Pay money off mortgage term?

tommythecat

Hi,

We are looking for a bit of advice as to if it is worthwhile to pay some money off the capital of our home?
We can pay off somewhere between 20k to 35k.
Our original mortage was for 380k on a house costing 425k IN 2009. The prices are back up around there again. It was a 30 year mortgage so we are on year 6. Still a lot of interest being paid. A.I.B are our lender.

So basically do people think it would be worth paying off some money and bringing the term down? It could take a few years off the mortgage which would be great. I don't just want to bring payments down that is of no interest to us at the moment.
If we thought we might move in five or ten years (bigger house) would this change your opinion?
My feeling is its a good idea.

Any thoughts would be greatly appreciated!

Thanks

Garret

MrDerp

tommythecat wrote: »

Hi,

We are looking for a bit of advice as to if it is worthwhile to pay some money off the capital of our home?
We can pay off somewhere between 20k to 35k.
Our original mortage was for 380k on a house costing 425k IN 2009. The prices are back up around there again. It was a 30 year mortgage so we are on year 6. Still a lot of interest being paid. A.I.B are our lender.

So basically do people think it would be worth paying off some money and bringing the term down? It could take a few years off the mortgage which would be great. I don't just want to bring payments down that is of no interest to us at the moment.
If we thought we might move in five or ten years (bigger house) would this change your opinion?
My feeling is its a good idea.

Any thoughts would be greatly appreciated!

Thanks

Garret

Have you considered an overpayment? If you're able to put aside 25-30K then you might consider overpaying the mortgage on a monthly basis. Even 150/month would probably take 5-6 years off your mortgage (I haven't run it through the calculator, but I've looked into similar for ourselves from time to time).

You never know when the cash pile might come in handy, and you'll never borrow cheaper money than your mortgage. On the face of it, of course it reduces the term, and will save you more mortgage interest than you can gain in low-risk storage/investment.

I would consider it a flexibility V cost question.

F412

tommythecat wrote: »

So basically do people think it would be worth paying off some money and bringing the term down? It could take a few years off the mortgage which would be great. I don't just want to bring payments down that is of no interest to us at the moment.
If we thought we might move in five or ten years (bigger house) would this change your opinion?

If you will be looking to move down the line then you will need a deposit and probably a 20% one if things stay as they are so it might not be the best idea to spend a big amount of savings like this.

As the other poster suggested, over paying every month and saving a little less from now may be a better idea. You can always go back to your normal repayment if you want to increase savings again and you wont lose your lump sum of savings.

tommythecat

Thanks Guys. The problem with A.I.B is they don't allow regular overpayments. You can only overpay by request with a letter so its not easy to do monthly.

iainBB

tommythecat wrote: »

Thanks Guys. The problem with A.I.B is they don't allow regular overpayments. You can only overpay by request with a letter so its not easy to do monthly.

We have a similar issue so we put monthly overpayments in to savings account and over pay on mortgage once a year .

jonnybravo

iainBB wrote: »

We have a similar issue so we put monthly overpayments in to savings account and over pay on mortgage once a year .

I just sent AIB mortgages an email with a signed letter asking them to increase my monthly payments to €x,xxx from 1 xxx 2015 and they did it straight away.

ted1

F412 wrote: »

If you will be looking to move down the line then you will need a deposit and probably a 20% one if things stay as they are so it might not be the best idea to spend a big amount of savings like this.

As the other poster suggested, over paying every month and saving a little less from now may be a better idea. You can always go back to your normal repayment if you want to increase savings again and you wont lose your lump sum of savings.

the collateral in the house will cover the deposit.

Arbiter of Good Taste

tommythecat wrote: »

Thanks Guys. The problem with A.I.B is they don't allow regular overpayments. You can only overpay by request with a letter so its not easy to do monthly.

Yes they do if you are on a variable rate mortgage. Just send them a letter instructing them to increase your monthly repayments to X and they will do it automatically.

