Mortgage payment vs Investment

mrcheez

I have two options I'm looking at with €40K...

OPTION 1:

Pay €30K off my mortgage
Put €10K toward ETFs

OPTION 2:

Pay €40K off my mortgage


The difference in paying the extra €10K off my mortgage is (estimated to be): €1,628 less interest over 13 years.

Would €10K invested in a (fairly low risk) ETF over 13 years give me more than €1,628 ?

I'm assuming yes, and that OPTION 1 is the better option.

at9qu5vp0wcix7

Assuming the ETF rises by more than ~30% you should come out better factoring in taxes and charges. I'd be interested in seeing the maths behind mortgage interest - genuinely curious as I wouldn't even know where to begin with that maths problem!

topper_harley2

At that rate why not just invest the entire 40K in ETFs?

Mortgage gives 100% reliable return on interest, ETF does not. It may be higher return, it may be lower, impossible to tell in advance.

topper_harley2

Sariah Fierce Crib wrote: »

Assuming the ETF rises by more than ~30% you should come out better factoring in taxes and charges. I'd be interested in seeing the maths behind mortgage interest - genuinely curious as I wouldn't even know where to begin with that maths problem!

You dont have to! Calculator here https://www.drcalculator.com/mortgage/ie/

Itchyness

Did you consider contributing to your pension (40% tax relief potentially)?

mickmac76

Also depends on weather you will need the money over the next 13 years. Once the money is put against the mortgage It's gone and can't be accessed again. Any ETFs can be sold in an emergency. I'd be inclined to go with the 30k 10k split assuming you have the usual emergency fund In place and an occupational pension of some sort.

newacc2015

Sariah Fierce Crib wrote: »

Assuming the ETF rises by more than ~30% you should come out better factoring in taxes and charges. I'd be interested in seeing the maths behind mortgage interest - genuinely curious as I wouldn't even know where to begin with that maths problem!

If OP sells enough every year to capitalise gains of €1270 tax free, there could possibly be no tax on it after a decade. If they use Degiro, the ETF fees should be minimal.

You can use overrepayment calculators.

OP have you considered refinancing at a lower rate once, you take the chunk off your mortgage since the LTV will be lower.

mrcheez

Itchyness wrote: »

Did you consider contributing to your pension (40% tax relief potentially)?

Well I have around 90k that I need to do something with so was thinking 30k off mortgage, 30k into investments and 30k into pension?

Don't have a pension yet (39)

mickmac76

If you have no pension yet at 39 I'd definitely be starting one. Possibly put more than 30k into the pension. It would depend on your earnings, no point investing in a pension if you don't get tax relief on the entire contribution.

mrcheez

Are all pension providers the same, or some recommended over others? Zurich good for example?

CIARAN_BOYLE

mrcheez wrote: »

Are all pension providers the same, or some recommended over others? Zurich good for example?

Its the fund terms that make a difference. Some providers will tend to have funds with good terms and some won't.
Make sure to drip feed the money you want into the pension so that you get full tax relief.

Also unless you plan on selling your house to boost your lifestyle in retirement I would definitely increase the pension contributions as high as you can.

mrcheez

And to calculate how much to drip feed into the pension I use a calculator like the following? https://www.irishlife.ie/pensions/pension-calculator

Assuming I'm drip-feeding amounts into the pension, I take it I don't drop in the full 30K at once, and thus use whatever's left over toward investments etc?

CIARAN_BOYLE

mrcheez wrote: »

And to calculate how much to drip feed into the pension I use a calculator like the following? https://www.irishlife.ie/pensions/pension-calculator

Assuming I'm drip-feeding amounts into the pension, I take it I don't drop in the full 30K at once, and thus use whatever's left over toward investments etc?

I think that calculator tells you what to put in to maintain a given income on retirement. I'm talking more about maximising tax relief.
http://www.revenue.ie/en/practitioner/tax-briefing/archive/74/

IE for example you are single, 39 and you earn €50,000. You can put €10,000 into your pension and get tax relief at 40%. IE you will be paying in €10,000 and claiming back €4,000 from revenue.
Second example, you are single, 40 and you earn €40,000. You can put €10,000 into your pension and get tax relief however €6,200 of your pension contribution will get tax relief at 40% and the rest will get tax relief at 20% meaning your tax relief from revenue is €2,480.

Viscount Aggro

I would pay off as much of mortgage as you can. Forget trying to beat your returns in the investment market.
You would know all about debt and arrears, should you be made redundant. It happened to me in 2009, could not get any work for nearly 2 years.

