What to do with 150,000

wdmfapq4zs83hv

So I have recently come into the sum of 150k unexpectedly & haven't a notion what to do with it. My instinct is to put it off my mortgage which would reduce the remaining term from 24 years to 9 years. We have 3 kids & would also like to consider putting some money aside for them for college but no idea what kind of sum or where we could get a good return, maybe prize bonds? I'm a bit lost. Are there any down sides to putting a lump sum onto my mortgage? Or what should I be thinking about?

ixus

Depends on what you have left in your mortgage, if its fixed, variable or a tracker. If tracker, leave it. "Karl jeacle" has a mortgage calculator to let you see the interest you are paying on present mortgage.

Personally, i would put min 40/50k away for college and unseen events (jobl loss/illness etc) and reduce the principal on the mortgage where i could with the majority of the rest.

You could then overpay your mortgage by maintaining current payments.make sure overpayment is going off principal.

ixus

Also, it doesn't have to burn a hole in your pocket. It's not a lump of hot coal. You could sit on it for 5/6months and think about things.

hytrogen

I was recently in a similar situation with no overheads thankfully so I went to a few banks for a financial planning meeting, making sure they were free & no obligations to sign up to anything.
After my head wasn't with it and my bank offered a long term online deposit account with no limits & it would help my future credit rating so I stashed it there until I was ready to do some work on my home & a few other projects in the future.
Easy option I know but it meant I still had it available within a reasonable time for when I go to do some projects.
Otherwise try your Credit Union & Savings certificates.

Seve OB

if you are going to save it or leave it sit for a while befor you decide what to do
don't put it all in one bank!
split it up,
as there is a limit on the bank guarantee of €100k. might not happen, but better safe than sorry

moneymad

Frank Skinny Yardage wrote: »

So I have recently come into the sum of 150k unexpectedly & haven't a notion what to do with it. My instinct is to put it off my mortgage which would reduce the remaining term from 24 years to 9 years. We have 3 kids & would also like to consider putting some money aside for them for college but no idea what kind of sum or where we could get a good return, maybe prize bonds? I'm a bit lost. Are there any down sides to putting a lump sum onto my mortgage? Or what should I be thinking about?

make 2% a month on it and retire

wdmfapq4zs83hv

Where would I make 2% a month on it???!!

Nody

Frank Skinny Yardage wrote: »

Where would I make 2% a month on it???!!

Nothing comes to mind that would not involve a quite high level of risk (i.e. normal dividend stock are between 1 to 4%, bonds are up to 6 to 8% etc.). What you could do is ask the bank if they would be willing to sell you the full loan now (i.e. instead of reducing from 24 years to 9 to get it down to zero) as for banks with the need for higher liquidity and value of cash today rather than in the future etc. You could then save what's your current monthly mortgage fee for your children's funds.

hytrogen

Frank Skinny Yardage wrote: »

Where would I make 2% a month on it???!!

I was in with AIB yesterday to complain about their lousy less than 1% interest across the board and then the lad at the desk found me an online savings account with the magic 2% interest. Max installment per month is €1000 but you've instant access.
*I do not work for a financial institute, I was only inquiring about the use of an account & the customer rep. helped me out out of the blue!

Nody

hytrogen wrote: »

I was in with AIB yesterday to complain about their lousy less than 1% interest across the board and then the lad at the desk found me an online savings account with the magic 2% interest. Max installment per month is €1000 but you've instant access.

That's their standard savings account and is listed on their website to be fair and that's not max installment but the maximum you get the 2% interest on per month (i.e. once you deposited a total of 1k EUR on the account you will only get 0.5% interest on anything beyond those 1k EUR)...

wdmfapq4zs83hv

Nody wrote: »

Nothing comes to mind that would not involve a quite high level of risk (i.e. normal dividend stock are between 1 to 4%, bonds are up to 6 to 8% etc.). What you could do is ask the bank if they would be willing to sell you the full loan now (i.e. instead of reducing from 24 years to 9 to get it down to zero) as for banks with the need for higher liquidity and value of cash today rather than in the future etc. You could then save what's your current monthly mortgage fee for your children's funds.

Any bank would never do this surely? Would meaning writing off 90k...

Nody

Frank Skinny Yardage wrote: »

Any bank would never do this surely? Would meaning writing off 90k...

It's 90k but that's over 24 years; the value of the money even 10 years out is going to be a lot less to the bank compared to having it today (see Discounted Cash Flows). Approach the bank without mentioning how much you'd be willing to pay and you may be very surprised

wdmfapq4zs83hv

Nody wrote: »

It's 90k but that's over 24 years; the value of the money even 10 years out is going to be a lot less to the bank compared to having it today (see Discounted Cash Flows). Approach the bank without mentioning how much you'd be willing to pay and you may be very surprised

Thats very interesting. How would you go about this? Would you write to them & how would you word it? Im clueless with this kind of thing! Even if I could get it down to 5 years or so that would be amazing

topper_harley2

hytrogen wrote: »

I was in with AIB yesterday to complain about their lousy less than 1% interest across the board and then the lad at the desk found me an online savings account with the magic 2% interest. Max installment per month is €1000 but you've instant access.
*I do not work for a financial institute, I was only inquiring about the use of an account & the customer rep. helped me out out of the blue!

