100k invest/mortgage/deposit

hairyslug

In a few months I'll have about 100k. I am totally clueless when it comes to large amounts of money.

I'm not in a position to be able to lose this money. It will ultimately be used for my kids care/education in later years. Eldest wont be in college for 11 years.


What are my realistic options.
I have a mortgage, 2.2% for the next 10 years, then 4.4 for 18 years after. We are comfortably able to afford the monthly repayments as is.

Do I look at the government saving schemes.
Do I invest
Or do I just put it in my bank.

Cheers

Water John

Government or Post Office for you. Also Check KBC and Rabbo bank.

Should do ok if you can leave in for a set time eg 5 or 10 years.

Pay off the mortgage as you are doing. Waste of money paying it off early.

Be prudent in your investment. No need to take risks.

Be careful, plenty 'advisors' out there.

Frogdog

Without derailing the thread, can Water John explain to me how paying off the mortgage earlier would be a waste of money? Putting money into a savings account to gain little to no interest is surely more foolish than paying off a mortgage of between 2.2% and 4.4%? Not to mind the added peace of mind paying off a mortgage provides.

Nody

Frogdog wrote: »

Without derailing the thread, can Water John explain to me how paying off the mortgage earlier would be a waste of money? Putting money into a savings account to gain little to no interest is surely more foolish than paying off a mortgage of between 2.2% and 4.4%? Not to mind the added peace of mind paying off a mortgage provides.

I can think of one reason without doing the math:

1) Paying it off early does not pay for college so he'd have to go back and borrow that money anyway (i.e. he needs those 100k in 11 years)
2) Connected to point 1; assuming he'd keep paying off the same monthly and save it instead it would be far to easy to "skip" a month or two.

Seeing how the current solidarity bond issue 5 10 years is 2.26% and is DIRT exempt he'd be about equal buying the bond and he'd not be as easily tempted not to save it and if needed can then decide to put the "left over" into the loan down the line if needed.

Having said that this is the investment forum so I'll throw this in as well as you're basically looking at breaking even with inflation at best; an option to consider would be to lock in most of it (let's say 75k) and put 25k into two or three global, low cost (look at their fee, it's a index fund so lowest possible is most important part!), index funds. You're close to impossible to lose the whole investment and you get a significant possibility for an upside on the 25k while having the 75k as security in case something goes wrong.

Frogdog

That's a fair enough train of thought. I'm more thinking that the OP won't need 100k "now" for college fees in 11 years time, at the earliest. If I was in that position, I'd be looking to pay a lump sum off the mortgage, and then invest the rest into low cost index funds or ETFs like you have suggested. Having paid off the mortgage early, or at least having significantly reduced the term, by the time the kids are in college or about to start college he could be mortgage free and saving/putting it towards the college expenses. He will also have his investments to use. I just think paying off his mortgage makes better financial sense - less debt, will own his house outright quicker, will be able to contribute more to college savings/expenses, etc.

Water John

I accept both points of view. It's horses for courses.
I suggested the op sticking to what he knows in terms of not having to manage various financial moves. Frogdog, you and I would probably be at ease doing the moves. The op seemed more conservative in approach and that is equally valid.
Nody's investment option on a minority portion is worth considering if op feels comfortable doing that.

Dricmeister

2.2% is low, but it's not ridiculously low. Cash deposits will yield virtually nothing after DIRT and PRSI (45%). Investments will be risky. Paying off the mortgage could give you the equivalent of a 4.4% return per annum guaranteed, assuming you're a higher rate tax payer and you're not getting mortgage interest relief.

Water John

The solidarity bond is a government issue. Very little or no risk and DIRT free.

If it was money that they had no specific use for I would agree with paying off the mortgage early. But this money has an important family use.
I am just saying what I suggest to the op, that keeps the money and its value for when its needed, the childrens education.

Frogdog

Some good and interesting debate here.

OP, I have a few more questions which might help us in giving you the best suggestions/advice:

1. What is the outstanding amount on your mortgage?
2. How will you come to this 100k? Is it your own savings, an inheritance, etc.?
3. How many children do you have? I presume they will, in most likelihood, attend college in Ireland?

hairyslug

Frogdog wrote: »

Some good and interesting debate here.