Also, the advice on ETFs above is incorrect. You cant avail of the 1270 CGT amount. Any gains are taxed at 41%.
If its classed by Revenue as an undertaking (UCITS).

mickmac76

Viscount Aggro wrote: »

I would pay off as much of mortgage as you can. Forget trying to beat your returns in the investment market.
You would know all about debt and arrears, should you be made redundant. It happened to me in 2009, could not get any work for nearly 2 years.

Also, the advice on ETFs above is incorrect. You can't avail of the 1270 CGT amount. Any gains are taxed at 41%.
If its classed by Revenue as an undertaking (UCITS).

I can't comment on the tax situation with ETFs as I know nothing about it but the part above about debt I don't agree with. In the case of redundancy the ETFs could be sold immediately and the money can be used to pay the mortgage every month. If you use all the money now to put against the mortgage and are made redundant down the line you still have to make your monthly repayment. Besides redundancy usually comes with a reasonable pay off. And while a 2 year period without work in 2009 was not at all unusual the economic situation then was the worst seen in a very long time. Such episodes are rare and I'm not sure assuming every downturn will be like that is helpful.

CIARAN_BOYLE

Viscount Aggro wrote: »

I would pay off as much of mortgage as you can. Forget trying to beat your returns in the investment market.
You would know all about debt and arrears, should you be made redundant. It happened to me in 2009, could not get any work for nearly 2 years.

Also, the advice on ETFs above is incorrect. You cant avail of the 1270 CGT amount. Any gains are taxed at 41%.
If its classed by Revenue as an undertaking (UCITS).

In my opinion everyone should have a cash convertible fund in the case of accident or illness. If you lose your job or have an accident you may need the cash to pay for food for your family or for medical care. The ETF is a decent place to keep this cash convertible investment fund.

I would agree with you regarding the tax treatment of ETFS.

mrcheez

So the tax relief from pensions can only be used toward employment income, rather than the tax on profits from selling funds ?

CIARAN_BOYLE

mrcheez wrote: »

So the tax relief from pensions can only be used toward employment income, rather than the tax on profits from selling funds ?

Pension relief is only available against income tax (PAYE employment, self employed, rental income etc). Not CGT or undertaking exit tax.

mrcheez

Thanks and final questions (I know this has swerved from original topic to pensions)... what's the best approach to investigating which pension provider to go for?
I assume there's no simple bonkers.ie approach to comparing them.

i.e. what should I look for in the fund terms? Is it something I need to negotiate with them?

Also what is considered a comfortable target pension amount? €32,500 ?

CIARAN_BOYLE

mrcheez wrote: »

Thanks and final questions (I know this has swerved from original topic to pensions)... what's the best approach to investigating which pension provider to go for?
I assume there's no simple bonkers.ie approach to comparing them.

i.e. what should I look for in the fund terms? Is it something I need to negotiate with them?

Also what is considered a comfortable target pension amount? €32,500 ?

I'm not going to comment on the last point as its entirely subjective.

Theres four main things to look for when investing in Pension.

Annual maintenance fees: IE how much of your fund do they take each year as a reward for managing your fund. You want this as low as possible.

Asset allocation rate: Do they take a portion of your fund before you pay into it. You want 100% asset allocation rate.

Historical return Does the fund generally grow in value or does it fall in value every year. Obviously growth is good but past performance is no guarantee of future returns.

Risk appetite How risky is the fund, and does it adjust its risk appetite based on your retirement year. More shares is riskier, likely to grow more but could also fall more if we have some bad years.

Some brokers can get you a bit of a bonus in terms of waiving asset allocation rates but some will increase the rates and you will never manage to get negotiate this yourself.

Good that you have no more queries. I'm almost out of pension knowledge (short of sitting down with you and working out how much you can contribute and get maximum tax relief).

Viscount Aggro

Rough guide - if you want 32500 p.a. retirement income, you would need roughly 25 times this sum in a pension fund, more than 800k, based on average annual 4% return. I dont think thats a realistic target for the average PAYE earner.

Also, side-stepping a bit here - pension industry has it rigged in Ireland, you cant touch it before (NRA) normal retirement age (60 years minimum). I checked on PRSA and similar private pension arrangements - yes, on early retirement from age 50. Guess what, only if you have stopped working permanently or disabled, and have a guaranteed annual income of 12700. You could have 10 rental properties, that does not count - they could be lost or empty. The government want peole toiling away, generating income tax or spending.

iainBB

Viscount Aggro wrote: »

I would pay off as much of mortgage as you can. Forget trying to beat your returns in the investment market.
You would know all about debt and arrears, should you be made redundant. It happened to me in 2009, could not get any work for nearly 2 years.

Also, the advice on ETFs above is incorrect. You cant avail of the 1270 CGT amount. Any gains are taxed at 41%.
If its classed by Revenue as an undertaking (UCITS).

