Pay lump sum to mortgage or invest in funds?

iwishihadaname

Hi all,

I have a lump sum of 80k in my deposit account and think I should be using it more wisely.

I was thinking about paying a lump sum of 45k and reducing the term of my mortgage, while investing the remainder in a fund. I have a rudimentary knowledge of investing but happy to take some risk. With Brexit etc, is it wise to invest in funds at this time?

Shai

do you have a pension you are maxing out?
what's left to pay on your mortgage? at what interest?
do you have savings outside of this money?
what are your yearly expenses? are they likely to change?
what's your occupation? is it recession proof?

AndrewJRenko

How's your marriage? Is it recession proof?

userfriendly2

Also interested to hear any responses on this topic from the knowledgeable Boards community.

topmanamillion

Banks allow you to make an overpayment of up to 10% of the mortgage balance per year without penalty. Anything above this is likely to come with penalties.

One of the best investments you could make is in home energy efficiency. There are grants available for this and for home renovations.
You will get a tangible return on investment through energy bills savings and increased equity, particularly if your home currently has a low efficiency rating.

userfriendly2

topmanamillion wrote: »

Banks allow you to make an overpayment of up to 10% of the mortgage balance per year without penalty. Anything above this is likely to come with penalties.

One of the best investments you could make is in home energy efficiency. There are grants available for this and for home renovations.
You will get a tangible return on investment through energy bills savings and increased equity, particularly if your home currently has a low efficiency rating.

Is that standard across banks? Or would there be different rules depending on the institution? Also is that an overpayment of 10% of the mortgage value or 10% of your yearly payments? Sorry for the ignorance. Mortgages confuse me. I wasn't aware of 10% p.a. Thanks

kippy

userfriendly2 wrote: »

Is that standard across banks? Or would there be different rules depending on the institution? Also is that an overpayment of 10% of the mortgage value or 10% of your yearly payments? Sorry for the ignorance. Mortgages confuse me. I wasn't aware of 10% p.a. Thanks

It would depend on the bank and the type of mortgage you have with them.

Neil3030

First thing - what rate of interest are you paying, and is it fixed or variable?

Second - are you currently working, paying PAYE, and are you contributing to a pension?

Then (and I don't know this because I don't live in Ireland) you need to research the cheapest way to access the stock market. Two things to consider here, 1. what brokerage account charges the lowest fees - both transaction/reinvestment and then service fees. And 2., are there any index funds that get preferential tax treatment in Ireland, say if you invest in Irish or European stocks? The reason the pension might be relevant here, is that you may not get hit with tax drag on holdings in your pension, so dividends etc. But again, I don't know the Irish system.

Then you work out the opportunity cost. Diversified gobal stock market funds should return, in the long run, 5 to 6% per year. Subtract from that the fees and taxes you expect to be confiscated by your broker and the government.

Then compare this final figure with your mortgage interest. If mortgage interest is higher, pay it off. If mortgage interest lower, invest.

Blacktie.

topmanamillion wrote: »

Banks allow you to make an overpayment of up to 10% of the mortgage balance per year without penalty. Anything above this is likely to come with penalties.

One of the best investments you could make is in home energy efficiency. There are grants available for this and for home renovations.
You will get a tangible return on investment through energy bills savings and increased equity, particularly if your home currently has a low efficiency rating.

Variable mortgages let you overpay without penalty. I've been doing it consistently for 2 years.

You'd want to look at the payback period for any energy efficiency upgrades. Some can be quite long even getting into decades.

If you pay it off the mortgage straight away that's a guaranteed return of whatever the APR is on the mortgage as you won't be paying that interest. Investment funds can outperform this but with added risk. Especially if you'll need it in the next few years.

Grumpypants

iwishihadaname wrote: »

Hi all,

I have a lump sum of 80k in my deposit account and think I should be using it more wisely.

I was thinking about paying a lump sum of 45k and reducing the term of my mortgage, while investing the remainder in a fund. I have a rudimentary knowledge of investing but happy to take some risk. With Brexit etc, is it wise to invest in funds at this time?

Paying a lump off the mortgage is a risk free way of making your money work. There are a few calculators out there that you can put in what you owe, for how long and at what rate.