OP, I have a few more questions which might help us in giving you the best suggestions/advice:

1. What is the outstanding amount on your mortgage?
2. How will you come to this 100k? Is it your own savings, an inheritance, etc.?
3. How many children do you have? I presume they will, in most likelihood, attend college in Ireland?

Its a brand new mortgage, 185k plus interest (not sure of exact figure)
The 100k is from an inheritance.
We have 3 kids, only one will be going to college, this is where its crucial that we can't lose or risk the money, our other 2 have quite severe special needs. While we are quite young now (both in mid/early 30s) we will not be around forever and these 2 will need permanent care. But the care they need will not be needed for sometime.

Some other info, as things are now, we are in a position to save about 1k a month, that's allowing for beings able to enjoy ourselves aswell.

Nody

Frogdog wrote: »

That's a fair enough train of thought. I'm more thinking that the OP won't need 100k "now" for college fees in 11 years time, at the earliest. If I was in that position, I'd be looking to pay a lump sum off the mortgage, and then invest the rest into low cost index funds or ETFs like you have suggested. Having paid off the mortgage early, or at least having significantly reduced the term, by the time the kids are in college or about to start college he could be mortgage free and saving/putting it towards the college expenses. He will also have his investments to use. I just think paying off his mortgage makes better financial sense - less debt, will own his house outright quicker, will be able to contribute more to college savings/expenses, etc.

The problem with this is that you're assuming that the loan can be repaid early without penalty fee which is unlikely.

Secondly as a rough calculation (2.25% interest, 25 years, nothing paid yet, 85k paid into the loan, no penalty fee) would put the saving at around 25k for the life of the loan on the interest. How ever the problem is he's putting in 85k now to get 25k back for the next 25 years so his actual saving taking into account a 1.75% yearly inflation would only be 16k (because 100 EUR in 25 years time don't buy as much as it does today). Now paying 85k to get 16k in return over 25 years is not exactly brilliant return on the investment (basically 640 EUR a year in today's value). Now as counter point even a very modest 3% interest (this would be blue stock level dividend level easily) would instead give him a return over 25 years of 93k (178k being the value of the investment in 25 years time) or 30k in today's money (115k investment value today) on his investment instead (not adding tax or currency into the equation) assuming dividends were reinvested to buy more (which they should) and assuming the stock does not increase in value from purchase price (a highly unlikely scenario but speculating on future share value is always a high risk area).

So rushing in to pay off a low interest loan when inflation is eating away most of the interest and you can get a return exceeding the loan rate easily is quite frankly stupid esp. if they can handle the loan with margin today and the investment will keep rising in value after the 25 years while the early loan repayment will not.

Used the below as reference for calculations:
Loan repayment calculator
Investment value today with inflation calculator

Frogdog

No I fully agree with you Nody, especially in light of the latest information provided.

cart man

Nody,
following your train of thought, should everyone who can release equity on an existing property and get a low rate mortgage (which they can afford to repay) not do so to reinvest as you have proposed?

OP, personally I would suggest you investigate if you could make a once of overpayment of the mortgage (with a letter stating that you do not want to pay down the capital), this should allow you full access to the money in the future (I have done this with EBS). The money will be then earning the best short term rate you will be able to get (with no dirt payments). You then have time to get proper financial advice which I believe you need as you have a number of specific circumstances that you need to plan well for, you also need to ensure you manage risk that suits your comfort level for your 100k and your monthly 1000 surplus.

Nody

cart man wrote: »

Nody,
following your train of thought, should everyone who can release equity on an existing property and get a low rate mortgage (which they can afford to repay) not do so to reinvest as you have proposed?

As long as they have a reasonable monthly margin (both in terms of monthly free cash flow to pay for unexpected costs and in terms of time left until expected retirement) it makes sense to use that leverage. But that leverage comes with the caveat that the interest rate needs to be fixed to avoid the surprise of more average (5%+) rates to ruin it (it's still doable at 5% but far harder to achieve compared to OPs 2.2%).

Deiseboy01

cart man wrote: »

Nody,
following your train of thought, should everyone who can release equity on an existing property and get a low rate mortgage (which they can afford to repay) not do so to reinvest as you have proposed?