Ha ha he sold you a right pup! This account is only for a year. Nationwide UK has 15 month account that pays 4%.

Close your 2% account immediately.

Nody

Frank Skinny Yardage wrote: »

Thats very interesting. How would you go about this? Would you write to them & how would you word it? Im clueless with this kind of thing! Even if I could get it down to 5 years or so that would be amazing

Book a meeting in person at your local branch with the bank manager to discuss your loan. Ask the bank manager if they would be willing to sell you your loan for cash today and if so at what price. What ever price they offer you make a counter offer 20% lower citing the fact it's an all cash offer, the need for the bank to improve their cash balance and your long term customer loyalty as you're planning on saving the mortgage amount (<insert amount>) with them going forward and haggle from there basically. If they go down 5% you go up maximum of 5%; the goal is to meet in the middle at 10% below what ever they offer basically.

drunkmonkey

Is a mortgage not an asset to the bank though?

I'm confused, let's say you owe 150k, on your mortgage, are you saying you could possibly go in and offer the bank 120k to clear the loan today?
I'm just not seeing how they make any money and why they'd go for it as their basically taking a hypothetical 30k hit on the loan?

Nody

drunkmonkey wrote: »

Is a mortgage not an asset to the bank though?

I'm confused, let's say you owe 150k, on your mortgage, are you saying you could possibly go in and offer the bank 120k to clear the loan today?
I'm just not seeing how they make any money and why they'd go for it as their basically taking a hypothetical 30k hit on the loan?

Because you're assuming that money keeps it's value and esp. that money you get tomorrow is worth the same today (future money is worth less than money today due to compounded interest, risk and inflation).

Let's make a very simplified example; you offer the bank two options:

A) You can get 120k EUR cash today
I'll pay you back 150k EUR cash in 10 years time

Which is the better option?

Answer: A

If they take the 120k back today and invests it in a 5% investment they would have 163k EUR by year 10 compared to the 150k EUR they have waiting for you to repay your loan because of compounded interest and most importantly to the bank a lower risk while improving their cash percentage (new banking requirements require a higher share of capital to be kept in the bank compared to their outstanding loans, i.e. banks need cash right now). But it gets even more complicated than that; keep in mind the banks generally have to loan the money they are loaning you; this costs them interest. The difference is usually around 2 to 3% which is basically their profit margin to cover costs, risks, defaults etc. Now today inflation is relatively low but once inflation starts to kick in (and keeping in mind loans are usually for decades rather than a few years) that will start to eat into the profit margin in the future as well giving yet another incentive to cut a loan off early which is why you should never accept to pay the face value of a loan if you're offering to pay it back early (assuming there being at least a decade or more left on it).

Or simply taking the Wiki example from the link above:

John Doe buys a house for $100,000. Three years later, he expects to be able to sell this house for $150,000.

Simple subtraction suggests that the value of his profit on such a transaction would be $150,000 − $100,000 = $50,000, or 50%. If that $50,000 is amortized over the three years; looking at those figures, he might be justified in thinking that the purchase looked like a good idea.

However, since three years have passed between the purchase and the sale, any cash flow from the sale must be discounted accordingly. At the time John Doe buys the house, the 3-year US Treasury Note rate is 5% per annum. Treasury Notes are generally considered to be inherently less risky than real estate, since the value of the Note is guaranteed by the US Government and there is a liquid market for the purchase and sale of T-Notes. If he hadn't put his money into buying the house, he could have invested it in the relatively safe T-Notes instead. This 5% per annum can therefore be regarded as the risk-free interest rate for the relevant period (3 years).

Using the DPV formula above (FV=$150,000, i=0.05, n=3), that means that the value of $150,000 received in three years actually has a present value of $129,576 (rounded off). In other words we would need to invest $129,576 in a T-Bond now to get $150,000 in 3 years almost risk free. This is a quantitative way of showing that money in the future is not as valuable as money in the present ($150,000 in 3 years isn't worth the same as $150,000 now; it is worth $129,576 now).

In essence this is what's applicable for the bank as well; money in the future = less value than money today and the only question is how much less it's worth (which in turn is dependent on a ton other factors such as bond interest, alternative investments available, inflation, legislation etc.).

ixus

Banks make profit on the interest on mortgage minus their funding cost."karl jeacle" mortgage calculator will educate you further.