For example 200k over 20 years at 3% on Bank of Ireland's calculator knocks 5 years and 30k in interest off your mortgage. It's hard to argue with that.

As long as you have no other loans. Credit card/car loans etc. on a higher interest rate to clear first, then that's a clever move.

If you want something a bit risky, i'd put 10k into bitcoin. The market bottomed out at $3k at the start of the year and has been growing steadily. It passed $10k last week. It's consolidating nicely right now. If it breaks $11.2k, it will take off. So far my crypto portfolio has had a 200% return in the last 3 months.

iwishihadaname

Shai wrote: »

do you have a pension you are maxing out?
what's left to pay on your mortgage? at what interest?
do you have savings outside of this money?
what are your yearly expenses? are they likely to change?
what's your occupation? is it recession proof?

I have 285,000 left on my mortgage with 2.95% variable interest rate. 29 years left.

I'm an accountant and have over a years salary in savings outside of this money. I've stress tested my savings and with the amount I save each month, I'm likely to have another lump sum sitting in my deposit account again in 6 months. All's good savings wise.

I'm 29 and contribute only 2% of salary to a pension, with my employer contributing 8%.

I've used those mortgage early repayment calculators and would save 53k in interest over the life of the mortgage and reduce the term by 6 years with a 45k lump sum. Looked at Irish Life Maps and for a Fund 3 (low risk) I may as well pay of my mortgage but with Fund 4 (medium Risk) I think I could make 80k over 29 years, that's if I'm calculating government levy and fees correctly which I'm not sure I am.

iwishihadaname

topmanamillion wrote: »

Banks allow you to make an overpayment of up to 10% of the mortgage balance per year without penalty. Anything above this is likely to come with penalties.

One of the best investments you could make is in home energy efficiency. There are grants available for this and for home renovations.
You will get a tangible return on investment through energy bills savings and increased equity, particularly if your home currently has a low efficiency rating.

My bank said no limit with the amount of lump sum I pay. Maybe because it's variable?

I have a new build which is A rated so not much to do there! Good idea though.

RoboRat

Grumpypants wrote: »

If you want something a bit risky, i'd put 10k into bitcoin. The market bottomed out at $3k at the start of the year and has been growing steadily. It passed $10k last week. It's consolidating nicely right now. If it breaks $11.2k, it will take off. So far my crypto portfolio has had a 200% return in the last 3 months.

The time to put money into Bitcoin was about 5 months ago when it was at 5k - 6k, now it's a risk. It may well take off but it may also go back down as there is a lot of institutional investment in BTC now. Funds can throw the market wither way, this wasn't as prevalent last year. By all means, invest in crypto but only what you can afford to lose and understand the technologies, their purpose and caps before jumping in.

The best use of that money is to pay off your mortgage early, it will earn you a lot more than most things you can invest in. Alternatively, pay half off the mortgage and leave the other half on the mortgage account but keep paying the monthly's - this could give you 2 - 3 years breathing space should a recession hit again and you lose your job or have to take a pay cut.

AndrewJRenko

Any wedding plans over the next decade? Or a possible house move if you do 'couple up'? Or will you be facing into the expense of infertility treatment or childcare?

jonnybravo

iwishihadaname wrote: »

I have 285,000 left on my mortgage with 2.95% variable interest rate. 29 years left.

I'm an accountant and have over a years salary in savings outside of this money. I've stress tested my savings and with the amount I save each month, I'm likely to have another lump sum sitting in my deposit account again in 6 months. All's good savings wise.

I'm 29 and contribute only 2% of salary to a pension, with my employer contributing 8%.

I've used those mortgage early repayment calculators and would save 53k in interest over the life of the mortgage and reduce the term by 6 years with a 45k lump sum. Looked at Irish Life Maps and for a Fund 3 (low risk) I may as well pay of my mortgage but with Fund 4 (medium Risk) I think I could make 80k over 29 years, that's if I'm calculating government levy and fees correctly which I'm not sure I am.

First thing you should do is increase your pension rate. It'll be the best return you'll get on an investment as you'll be getting 40% tax back plus all gains are tax free. You could also look at contributing a lump sum into your pension for last year and claiming the 40% tax back.