OP, personally I would suggest you investigate if you could make a once of overpayment of the mortgage (with a letter stating that you do not want to pay down the capital), this should allow you full access to the money in the future (I have done this with EBS). The money will be then earning the best short term rate you will be able to get (with no dirt payments). You then have time to get proper financial advice which I believe you need as you have a number of specific circumstances that you need to plan well for, you also need to ensure you manage risk that suits your comfort level for your 100k and your monthly 1000 surplus.

Hi Cartman

Can you give me a little more detail on the overpayment option, not quite getting what you ve done there.

Thanks

Deiseboy

daheff

I think what most people are missing here is that the OP has an asset (100K) and a liability (-185K).


Lets assume (and its a big assumption -could be higher or lower if theres a variable element to it) that the mortgage rate is fixed for 10 years at 2.2%.
I get the impression its a first time mortgage too...so there may be a TRS rebate too here (however small). That would mean the rate actually paid would be slightly less than 2.2%

Another poster mentioned the solidarity bond paying 2.26%, which is dirt exempt.

So if we split the mortgage to 2 elements 100K +85K we can see then that the OP has 'cover' for the 100K element. Interest earned on savings would be pretty much the same as interest paid..OP would probably gain a little because of the TRS.

Inflation wouldnt be an issue for the OP as his asset is offset by a liability. He wont win/lose on the 100K because of inflation, because any win is offset by the mortgage 100K doing the opposite.

the other thing to look at here is that if the OP pays back money to the bank...well thats it...he wont get that money back too easily if he needs it in the future.

the other key part I picked up is that the OP says he has excess income of 1K a month.

I think this is the part of the income that could/should be put into slightly more risky investments and/or used to accelerate mortgage payments

OP -If i were in your shoes, I'd put your lump sum into the highest yielding interest account you can find and try to fix the rate for 5 years (assuming your mortgage rate is fixed as it is).

The 1K you have a month extra, if saved at 0% would give you 120K over the 10 years until your child goes to college.

Reasonably speaking you could invest some of that /pay down mortgage debt over the next 5-10 years.


the other unanswered question is have you any other loans that are at a higher rate (car loan/credit card debt etc)?? If you do, then the sensible thing is to pay back these loans first.

cart man

Deiseboy01 wrote: »

Hi Cartman

Can you give me a little more detail on the overpayment option, not quite getting what you ve done there.

Say your monthly repayment is normally 1000€ paid by dd. Go into you branch, write a cheque for €100,000 give it to the clerk and say you want to pay you mortgage, explain that you want to make an overpayment but not pay down the capital (this is important). if the clerk is knowledgeable this wont be a problem. if there is an issue look for one with more experience. each month the interest will be calculated on the net amount (185-100=85k), the repayments will be the same (1k) therefore you are paying back the principle faster. if left like this the mortgage will clear less than 10 years, however at any stage if you need the cash you can walk into branch and say that you made an overpayment on x date and that you would now like your money back, they should write you a cheque no problem straight away.

I am not a financial advisor, I have recommended that OP sees one. My proposal is for a quick, easy, efficient, flexible, safe option for OP whilst determining best solution for his circumstances.

Arciphel

I thought you could only do this with special "offset" mortgages?

cart man

Nody wrote: »

Secondly as a rough calculation (2.25% interest, 25 years, nothing paid yet, 85k paid into the loan, no penalty fee) would put the saving at around 25k for the life of the loan on the interest. How ever the problem is he's putting in 85k now to get 25k back for the next 25 years so his actual saving taking into account a 1.75% yearly inflation would only be 16k (because 100 EUR in 25 years time don't buy as much as it does today). Now paying 85k to get 16k in return over 25 years is not exactly brilliant return on the investment (basically 640 EUR a year in today's value).[/URL]

Hi Nody, the thing is the 25k saving you calculated would be realised a lot quicker than 25 years???
You have also ignored any interest gained on the cash available between the time the mortgage has been repaid and 25years?

cart man

Arciphel wrote: »

I thought you could only do this with special "offset" mortgages?

No I have a regular account.

My understanding is an offset account is that the bank reviews your current and mortgage account together.


My proposal has nothing to do with current account only the mortgage account

DulchieLaois

Deposit on an apartment in Dublin which Rent will pays itself every month
If child is going to college, she has use of apartment

Pay off Mortgage - saves money on long term