Variable means you can pay the principal off whenever.
Fixed means you can pay principal off after that term. If you pay it off before end of term there's a cost for punter.

drunkmonkey wrote: »

Is a mortgage not an asset to the bank though?

I'm confused, let's say you owe 150k, on your mortgage, are you saying you could possibly go in and offer the bank 120k to clear the loan today?
I'm just not seeing how they make any money and why they'd go for it as their basically taking a hypothetical 30k hit on the loan?

abff

Nody wrote: »

Nothing comes to mind that would not involve a quite high level of risk (i.e. normal dividend stock are between 1 to 4%, bonds are up to 6 to 8% etc.). What you could do is ask the bank if they would be willing to sell you the full loan now (i.e. instead of reducing from 24 years to 9 to get it down to zero) as for banks with the need for higher liquidity and value of cash today rather than in the future etc. You could then save what's your current monthly mortgage fee for your children's funds.

There's absolutely no logic to the bank paying a discount to someone paying off a mortgage early, unless it's costing them more to fund the mortgage than they are receiving in interest payments.

If the OP has a tracker mortgage, he could approach the bank and ask them if they would offer a discount on a lump sum payment. However, I don't think they are likely to agree to give a discount as I know someone in a similar position who tried this and got nowhere.

If the mortgage is on normal commercial terms, the bank would be losing a proportion of expected future profits if the OP makes a lump sum payment.

ronan45

You could then overpay your mortgage by maintaining current payments.make sure overpayment is going off principal.[/QUOTE]


Could the bank refuse to take the overpayment on the principal and tell you it will only allow overpayments on the Interest?

abff

ronan45 wrote: »

You could then overpay your mortgage by maintaining current payments.make sure overpayment is going off principal.

Could the bank refuse to take the overpayment on the principal and tell you it will only allow overpayments on the Interest?[/QUOTE]

No.

If it's a standard variable rate loan, any overpayment would come off the principal. However, if it's a fixed rate loan, a penalty might apply, with the overpayment less penalty being taken off the principal.

Not sure what happens with a tracker mortgage - there may be some provision for a penalty on early repayment, but this presumably would be based on market rates at the time the repayment is made and I think it's unlikely any bank would try to impose a penalty in current market conditions

Nody

abff wrote: »

There's absolutely no logic to the bank paying a discount to someone paying off a mortgage early, unless it's costing them more to fund the mortgage than they are receiving in interest payments.

If the OP has a tracker mortgage, he could approach the bank and ask them if they would offer a discount on a lump sum payment. However, I don't think they are likely to agree to give a discount as I know someone in a similar position who tried this and got nowhere.

If the mortgage is on normal commercial terms, the bank would be losing a proportion of expected future profits if the OP makes a lump sum payment.

Of course there is and it's called alternative investments. If the bank has to raise money to meet the newer tougher capital requirements (i.e. higher capital vs. loan book value) or if they have an alternative investment that will give more than the 2% difference the loan is worth (and that's 2% before inflation) it makes a lot of sense for the bank to do so. Yes they would lose let's say 30k book value over but if they gain 50k value by an alternative investment in the same time period they can't do currently due to capital controls it's definitely worth it for the bank.

abff

Nody wrote: »

Of course there is and it's called alternative investments. If the bank has to raise money to meet the newer tougher capital requirements (i.e. higher capital vs. loan book value) or if they have an alternative investment that will give more than the 2% difference the loan is worth (and that's 2% before inflation) it makes a lot of sense for the bank to do so. Yes they would lose let's say 30k book value over but if they gain 50k value by an alternative investment in the same time period they can't do currently due to capital controls it's definitely worth it for the bank.

If we accept your logic, then the bank should stop issuing mortgages altogether and invest everything in these magic alternative investments.

What are they and how do I access them?

drunkmonkey

Let's say, there's a rate of 3.6% (<50%ltv)on the mortgage not fixed, 130k remaining over 25yrs.
Now the bank know the couple and the manager would understand that the mortgage will never go the 25yrs, realistically he may get 5/10yrs in repayments but the loan would be clear then. He also knows there's a sum greater than the remaining mortgage in a savings account.

So in this case the bank manager has full visibility of the banks and clients positions.

Now if the couple in the example could save 10/20% it might make sense to just clear it now.

As the amount involved is so small they'd hardly go for, I could understand if it's a 500k mortgage but if it's a little over 100, it would be hardly worth the banks while?

What way would you play it in the above situation?

Nody

abff wrote: »

If we accept your logic, then the bank should stop issuing mortgages altogether and invest everything in these magic alternative investments.

You might have heard of them; they are called investment banks and branches such as Morgan Stanley and they do exactly that and quite successfully and was the main money maker for the banks for ages. Loans these days have been loss making (see write down of loan values, bad loans etc.) for quite a while now compared to the day to day trading.