If you are on a fixed rate, obviously you will have to wait until the end of the fixed term.

iainBB

The truth is most people are bad with investments and 40k sitting in a savings acc earns very very little with taxes and inflation taking into account. High interest rate mortgage maybe cheap credit but over many years it is still a lot of money.

I'm basic terms
If your mortgage interest rate is worse then your savings rate and your a bad investor. Put it towards mortgage. It will stop you spending it and wasting it.

JuliusCaesar

MrDerp wrote: »

Even 150/month would probably take 5-6 years off your mortgage (I haven't run it through the calculator, but I've looked into similar for ourselves from time to time).

An extra 200pm on mine reduced the term by .............








11 months.

Greyian

JuliusCaesar wrote: »

An extra 200pm on mine reduced the term by .............








11 months.

You must have had a very large mortgage in that case, or only started overpaying towards the end.

If you have a €300,000 mortgage at 4% on a 30 year term, increasing your monthly repayments by €200 from month 1 would knock over 6 years off the mortgage.
Even on a €500,000 mortgage, you would knock over 4 years off the mortgage, if you started overpaying by €200/month from the very beginning.

Uriel.

Just so you know AIB have now introduced the ability to make payments to your mortgage account via their Internet and mobile banking system. You can't set up an automatic overpayment on a regular basis but you can pay into the mortgage account on a manual basis. I use the facility on a regular basis when I've some free cash... It's good for avoiding temptation and buying stuff I really don't need.

4ensic15

tommythecat wrote: »

Thanks Guys. The problem with A.I.B is they don't allow regular overpayments. You can only overpay by request with a letter so its not easy to do monthly.

I had a mortgage and over paid. I just lodged money to the mortgage account by making a transfer from a current account. All that happens is that a letter comes out bringing down the repayments. I never requested permission by letter. The interest charge drops on the next quarter giving more scope to bring the outstanding balance down. It is probably a better idea to do this every few months when you are sure that you don't need the money. Once paid off the loan there is no borrowing it back.

ronan45

Would it not depend on the type of Mortgage it was?
Tracker?
variable?
If tracker might be better to invest extra money! Better return!

tommythecat

Thanks guys. A lot of food for thought. We will have to mull this over and see what's the best option. Perhaps pay off half the money we have and hold onto the rest for a rainy day. I'll have to look into the ability to over pay with A.I.B. On a regular basis. Thanks again

Moonbeam

It normally saves the most money to pay it off the principal as it saves you money long term.

padjo5

Once you lodge it to the mortgage account that money is gone gone gone!
If you can invest the funds and make a reasonable rate of return you will be in the same position financially in say 5-10 years, BUT you will still have the funds available, offering you the choice then to either invest/reduce mortgage at that point/deposit for next home/purchase other items etc etc........!
People's gut reaction is to throw money at their biggest financial burden (usually mortgage) but that is not always the most appropriate action if your mortgage rate is in the 3-5% range. Each to their own but it is definitely worth mulling it over and considering all options first.
Paddy

AlmightyCushion

padjo5 wrote: »

Once you lodge it to the mortgage account that money is gone gone gone!
If you can invest the funds and make a reasonable rate of return you will be in the same position financially in say 5-10 years, BUT you will still have the funds available, offering you the choice then to either invest/reduce mortgage at that point/deposit for next home/purchase other items etc etc........!
People's gut reaction is to throw money at their biggest financial burden (usually mortgage) but that is not always the most appropriate action if your mortgage rate is in the 3-5% range. Each to their own but it is definitely worth mulling it over and considering all options first.
Paddy

It's difficult to make a low risk 3-5% after taxes and expenses.

padjo5

Yep it sure can be, which is a separate decision. The concept I'm putting forward as an option to consider is about retaining the liquid asset, gaining some level of return and keeping options open, instead of firing all disposable cash at one's long term, low rate debt.

Mathematics may well favour the debt clearing but that may have disadvantages in other ways in future.

ixus

Are you variable or fixed? Term left if fixed?
Current rate paid?
LTV on property?I'd guess you were 10% deposit but now have 25% ratio. If you switched whate rate could you get with or without the extra cash? UB offering 3.5% fixed 7yrs if 40%.