I'd also put some of your lump sum into your mortgage and instead of building up your savings again I'd increase your monthly payments. You can save more in interest by paying it off per month rather than in lump sums.

If using investment funds I'd look at charges. I'm no expert but I understand the Irish Life Maps funds have high charges.

Irishder

Id appreciate it if someone could link to a calculator that shows the savings. I am in a similar position but my mortgage is a tracker ECB+1.15%. Apologies for high jacking the thread.

kippy

Irishder wrote: »

Id appreciate it if someone could link to a calculator that shows the savings. I am in a similar position but my mortgage is a tracker ECB+1.15%. Apologies for high jacking the thread.

I am not sure what calculator you are looking for but this will allow you to play around with the capital amount, regular and bulk payments:
https://www.drcalculator.com/mortgage/

Neil3030

Stay the heck away from crypto, and stay the heck away from actively managed funds. Nobody can predict downturns or upturns consistently, all they do is chew up your return with fees. Low cost, passively managed, index tracking funds are the way to go. If the ongoing charges are more than 0.20% or 0.30% for the fund, it's not a great deal. Fidelity, Vanguard and iShares have some great products in the U.S. Legal and General have some great products in the UK. Hopefully one of these will cater to the Irish market. I also don't know what brokerage account won't fleece you with additional charges - I suspect they all will, in Ireland at least.

AndrewJRenko

Neil3030 wrote: »

Stay the heck away from crypto, and stay the heck away from actively managed funds. Nobody can predict downturns or upturns consistently, all they do is chew up your return with fees. Low cost, passively managed, index tracking funds are the way to go. If the ongoing charges are more than 0.20% or 0.30% for the fund, it's not a great deal. Fidelity, Vanguard and iShares have some great products in the U.S. Legal and General have some great products in the UK. Hopefully one of these will cater to the Irish market. I also don't know what brokerage account won't fleece you with additional charges - I suspect they all will, in Ireland at least.

Are any of these passive funds available in the Irish market? Quinn Life used to offer them in the good oul days, but nothing now afaik.

Neil3030

AndrewJRenko wrote: »

Are any of these passive funds available in the Irish market? Quinn Life used to offer them in the good oul days, but nothing now afaik.

Just did a quick Google, and these guys look good:

https://www.degiro.ie/helpcenter/faq/fees/1117

They offer plenty of commission free ETFs too:

https://www.degiro.ie/data/pdf/ie/commission-free-etfs-list.pdf

adam88

Fair play to you. You seem to be a sensible young lad. I’m only 30 so that’s a good compliment.

Ya you seem to have your head screwed on, defo aim to max out your pension and max out last years pension as well, a pension advisor would explain that to you. In terms of who to go to defo go with the cheapest, it had been suggested for me to go with a pension plan that I can manage myself but I don’t have time for that am happy to pay the fees as long as I’m seeing some growth.

Also pay what ever is left off the mortgage. You’ve a years salary built up so you okay if the economy gets shaky. Be careful how they apply the lump sum if for e.g. your paying 1000 pm now, after the lump sum your payments could go down the 750pm which sort of defeats the purpose. You can always counteract this by transferring the difference every month into your mortgage account. The other option with the remainder of your mortgage is that the term is reduced which means that if you lose your job etc your still expected to pay the 1000pm and not the 750 pm. I personally go with the reduced payments every month and transfer over the difference, it allows me breathing space if things were to go tits up

Neil3030

Does anyone know if an Irish investor has a European stock ETF in a tax-advantaged account, are witholdings taxes still taken from EU states on income from relevant securities?

So for e.g., suppose an Irish tax resident holds something like the IEUR in a PRSA, and Total S.A. (HQ in France) pay their dividend. Is any portion of that retained by the French govt (or, indeed, anyone else)? Or will the dividend apply in full to the dividend payment made by the ETF? My (limited) understanding of the tax-treaty situation is that if you had this stock in a taxable account, the French tax witholdings and Irish dividends tax offset, so 20% is lost regardless. However this offset won't apply in the PRSA, as the Irish dividend tax will not be taken on a security held in a tax-advantaged account...

