To clear mortgage or not

podge018

Quick summation of what is happening in our life.

Married with 2 kids under 2 and a half.

My income appox 60k, wife 50k.

Mortgage outstanding of 170k, 25 years left, repayments 800p.m. fixed for 5 years @ 2.8% I think, since September.

Creche fees 600p.m, doubling soon when youngest starts but reducing a bit in September when eldest starts the ECCE pre-school scheme.

Mortgage protection (serious illness cover) recently paid out to us and not the mortgage provider. So we now have 170k and unsure what do with it. First thoughts were to clear the mortgage - what else, but most people we've talked to says that would be crazy. Health isn't a concern now, fingers crossed.

Spoke with somebody in financial services and he was talking about buying 5/10 year bonds, which I know little about, but that there's a risk involved. There's An Post too, which should be okay.

We would like to build an extension on the house now while kids are young and my wife would ideally like to take career break until youngest starts school proper in September 2022. One of us wouldn't get further mortgage approval for 5 years due to the serious illness diagnosis.

Finding this all very overwhelming and know it's going to be a decision we have to live with for the rest of our lives.

If this happened you what would your gut tell you? Have to say mine was to just clear the mortgage, but then I know we'll never have so much money at our disposal ever again in our lives.

ste

I can relate somewhat and my advice is to just relax and sit on it for the moment.
I also would stop discussiong it with people - everyone always has a view to share

I would split money to ensure covered by bank guarantee
https://www.centralbank.ie/consumer-hub/deposit-guarantee-scheme

I would start a list of what you might spend your money on and just come back to it whenever the mood takes over the next few months.

Now relax and carry on. Youll both figure out what you want to do when you take the pressure off. Also there is noghing wrong with just leaving it in the bank. Peace of mind is worth a lot.

And take a nice holiday and buy something nice for yourselves!

Alkers

It's not all or nothing either, you could for example clear half the mortgage but keep the remaining term, leaving the monthly repayments around half what they are currently. More manageable monthly outgoings and still a bit of a lump sum.

wench

How does this affect the death payout element? Is that separate and still in effect, or has the policy now paid out all it will?

Dardania

wench wrote: »

How does this affect the death payout element? Is that separate and still in effect, or has the policy now paid out all it will?

Stupid question - do you have to pay income tax on that?

If so, maybe you could top up your pension a little bit to offset also

podge018

wench wrote: »

How does this affect the death payout element? Is that separate and still in effect, or has the policy now paid out all it will?

Policy has fully paid out, end of story.

They made a mistake when setting it up and it should have been assigned to the mortgage provider, not us. We'd have no say then and would be mortgage free.
It seems it's quite rare that we get the money to do with what we want.

podge018

Dardania wrote: »

Stupid question - do you have to pay income tax on that?

If so, maybe you could top up your pension a little bit to offset also

No, don't have to pay tax.

wench

podge018 wrote: »

Policy has fully paid out, end of story.

They made a mistake when setting it up and it should have been assigned to the mortgage provider, not us. We'd have no say then and would be mortgage free.
It seems it's quite rare that we get the money to do with what we want.

Then you need to think carefully before doing anything other than paying off the mortgage.
If you were to pour it into an extension, and then one of you were to be run over by a bus, would that leave the survivor up the creek with a mortgage they can't pay?

Wildly Boaring

Lifestyle wise any inclination to pay the mortgage off and either one of ye take a few years away from work?

Mortgage plus creche would surely take up a wage.

Much better quality of life

Paul_Mc1988

wench wrote:

Then you need to think carefully before doing anything other than paying off the mortgage. If you were to pour it into an extension, and then one of you were to be run over by a bus, would that leave the survivor up the creek with a mortgage they can't pay?

I would agree with this. At least use half the money to pay of half the mortgage and the outstanding to build the extension. This provides future cover if something were ever to happen to either of you.

podge018

wench wrote: »

Then you need to think carefully before doing anything other than paying off the mortgage.
If you were to pour it into an extension, and then one of you were to be run over by a bus, would that leave the survivor up the creek with a mortgage they can't pay?

I know, that's the quandary. There is the option there for the other person to take out mortgage protection cover for the amount and term left though.

py

Pay off the mortgage. Means you own your house and never have to pay another cent to the bank for it.

Family member received inheritance and ploughed the whole lot in to a big extension for their existing house instead of paying their mortgage down. The sole earner in the family became seriously ill and now the banks have been chasing them for 5-6 years to repossess it. It's possibly an edge case but if it were me after seeing what happened, I'd pay the mortgage down without a 2nd thought.

Feisar

If someone handed me €170K it'd be bye bye mortgage.

whiskeyman

How much is extension going to cost?
I know clearing down mortgage is often said, but it's probably the cheapest loan you'll have.
May be worth clearing some of it depending on the extension.
Is that extension really needed though? Any other upgrades required?

quagmire47

If it were me, I'd be straight down to the bank to pay off the mortgage. Extra €800 per month in your pocket and saving yourself all that interest you'd pay in the next 25 years.

alwald

The 2 best options if I am in your situation:

1 - the most obvious option is to clear the mortgage, the partner can take a career break. You are mortgage free and childcare free. This will allow you to save 800 EUR a month towards an extension and build it when you have the funds.