Thoughts would be to switch to better rate if one first then pay down some.

NIMAN

Does it not have to be a variable only that allows you to make overpayments?
I always thought overpayments weren't allowed against a tracker. Not sure about fixed?

I think we have made 7 or 8 overpayments now in 5 years - makes a big difference when you take a lump of the capital. I always did it by sending an overpayment form from the website along with a cheque, didnt ever use the electronic banking route as I was afraid it might keep term the same and reduce the monthly payments, which I don't want.

AlmightyCushion

padjo5 wrote: »

Yep it sure can be, which is a separate decision. The concept I'm putting forward as an option to consider is about retaining the liquid asset, gaining some level of return and keeping options open, instead of firing all disposable cash at one's long term, low rate debt.

Mathematics may well favour the debt clearing but that may have disadvantages in other ways in future.

Ah right, I get you now. I definitely wouldn't recommend putting 100% of savings into paying down the mortgage. I agree, it makes sense to keep so money or something that can be easily converted into money in case of emergencies.

pasquale83

Hello folks. Just a quick question to let me understand better how monthly overpayments/lump sum payment work.

In both cases the additional money will reduce the residual debt amount only? I mean, they will not be used to pay any interests, correct?

I am trying to simulate different scenarios and this thing is not really clear to me. Thanks!

AlmightyCushion

pasquale83 wrote: »

Hello folks. Just a quick question to let me understand better how monthly overpayments/lump sum payment work.

In both cases the additional money will reduce the residual debt amount only? I mean, they will not be used to pay any interests, correct?

I am trying to simulate different scenarios and this thing is not really clear to me. Thanks!

Yeah, it will all come off the capital and none of it goes towards interest. If you owe €100,000 on your mortgage and you put €10,000 towards it, you know only owe €90,000 and will pay interest on the €90,000. So, not only does it reduce the amount you owe, it reduces the amount of interest you'll pay over the life of the mortgage.

aido79

Are there any mortgage providers that have offset or redraw accounts in Ireland? I live in Australia and it is common practice to have this option. For example if I had 10k to spare I would put it in the offset account which is linked to the mortgage. It effectively knocks 10k off my mortgage as I don't have to pay interest on it and I still earn interest on the money in that account. The money can be redrawn from the account at any time so there is no problems with having the money tied up as would be the case if you actually paid the money off the capital.

pasquale83

AlmightyCushion wrote: »

Yeah, it will all come off the capital and none of it goes towards interest. If you owe €100,000 on your mortgage and you put €10,000 towards it, you know only owe €90,000 and will pay interest on the €90,000. So, not only does it reduce the amount you owe, it reduces the amount of interest you'll pay over the life of the mortgage.

Thanks AlmightyCushion. After doing an overpayment or in general during the mortgage life, is it possible to request a mortgage statement (I am not sure if that is the proper name...)?

I just want a statement summarizing the payments I have done and the capital I still need to pay.

themink

People like the idea of being debt free as soon as possible but its not necessarily the best decision from a purely financial perspective. You should consider things like tax relief on mortgage interest & effects of inflation on future payments also

pasquale83

themink wrote: »

People like the idea of being debt free as soon as possible but its not necessarily the best decision from a purely financial perspective. You should consider things like tax relief on mortgage interest & effects of inflation on future payments also

Yeah, you are absolutely right, especially on inflation. Unfortunately there is no mortgage interest relief in Ireland since 2012 and I bought this year.

cart man

My experience is with EBS so you would need to verify with your own bank that it operates the same. But there is a difference between an overpayment and paying down your mortgage. The first option reduces the amount that interest is charged on, the payments remain the same (the remaining years of the term reduces) and you have full access to the money to withdraw it again - this is a very liquid, low risk and tax efficient option. The second option reduces the amount owed but the the length of term stays the same. Therefore the amount paid each month is reduced the money in this case is tied up and can't be accessed again ( you would need to draw down a top up mortgage).

