Pay off lump sum on mortgage suggestion

billyhead

I have a remaining mortage of about 92,000 with teh county council of which monthly repaymanets are 640 euro. I have a lump sum of cash in the AIB of 12,000 in one of those short term deposit 7 days notice accounts. I was just wondering would you think it would be best to pay off some of my mortgage with this amount. The mortage was for 20 year term of which there are 14 years left. Also would it be a simple process in paying off some of the mortage. Do I just ring them council and inform then and then arrange to trasnfer the money from the bank to the mortgage account? The interest to be fair is not very great on the deposit account and I was thinking that finanacially wise I would be better of reducing the mortage. What do you suggest?

smcgiff

Couple of questions...

Do you have a variable mortgage?

Do you have any non mortgage loans?

billyhead

Yes a variable mortgage and no I have no other loans to pay off

smcgiff

Most likely the best thing to do to pay off mortgage. Bear in mind mortgage is probably the cheapest finance out there so ensure you're not likely to need finance in near future. Good luck.

billyhead

smcgiff wrote: »

Most likely the best thing to do to pay off mortgage. Bear in mind mortgage is probably the cheapest finance out there so ensure you're not likely to need finance in near future. Good luck.

I have just been informed that I can make the lump sum payment The special payment will reduce the instalment not the term. I presume it would still be worthwhile making the payment due to the interest rates not being great with the AIB deposit account

smcgiff

Hi Billy,

If its a variable loan and you keep your payments as they are the term will automatically reduce.

I'm assuming you don't need special permission to make a non standard payment.

billyhead

Thanks for the great advice so far. I was told the term i.e length of the contract will not reduce if I make the payment. It should be straightforward to do aswell. Its just as a matter of making the payment in their head office with a post draft from the bank. I presume though if I reduce the mortgage the monthly payments would reduce in terms of interest etc which would be more cost advantageous then the interest I am getting at the moment witht AIB savings account

Leroy42

You would save money alright, but you would also lose out on the interest to be earned (net of DIRT) on the lump sum you pay in, as well as now not having access to the funds should you require them.

It all depends on the respective rates and you're own standing regarding having debt etc. For example, you lose your job tomorrow, and get little redundancy. What price can you put on having the cash available then.

As was said above, mortgage is the cheapest form of debt, but of course it amounts to significant costs over the full term.

Take the 12k on say a 4.5% mortgage rate, it costs you 540 per year in interest. 12k (@ 2%) on deposit will net you around 160 a year. So a difference of 380 pa. (very simple sums just for an example). Is 380 a price worth paying to have access to your funds?

smcgiff

Yip, you are right.

If you reduce the mortgage and reduce your repayments, you'll still gain by not accruing as much interest. You'll also save on your cashflow.