2 - Pay off a big chunk of the mortgage so as you are left with 5 years only @ a fixed rate of 2.8% and use the rest to build an extension.

What if your bank will be notified of this 170k payment what will happen then?

ArrBee

Can you even clear it when you are on a fixed rate?

Seems odd to have the insurance pay out yet your still working?

Anyway, I'd be inclined to pay off mortgage if there was no penalty to do so, then look to re-mortgage for the extension and take out protection insurance on the new mortgage maybe?

ELM327

If you're not clearing the mortgage I'd suggest a sanity check quite frankly (not literally, figure of speech but still)

manu2009

Clear your mortgage, why give the bank more money on interest when you have the opportunity not to!

TeaBagMania

im with the lot of clearing the mortgage, you might be thinking of adding an extension now but your kids are still little.
In five years you can save a bit and use the equity in your house to upgrade to a larger house

ELM327

In my opinion you've got two real options here.
1 - the sensible option, clear the mortgage, easy life, less stress, take time out of work to look after kids etc

2 - the radical option. Use the 170k as collateral for a 1:5 leveraged investment in commercial rental property CFD. I'd love to have the balls to do this if I were in that scenario but I don't think I would.

Feisar

Actually scrap my previous about clearing the mortgage.

Find a good financial advisor, spend a few bob on them and then decide.

rgunning

podge018 wrote: »

I know, that's the quandary. There is the option there for the other person to take out mortgage protection cover for the amount and term left though.

My worry for you (if you don't pay off the mortgage), is that regardless of the error that your insurer made in who the payout was meant to be paid out to, was the intent for it for it clear (i.e. was this specifically bought as mortgage protection). I feel this would have no bearing on whatever happens if everyone stays healthy and well. In the case where you take out new cover, and this ensurer is required to pay out, and they see that you already received payment to clear said mortgage (which you didn't clear), I would feel they might try to stall to see if they legally have to pay out.

Rather than go to a financial advisor (whose only interest would be to get you the greatest return on the sum), I would consider talking to a solicitor (who has a different interest than a financial advisor) to ensure that there are no implications to not clearing the mortgage.

To be clear, I am not suggesting that there would be any dishonesty in not clearing the mortgage, I would just not want to be in the situation where an insurer has a possibility to legally challenge a further payout if you re-insured.

Henry Ford III

Feisar wrote: »

If someone handed me €170K it'd be bye bye mortgage.

If someone handed me €170k it'd be buenos dias Espana

Henry Ford III

ELM327 wrote: »

...the radical option. Use the 170k as collateral for a 1:5 leveraged investment in commercial rental property CFD. I'd love to have the balls to do this if I were in that scenario but I don't think I would.

It's very risky in the circumstances.

The ideal solution is to invest and try to earn more net than the carrying cost of the mortgage.

Trouble is there'll be risk involved in this too.

1hnr79jr65

Straight up i would pay off the mortgage for immediate security. Nice not having a large debt hanging over your head and would leave alot more disposable income which can be saved and/or invested to steadily grow your bank account.

Easier to risk some money when you have no large risk hanging over you such as mortgage.

Feisar

Henry Ford III wrote: »

It's very risky in the circumstances.

The ideal solution is to invest and try to earn more net than the carrying cost of the mortgage.

Trouble is there'll be risk involved in this too.

How often does one get to invest €170K that gives €800 a month risk free for 25 years? The OP can do this by clearing the mortgage.

€800x12x25=€240K

Henry Ford III

Feisar wrote: »

How often does one get to invest €170K that gives €800 a month risk free for 25 years? The OP can do this by clearing the mortgage.

€800x12x25=€240K

I did mention there would be risk involved.

p.s. Pity that back to back (or offset)
mortgages are no longer (I think) available.

Feisar

Sorry, forgot to mention, best of luck OP

crustybla

We had a payout a couple of years ago. We cleared the mortgage. We often think of what we could do with that money now but we always come back to relief that we did pay it off. You are both working and could afford to save more. A mortgage can really hold people back. There's a real sense of comfort, even on your broke days when you can say you actually own your own home!
Best of luck with whatever you do and continued health to you both.

Sleeper12

This is a no brainer imo. You got a windfall so to speak. You got it to pay the mortgage off. I'm really not sure why you'd to do anything else with it.

As someone who is mortgage free I can promise you that there is no better feeling than being mortgage free. Knowing that you actually do own your own home rather than the bank owning it for decades. There is nothing stopping you from clearing the mortgage & continuing to save your monthly mortgage amount.

Have you totalled the amount you will pay over the duration of the remaining mortgage time & worked out how much more than 170k you will pay? Even at the 2.75 percent fixed rate? Interest rates are still historically low in Europe. When the EU economy kicks off again rates can only go higher. Chances are that your payments will increase in 5 years.

I can't stress this enough, there is no better feeling in the world knowing that you own your own home.

godtabh

I'd pay the mortgage off in a heart beat.

noel100

Buy crypto currency

3DataModem

A pretty good short / mid term strategy is to pay off 3000 per month instead of 800 per month. In a year if you've not thought of anything else, you've at least knocked another 27k off the mortgage.