NIMAN

cart man wrote: »

My experience is with EBS so you would need to verify with your own bank that it operates the same. But there is a difference between an overpayment and paying down your mortgage. The first option reduces the amount that interest is charged on, the payments remain the same (the remaining years of the term reduces) and you have full access to the money to withdraw it again - this is a very liquid, low risk and tax efficient option. The second option reduces the amount owed but the the length of term stays the same. Therefore the amount paid each month is reduced the money in this case is tied up and can't be accessed again ( you would need to draw down a top up mortgage).

Sounds wrong to me.

When I make overpayments, your Option 1 (the money comes off the total capital but monthly repayments remain the same) - this doesn't allow you to access that money again. You can't put it back on your capital and get it back from the bank should you need it.

pasquale83

cart man wrote: »

My experience is with EBS so you would need to verify with your own bank that it operates the same. But there is a difference between an overpayment and paying down your mortgage. The first option reduces the amount that interest is charged on, the payments remain the same (the remaining years of the term reduces) and you have full access to the money to withdraw it again - this is a very liquid, low risk and tax efficient option. The second option reduces the amount owed but the the length of term stays the same. Therefore the amount paid each month is reduced the money in this case is tied up and can't be accessed again ( you would need to draw down a top up mortgage).

What do you mean when saying: "you have full access to the money to withdraw it again"? You really can take the money back when doing overpayments?

Tow

tommythecat wrote: »

Thanks Guys. The problem with A.I.B is they don't allow regular overpayments. You can only overpay by request with a letter so its not easy to do monthly.

They may say that, but it is just a matter transferring money online into your mortgage account.

Until about a year or two ago it would reduce the principle balance, so effectively reduce the term. The reduced balance would be taken into account when they recalculated the interest part of the monthly repayment, every quarter. Up to this point in time they claimed it could not be done and I think had a block on setting up payments to mortgage accounts on the AIB Internet Banking. However, there were no problems in making the transfer from another bank!

However, they now 'allow' over payments, as they changed their systems to keep the term the same and reduce both the interest and capital parts of the repayment.

The_Conductor

aido79 wrote: »

Are there any mortgage providers that have offset or redraw accounts in Ireland? I live in Australia and it is common practice to have this option. For example if I had 10k to spare I would put it in the offset account which is linked to the mortgage. It effectively knocks 10k off my mortgage as I don't have to pay interest on it and I still earn interest on the money in that account. The money can be redrawn from the account at any time so there is no problems with having the money tied up as would be the case if you actually paid the money off the capital.

Bank of Ireland used do offset accounts- based on overdrafts- not mortgages- I'm not aware of any lender who offers the product as you've described.

WhatsGoingOn2

aido79 wrote: »

Are there any mortgage providers that have offset or redraw accounts in Ireland? I live in Australia and it is common practice to have this option. For example if I had 10k to spare I would put it in the offset account which is linked to the mortgage. It effectively knocks 10k off my mortgage as I don't have to pay interest on it and I still earn interest on the money in that account. The money can be redrawn from the account at any time so there is no problems with having the money tied up as would be the case if you actually paid the money off the capital.

Yes, I have an offset tracker mortgage as you described from Ulster Bank. The origi mortgage was taken out with First Active.

earlyevening

First Active and NIB offered these in the boom.

I had an NIB current account offset mortgage.

tommythecat

Tow wrote: »

They may say that, but it is just a matter transferring money online into your mortgage account.

Until about a year or two ago it would reduce the principle balance, so effectively reduce the term. The reduced balance would be taken into account when they recalculated the interest part of the monthly repayment, every quarter. Up to this point in time they claimed it could not be done and I think had a block on setting up payments to mortgage accounts on the AIB Internet Banking. However, there were no problems in making the transfer from another bank!

However, they now 'allow' over payments, as they changed their systems to keep the term the same and reduce both the interest and capital parts of the repayment.

