is why I can't see past the overpayment being the right decision. No penalties, straight to capital, less interest to pay back, shorter term. There is an emotional decision in here somewhere too, hasn't always been rosey so just want it finished. Should be done in 8 years.

Yes, have been dipping my toes in investing, trial and error stuff, relatively small change to get the feel for it.

Thanks for all the replies

cruizer101 · 10-11-2021 5:20pm

Whilst I'm a fan of overpaying one thing to be aware is it is far more effective towards the beginning of a mortgage.

On a 300k 30 yr mortgage 3%

Overpay €100 in first month save €145 in interest, that same €100 5 yrs in would save €110, 10 yrs €81, 20 yrs €34.

Given only 8 yrs left the savings are no where near as significant. Going back to your OP inflation isn't as significant either.

In your shoes if you have extra money to invest I would look at maxing out pension contributions, given they are paid before tax it is near impossible to beat the instant return you get there.

Jim2007 · 10-11-2021 5:53pm

https://www.boards.ie/discussion/comment/118146740#Comment_118146740

It may make you feel good, but in terms of financial risk it’s a very high risk strategy. You are very heavily invested in a high risk asset class with a low return rate, you have failed to diversify etc… there are a lot of ifs about these strategies that people have forgotten about again since 2007.

Outside the anglo sphere property does not represent financial security, it represents the exact opposite. There is a reason why Irish households lost so much of their wealth in the last recession and are likely to do again next time - they loaded up on a high risk asset class and ignored the general tenants of investing. It really should not have been much of a surprise….

TheRef · 11-11-2021 9:17am

https://www.boards.ie/discussion/comment/118147206#Comment_118147206

Huh? How can paying off debt ever be considered a "very high risk strategy"? While the poster has a second property, they are not investing in property.

I do find it very hard to take others in this thread seriously who recommend investing in shares or funds over paying off a mortgage without caveating it that you really need to know what you are doing and that it comes with significant risk.

Ballpark figures:

€100k and 10 years remaining on your mortgage @ 2.95%. Current monthly repayments: €963.
Pay off €20k (don't reduce term): €80k with same term of 10 years, same rate: New Monthly repayments: €770.
Pay off €20k: (reduce term): €80k with new term of 8 years, same rate: Similar monthly repayments: €936

Option 1: Total repayments: €115,596

Option 2: Total repayments: €112,476 (incl. €20k up front): 1.45% annual return on the €20k

Option 3: Total repayments: €109,908 (incl. €20k up front): 2.5% annual return on the €20k

So, by all means, if you think you can do better than the guaranteed returns, go for it.

noplacehere · 11-11-2021 9:28am

There are other possible considerations too

For us:

Overpaying to principal only from the start of the term has massively reduced the interest due on the mortgage in a very favourable way to the potential savings in any sort of secure saving fund

Overpaying without penalty has our term more than halved and we have the option to readjust to the max length again without penalty should there be any difficulty with finances

Both partners could not get life insurance. Overpaying from the beginning has it already within the reach of both partners independently if god forbid something happens.

At the end of the adjusted term if we keep up the overpayments we will have kids in college. It is the perfect time to be either completely free of the mortgage or if we readjust to the max length it will be a very minimal payment. The mortgage insurance being finished will also be up freeing more money (premium was loaded for the insurance partner 200%)

Investing could not match the above benefits for our family.

Jim2007 · 11-11-2021 11:27am

https://www.boards.ie/discussion/comment/118149421#Comment_118149421

I don’t for a minute expect an Irish person to agree with me because the ‘get on the property ladder’ is too engraved…. If you want to ignore the financial carnage of the last recession, accept that say 1% - 3% is an acceptable return on a high risk asset class where you have failed to diversify, fine it’s your money. But in a world where the general consensus is that a well diversified portfolio can achieve a return of around 6% - 8%, it by no means represents financial security.

Buddy Bubs · 11-11-2021 11:32am

https://www.boards.ie/discussion/comment/118145613#Comment_118145613

You got the pension bit right but the rest is, well, let's say a bit generic and basic. No one size fits all, not even close.

TheRef · 11-11-2021 12:15pm

https://www.boards.ie/discussion/comment/118149965#Comment_118149965

This is nothing to do with "getting on the property ladder" - its that someone is €100k's in debt, paying ~3% interest every year on that debt and some folks have an opportunity to reduce that debt. Reducing debt is always a safe thing to do. Yes, some folks may choose to pay the 3% and instead take a risk on achieving a return greater than this, but every investment is a gamble. You "can" achieve a return of 6%-8% but you "can" also lose 6%-8%.

Investing in stocks and shares is not done lightly. I've been there, won some, lost more. I also don't have the time or knowledge to invest in the stock market and I don't have the appetite for high risk. So, each to their own.

https://www.boards.ie/discussion/comment/118149995#Comment_118149995

Yes, it is basic, but we are on an general internet forum where the majority of posters don't understand or care for investing.

I would love someone to show me an investment that all but guarantees an annual return > 3%.

Buddy Bubs · 11-11-2021 2:29pm

https://www.boards.ie/discussion/comment/118150239#Comment_118150239

All but a very small few understand it when explained to them. I worked in mortgages, pensions and investments in a previous life and people do get it. Many were looking to overpay mortgage before they knew the options. Pension was big one. But even if that's maxed out an investment fund for 10 years plus for children's university made sense for many as an alternative. Just don't think you can make generic sweeping statements for a large, diverse group of people.

Donald Trump · 11-11-2021 2:37pm

https://www.boards.ie/discussion/comment/118146349#Comment_118146349

The basic idea is that mortgage is the cheapest form of credit you can get. If you have absolutely nothing else to do with the spare money then pay it off. If you could put it to work in some other area then you might be better off doing that. That is the basic principle

Overpaying might be good for the mental accounting part of things. If someone isn't that good at managing money overall and has to compartmentalise, they might be able to have a target like overpay by 100 each month. Whereas if they didn't have that target they might just fritter that 100 away. For those people, paying the extra bit off can help.

daheff · 11-11-2021 7:49pm

To my mind you should do the following

Put aside 6+ months of income into safe, easily accessible deposits (demand deposit)

Then look to pay off highest cost debt first (eg credit card).

Only at that point should any excess funds be considered further for investment.

On your mortgage you are probably paying about 3% interest. With inflation rearing it's head, now is a good time to fix variable mortgage (if not already done so).

If you repay capital, it's difficult to redraw (and can be costly). Better to have cash on hand and not need it than need it.

Can you get a higher return than 3% investing elsewhere? Probably, and especially over a longer time horizon . Take for example investing in a stock that pays a regular dividend which is about 3% (same as you pay on the mortgage). You will pay income tax on this at the same rate as your marginal rate, so to stay at a similar position you would actually need to get a return of around 6% (assuming you pay at the higher rate). Over time you would expect(hope) for the company to increase its dividend. This then increases your return on investment. If your return goes up you are then doing better than paying off your loan. And if the dividend keeps rising then the capital element of your investment rises too.

Downside is that if a recession happens dividends get cut first and share prices drop. However over a long enough time horizon and a diversified portfolio, you should not be at a loss.

Another option is to contribute to your pension. At higher rate every 60eur invested becomes 100eur with the tax credit. That's before any returns. Downside to pension contribution is that you then can't access funds until you are at least 50.

Personally, if I had a mortgage that I could fix at a low rate and had no issues paying it, I'd be tempted to not repay it until I'd so much money sloshing around that I could max out pension, have a rainy day fund, pay off every other debt and have cash to invest.

Mortgage overpayment/possible inflation increase

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