Would you have a link to this info please, my understanding was you did get tax free allowanceof 1250 a year per person but got the 41% on remaining.

650Ginge

Viscount Aggro wrote: »

Rough guide - if you want 32500 p.a. retirement income, you would need roughly 25 times this sum in a pension fund, more than 800k, based on average annual 4% return. I dont think thats a realistic target for the average PAYE earner.

Also, side-stepping a bit here - pension industry has it rigged in Ireland, you cant touch it before (NRA) normal retirement age (60 years minimum). I checked on PRSA and similar private pension arrangements - yes, on early retirement from age 50. Guess what, only if you have stopped working permanently or disabled, and have a guaranteed annual income of 12700. You could have 10 rental properties, that does not count - they could be lost or empty. The government want peole toiling away, generating income tax or spending.

Just on the €12700 guaranteed income. Is this is you take an ARF? Or something on top of that requirement.

A link to the info would be great. Thanks.

topper_harley2

iainBB wrote: »

Would you have a link to this info please, my understanding was you did get tax free allowanceof 1250 a year per person but got the 41% on remaining.

www.revenue.ie/en/about/publications/exchange-traded-funds-guidance-note.pdf

https://www.gillenmarkets.com/featured_articles/tax-issues-for-irish-residents.cfm

It depends on where the ETF is domiciled. This has been discussed before on here repeatedly, and on askaboutmoney. Search this forum for ETF threads.

Briefly, the annual allowance is for investments liable for CGT, such as profits from sale of shares, and the rate is 33%, not 41%. This also applies to non-UCITs ETF funds. Hence, for these types of ETFs (such as US/Canadian ETFs), you can take advantage of that allowance, and loss relief is available.

However, most ETFs are UCITs, meaning they are taxed as exit tax, NOT CGT, and hence the allowance does not apply. The exit tax rate is 41%, and loss relief between fund purchases is not available. Basically these suck.

mickmac76

topper_harley2 wrote: »

www.revenue.ie/en/about/publications/exchange-traded-funds-guidance-note.pdf

https://www.gillenmarkets.com/featured_articles/tax-issues-for-irish-residents.cfm

It depends on where the ETF is domiciled. This has been discussed before on here repeatedly, and on askaboutmoney. Search this forum for ETF threads.

Briefly, the annual allowance is for investments liable for CGT, such as profits from sale of shares, and the rate is 33%, not 41%. This also applies to non-UCITs ETF funds. Hence, for these types of ETFs (such as US/Canadian ETFs), you can take advantage of that allowance, and loss relief is available.

However, most ETFs are UCITs, meaning they are taxed as exit tax, NOT CGT, and hence the allowance does not apply. The exit tax rate is 41%, and loss relief between fund purchases is not available. Basically these suck.

Just a quick question on the above. How do you know if an ETF is non-UCIT. Does anyone have a list of them.

iainBB

Cheers, I guess ETN are treated the same. What a terrible country.

topper_harley2

mickmac76 wrote: »

Just a quick question on the above. How do you know if an ETF is non-UCIT. Does anyone have a list of them.

Any US/Canadian domicilied ETFs are non-UCIT.

mrcheez

mrcheez wrote: »

So the tax relief from pensions can only be used toward employment income, rather than the tax on profits from selling funds ?

CIARAN_BOYLE wrote: »

Pension relief is only available against income tax (PAYE employment, self employed, rental income etc). Not CGT or undertaking exit tax.

Sorry just on this again... the funds I'm talking about are Rabodirect funds which are not subject to CGT (according to http://www.boards.ie/vbulletin/showthread.php?t=2054941120 anyway)

So I'm selling my Rabodirect funds this year, and consequently my pension payments could be used to offset the tax I pay on profits right?

CIARAN_BOYLE

mrcheez wrote: »

mrcheez wrote: »

So the tax relief from pensions can only be used toward employment income, rather than the tax on profits from selling funds ?

CIARAN_BOYLE wrote: »

Pension relief is only available against income tax (PAYE employment, self employed, rental income etc). Not CGT or undertaking exit tax.

Sorry just on this again... the funds I'm talking about are Rabodirect funds which are not subject to CGT (according to http://www.boards.ie/vbulletin/showthread.php?t=2054941120 anyway)

So I'm selling my Rabodirect funds this year, and consequently my pension payments could be used to offset the tax I pay on profits right?

I believe that the tax on Rabo funds are an exit tax which is an income tax however I believe this does not count towards net relevant earnings for pension contributions limits.

However I am not certain. Perhaps if you went to a professional advisor with the fund fact sheet or the contract you entered when you joined the fund you would get a certain answer.