Hi

Thanks everyone. Tow could you clarify this for me if you don't mind. Are you saying that I should keep the term the same but reduce the repayment by over payment as such? Slightly confused. Thanks

The_Conductor

tommythecat wrote: »

Hi

Thanks everyone. Tow could you clarify this for me if you don't mind. Are you saying that I should keep the term the same but reduce the repayment by over payment as such? Slightly confused. Thanks

If you keep the term the same but overpay now- it means you have a buffer if/when interest rates eventually rise to 'normal' levels (which looks like it could very well be in several years time). Knocking lumps off the principle now- can you large lumps off the interest in future.

tommythecat

The_Conductor wrote: »

If you keep the term the same but overpay now- it means you have a buffer if/when interest rates eventually rise to 'normal' levels (which looks like it could very well be in several years time). Knocking lumps off the principle now- can you large lumps off the interest in future.

Ah I see. So is there much difference monetarily speaking in savings between the two?

The_Conductor

tommythecat wrote: »

Ah I see. So is there much difference monetarily speaking in savings between the two?

It depends on what happens with interest rates in the future- which no-one can really predict....... Not reducing the term now- while paying down the principle- gives you more options in the future (including the option to shorten the term at a future date).

cart man

NIMAN wrote: »

Sounds wrong to me.

That may be so but it is how it actually worked for me.

pasquale83 wrote: »

What do you mean when saying: "you have full access to the money to withdraw it again"? You really can take the money back when doing overpayments?

Yes.

Let's play this scenario out (please excuse the approx. crude numbers). Say your mortgage is €100,000, you have 20 years left, interest rates 4% (APR), monthly repayments are €600. Cash available €20,000.

Of the €7,200 you pay in the first year €4,000 goes on interest and €3,200 goes on paying down the principle.
If on the first month instead of making the €600 payment you give a cheque for €20,600 (ie overpay). The following month when interest is calculated it is off €79.7k (approx) and not €99.7k, and so forth over the year. As a result in the year you will have paid approx approx €3,200 on interest and €4,000 off the principle. Thus are better off by €800 for your €20k over-payment (4% interest, however you do not pay DIRT on this so effective deposit rate of approx 5%).

You can at any stage go into the branch of your bank and say that you have noticed that there was an overpayment on your account and that you would like for them to return your overpayment. They should do this. Once that has been done you will still have a lower principle balance.

I can state as a matter of fact that this worked for me.

If you are still unsure about this just ask in your branch...

pasquale83

cart man wrote: »

That may be so but it is how it actually worked for me.



Yes.

Let's play this scenario out (please excuse the approx. crude numbers). Say your mortgage is €100,000, you have 20 years left, interest rates 4% (APR), monthly repayments are €600. Cash available €20,000.

Of the €7,200 you pay in the first year €4,000 goes on interest and €3,200 goes on paying down the principle.
If on the first month instead of making the €600 payment you give a cheque for €20,600 (ie overpay). The following month when interest is calculated it is off €79.7k (approx) and not €99.7k, and so forth over the year. As a result in the year you will have paid approx approx €3,200 on interest and €4,000 off the principle. Thus are better off by €800 for your €20k over-payment (4% interest, however you do not pay DIRT on this so effective deposit rate of approx 5%).

You can at any stage go into the branch of your bank and say that you have noticed that there was an overpayment on your account and that you would like for them to return your overpayment. They should do this. Once that has been done you will still have a lower principle balance.

I can state as a matter of fact that this worked for me.

If you are still unsure about this just ask in your branch...

Hi cart man, that is a great news! I will cross-check if that is allowed with my mortgage. If I can take the money back it is like if I have a deposit account.

But I think it will work only if the interest rate is calculated monthly, is it always the case? Thanks!

pasquale83

pasquale83 wrote: »

Hi cart man, that is a great news! I will cross-check if that is allowed with my mortgage. If I can take the money back it is like if I have a deposit account.

But I think it will work only if the interest rate is calculated monthly, is it always the case? Thanks!