In a year, things will be clearer. I would generally advocate not putting the money anywhere except the house (either by clearing the mortgage or extending).

If you feel like blowing 15k on a holiday or something (and after an illness issue, you are entitled to), definitely just jam the other 155k into the mortgage, and look forward to the end of 2020 when you'll be mortgage free, stress free, and 800 per month richer.

ger664

Was in your spot in 2006. Best advise I got was clear the mortgage, you will have a roof over your families head when and if things go tits up down the road.

twowheelsonly

I'd also go with paying off the mortgage. 100% no brainer for me.

If your wife stays working until August /September (start of new school / creche terms) you can save a nice little sum in the meantime and when she takes a break the savings on childcare will allow you to continue to do so.

The freedom that being mortgage free will give you will justify paying it off. If you just kept saving that 800 for the next 25 years you'd have €240k at the end of it AND the house. If you don't pay off the mortgage now (and if you're anything like me!!! ) there'll be 10k here and 15k there maybe 30 or 40 on an extension as well. Potentially you could end up in 25 years time with the house but much smaller savings. You'll also have paid out 70k or so in interest, money that could be in your pocket or earning even more for you rather than the bank.

Even if you didn't save that 800 a month for the next 25 years you'd still have 10k a year extra per year to spend on family / holidays etc.

long_b

How come your mortgage protection paid out at all? I must be missing something

.G.

Yeah I'd pay off the mortgage if I were you. Debt free and one of you gets to take a work break and to spend quality time with the kids at a very young age is a great thing imo.

randombar

That mortgage will cost you 58,794.53 in interest based on 2.5% (I'm guessing rates would go up at some stage) so any investment would have to make more than that after dirt?

Pay off the mortgage. Figure out after what to do with your additional income.

ANXIOUS

long_b wrote: »

How come your mortgage protection paid out at all? I must be missing something

I think that's where he is getting confused. This is a serious illness policy, which isn't a requirement for a mortgage so not surprised it wasn't assigned to the bank.

Muppet Man

100% mortgage - you will NEVER be evicted.

mugsymugsy

Clear the mortgage down to say 16k and then you have some cash for a holiday and a bit of cash to access if things crop up.

Best of luck op for the future

long_b

ANXIOUS wrote: »

I think that's where he is getting confused. This is a serious illness policy, which isn't a requirement for a mortgage so not surprised it wasn't assigned to the bank.

Sorry, yes - serious illness policy.

If it paid out then someone is pretty unwell? In which case future mortgage payments could become difficult to maintain?

phormium

Clear the bulk of the mortgage at least, keep some as a savings cushion and treat yourselves to something you fancy like a holiday for example.

ANXIOUS

long_b wrote: »

Sorry, yes - serious illness policy.

If it paid out then someone is pretty unwell? In which case future mortgage payments could become difficult to maintain?

It could be for a wide rang of things, in particular and generally the older the policy the wider definition of illness covered. Some pay out for getting a stint or any open heart surgery.

Tazz T

At some stage over the next 25 years interest rates will be much higher than they are now. There is no guarantee you and your partner will enjoy the same levels of income over that same period of time, you could even get in trouble with your repayments.

Paying your mortgage off now could be the best risk free investment in your future you ever make. And you will immediately have 800 extra income per month.

And should you need a lump sum at any time in the future, you have your home as collateral.

cnocbui

Clear the mortgage - absolute no brainer. The only time when you wouldn't want to do that is if you can invest that money at a higher rate of return than the mortgage costs. Good luck with that in this country.

Larsso30

clear the mortgage 100%.

podge018

long_b wrote: »

How come your mortgage protection paid out at all? I must be missing something

Without getting too specific, there was a critical illness diagnosis which after a procedure is now gone, hopefully never to return. A close eye will be kept on it however.

Henry Ford III

podge018 wrote: »

Without getting too specific, there was a critical illness diagnosis which after a procedure is now gone, hopefully never to return. A close eye will be kept on it however.

Sounds like the policy should have been assigned to the lender but for whatever reason wasn't.

If the lender knew the insurer had paid out they'd probably be giving you a call......

p.s. I'd pay them back but retain enough for any extension you are planning.

Amirani

GaryCocs wrote: »

That mortgage will cost you 58,794.53 in interest based on 2.5% (I'm guessing rates would go up at some stage) so any investment would have to make more than that after dirt?

This is pretty much the main consideration.

The OP should also consider their pension situation. Are they paying anything into their pension currently and are they availing of a potential employer match? This can offer automatic tax benefits of 40% upfront (20% long term) in addition to extra money offered by your employer to match your contributions.

It's generally worth talking to a financial adviser here. If you're not currently taking advantage of tax and compounding benefits of a pension then invest some here (only up to tax benefit and employer match), it's the only thing that will pretty much guarantee a better return than paying down your mortgage. If you already have a pension sorted, pay off the majority of your mortgage, and just hold 6 months worth of expenses in a dedicated savings account in case anything goes wrong down the line.