What are they and how do I access them?

You don't; they do because they can stump up the 100 million+ required to make it happen but you already know this. The simple fact is if you want to make money loans to private customers is not the way to go (which is why the government is so afraid of them going bankrupt).

hytrogen

Nody wrote: »

That's their standard savings account and is listed on their website to be fair and that's not max installment but the maximum you get the 2% interest on per month (i.e. once you deposited a total of 1k EUR on the account you will only get 0.5% interest on anything beyond those 1k EUR)...

I think you're mixing that up with the deposit 7? That one I a bogey for anything over 10k & it's a 7 day wait to draw anything from it.
There is a deposit 21 which was supposed to be better rate overall then they restructured (annoyingly) the interest rates to bog levels again.

hytrogen

topper_harley2 wrote: »

Ha ha he sold you a right pup! This account is only for a year. Nationwide UK has 15 month account that pays 4%.

Close your 2% account immediately.

Wrong postcode, no Nationwide here.. (unless it's the drinking game!) Haha

abff

If mortgage loans are loss making, why are banks continuing to offer them? Is it because of political pressure requiring them to do so?

I know there has been a lot of pressure on Irish banks to reduce the interest rates they charge on variable rate mortgages, which accusations of profiteering, etc. and I know that some of this is an attempt to recover losses due to bad loans.

But these losses are primarily due to bad lending practices, with excessive loan to value ratios and insufficient regard for borrowers' ability to pay.

In reviewing an individual loan, the bank will access the likelihood of future default and would, in my opinion (and I accept this is only my opinion) be unlikely to offer a discount unless they consider the likelihood of default to be a substantive risk. If the OP has €150k to invest, I doubt the bank would place them in the 'high risk of default' category.

So I can see the logic of a bank selling off a book of distressed mortgage loans at a discount. But I just don't think they will be amenable to offering a discount for early repayment to individual mortgage holders who are capable of meeting their obligations. And as I said in my earlier post, I know from practical experience of one case where I advised a friend in a similar situation who has a tracker mortgage that he should approach the bank and see whether they would offer a discount for early repayment. The answer was a resounding no.

Elliottsmum79

abff wrote: »

If mortgage loans are loss making, why are banks continuing to offer them? Is it because of political pressure requiring them to do so?

I know there has been a lot of pressure on Irish banks to reduce the interest rates they charge on variable rate mortgages, which accusations of profiteering, etc. and I know that some of this is an attempt to recover losses due to bad loans.

But these losses are primarily due to bad lending practices, with excessive loan to value ratios and insufficient regard for borrowers' ability to pay.

In reviewing an individual loan, the bank will access the likelihood of future default and would, in my opinion (and I accept this is only my opinion) be unlikely to offer a discount unless they consider the likelihood of default to be a substantive risk. If the OP has €150k to invest, I doubt the bank would place them in the 'high risk of default' category.

So I can see the logic of a bank selling off a book of distressed mortgage loans at a discount. But I just don't think they will be amenable to offering a discount for early repayment to individual mortgage holders who are capable of meeting their obligations. And as I said in my earlier post, I know from practical experience of one case where I advised a friend in a similar situation who has a tracker mortgage that he should approach the bank and see whether they would offer a discount for early repayment. The answer was a resounding no.

Mortgage loans aren't loss making. At least new ones. Political pressure is to make it appear as if we have a functioning banking sector but not on individual loan decisions. Stricter lending criteria etc make it harder to qualify for a mortgage etc.

Have you seen the principal versus interest payment at the beginning of a new mortgage- disheartening to see the proportion of funds just going to interest for many years early on.

Shocking, a stat most people never look at is the total cost of financing a mortgage. A 500k loan @4% will cost you c€900k in total repayments ( thats a whoppping €400k in interest) over the lifetime of the loan. Work it out here: http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10289257/Mortgage-calculator-Total-cost-of-repayments.html

Given the legal underpinnings of the contract you sign for a mortgage, I'm thinking this is pretty theoretical argument about making the bank an offer they cant refuse. Performing loans can just tick along nicely for the banks now that the balance sheets are in a bit better nick.

Elliottsmum79

ronan45 wrote: »

You could then overpay your mortgage by maintaining current payments.make sure overpayment is going off principal.

Could the bank refuse to take the overpayment on the principal and tell you it will only allow overpayments on the Interest?[/QUOTE]

Again, make sure to chat to the bank before any overpayment.You need the banks agreement to overpay on fixed mortgage rate ( and usually you need to wait til the fixed term is up) as to overpay is technically a breach of contract when on a fixed rate. Need to be careful on this one.

Das Reich

Are you guys talking about 2% monthly or yearly?

Zipppy

moneymad wrote: »

make 2% a month on it and retire

Best option of all....

I'm in same boat re investment...now you have me thinking