So, just to make things clearer to me, if after one year I withdraw the 20k from my mortgage the principle will go up by 19.2 k...It is like if I have a 4% deposit tax free and I use the interests on 20k to reduce the principle, is that correct? Thanks!

4ensic15

pasquale83 wrote: »

So, just to make things clearer to me, if after one year I withdraw the 20k from my mortgage the principle will go up by 19.2 k...It is like if I have a 4% deposit tax free and I use the interests on 20k to reduce the principle, is that correct? Thanks!

It seems to me that the 20k will be returned but the principal balance will be €800 less than it the 20K had never been paid in. The approach of AIB is to simply reduce the monthly payment so that the loan finishes up at the same time as previously. No way will they give back the 20k.

pasquale83

4ensic15 wrote: »

It seems to me that the 20k will be returned but the principal balance will be €800 less than it the 20K had never been paid in. The approach of AIB is to simply reduce the monthly payment so that the loan finishes up at the same time as previously. No way will they give back the 20k.

What AIB is doing is indeed different from what other banks are allowing people to do. I have to cross-check better with my bank (KBC) but at the time I collected information on the mortgage they told me I have two options with overpayments:

- reduce the principle keeping the monthly repayment the same thus reducing the duration of the mortgage
- reduce the monthly repayment that means paying interests quickly thus keeping the duration the same

If I pick the first option, that is what I have in mind, I will ask if I can get money back if I need them and if it will work how cat man described. If that will work I will use my mortgage as a deposit account with the same (net) interest rate of my mortgage. So I will reduce the mortgage principle ad at the same time will keep the funds available. Let's see what they will tell me, I will keep the forum posted.

gordongekko

jonnybravo wrote: »

I just sent AIB mortgages an email with a signed letter asking them to increase my monthly payments to €x,xxx from 1 xxx 2015 and they did it straight away.

But they are not compelled to put them back down if your circumstances change.

NIMAN

Am looking at the AIB overpayment form right now, and it reads " unscheduled lump sum payments result in a permanent reduction of the mortgage balance and are non refundable "

4ensic15

NIMAN wrote: »

Am looking at the AIB overpayment form right now, and it reads " unscheduled lump sum payments result in a permanent reduction of the mortgage balance and are non refundable "

The monthly repayment goes down as a result of the unscheduled payment so the saving can be accumulated as a "rainy day" fund until the next unscheduled payment.

NIMAN

4ensic15 wrote: »

The monthly repayment goes down as a result of the unscheduled payment so the saving can be accumulated as a "rainy day" fund until the next unscheduled payment.

In my case it doesn't, as the AIB form gives you 2 options: first to reduce the principal and keep the repayment at same amount, meaning a reduction in term of mortgage, or secondly the option to keep term same and reduce monthly repayments.

I always go for 1.

And as a result, there's no way I am getting that money back, no matter how nicely I ask.

padjo5

Be very diligent in verifying whether you can actually 'withdraw' your over-payment on a future date, as claimed above. It's not a feature I've come across, ever.

pwurple

Well, you get it back when you sell the house.

Overpayment makes most sense in the first half of a mortgage term (which you are in OP), because you avoid more interest.

I'd put half that lump in if you have nothing else earmarked for it and arrange a regular overpayment if possible as well. Building up equity in your home is second best to having a rainy day fund. It's still there, but not as accessible. It gives you flexibility to pause payments possibly later if you need to. You used to be able to borrow against equity (not sure about now!). And you can sell and downsize if you need a lump again.

Chris_5339762

NIMAN wrote: »

In my case it doesn't, as the AIB form gives you 2 options: first to reduce the principal and keep the repayment at same amount, meaning a reduction in term of mortgage, or secondly the option to keep term same and reduce monthly repayments.

I always go for 1.
.

Funny enough I always go for (2)! It beings down your monthly repayments but if do have problems down the line you are paying less anyway, and you are cushioning yourself more against interest rate rises.

You will pay a bit more interest but if you know you're going to pay your mortgage off early anyway then it makes sense.