Grumpypants

Grumpypants wrote: »

Paying a lump off the mortgage is a risk free way of making your money work. There are a few calculators out there that you can put in what you owe, for how long and at what rate.

For example 200k over 20 years at 3% on Bank of Ireland's calculator knocks 5 years and 30k in interest off your mortgage. It's hard to argue with that.

As long as you have no other loans. Credit card/car loans etc. on a higher interest rate to clear first, then that's a clever move.

If you want something a bit risky, i'd put 10k into bitcoin. The market bottomed out at $3k at the start of the year and has been growing steadily. It passed $10k last week. It's consolidating nicely right now. If it breaks $11.2k, it will take off. So far my crypto portfolio has had a 200% return in the last 3 months.

Bitcoin was at $10,500 when i wrote that on Monday. Less than 48 hours later it had broken $11,200 and is now over $12,650.

20% return in 2 days. Not too shabby.

adam88

Grumpypants wrote: »

Bitcoin was at $10,500 when i wrote that on Monday. Less than 48 hours later it had broken $11,200 and is now over $12,650.

20% return in 2 days. Not too shabby.

Could have easily have fallen just as much. Bitcoin is volatile.

FernandoTorres

Grumpypants wrote: »

Bitcoin was at $10,500 when i wrote that on Monday. Less than 48 hours later it had broken $11,200 and is now over $12,650.

20% return in 2 days. Not too shabby.

Yes and if you'd given this advice in Dec 2017 when people were saying it was going to the moon he'd be sitting on a $7k loss after 2 years of investment. At best it should be a tiny proportion of a diversified portfolio.

Grumpypants

FernandoTorres wrote: »

Grumpypants wrote: »

Bitcoin was at $10,500 when i wrote that on Monday. Less than 48 hours later it had broken $11,200 and is now over $12,650.

20% return in 2 days. Not too shabby.

Yes and if you'd given this advice in Dec 2017 when people were saying it was going to the moon he'd be sitting on a $7k loss after 2 years of investment. At best it should be a tiny proportion of a diversified portfolio.

But i didn't say it in 2017 when the market was over extended. I said it on Monday when the market was primed to burst. And was right.

Deub

adam88 wrote: »

Fair play to you. You seem to be a sensible young lad. I’m only 30 so that’s a good compliment.

Ya you seem to have your head screwed on, defo aim to max out your pension and max out last years pension as well, a pension advisor would explain that to you. In terms of who to go to defo go with the cheapest, it had been suggested for me to go with a pension plan that I can manage myself but I don’t have time for that am happy to pay the fees as long as I’m seeing some growth.

Also pay what ever is left off the mortgage. You’ve a years salary built up so you okay if the economy gets shaky. Be careful how they apply the lump sum if for e.g. your paying 1000 pm now, after the lump sum your payments could go down the 750pm which sort of defeats the purpose. You can always counteract this by transferring the difference every month into your mortgage account. The other option with the remainder of your mortgage is that the term is reduced which means that if you lose your job etc your still expected to pay the 1000pm and not the 750 pm. I personally go with the reduced payments every month and transfer over the difference, it allows me breathing space if things were to go tits up

Great advice.
While you're paying your mortgage and pension, you can start learning about trading. Look at trading stocks, indexes and forex. Check the ones you are interested in and learn/read. Open a demo account and practice. It takes time to learn (1 to 2 years to have a basic knowledge, depending on how much time you dedicate every week).
Then you can start with a small amount (3k to 5k) and see how it goes.

cooperguy

Sounds like you have a good savings rate! I would definitely put a large chunk of the lump sum into the mortgage. You have a 2.95% interest rate on your mortgage. Putting a lump sum in there is the equivalent of earning 5%+ from an investment fund (you have to pay tax on any profit you make on the fund). It's also a risk free return! (though a lot harder to unlock if you needed the money again).

I would also up your pension contribution to 15% (including the employer match). This looks like its affordable to you and maxes out the tax advantage you can get. (I would up that to around 20% once you turn 30, your tax allowance increases then and if I remember rightly that is the top end of what recommended. This would only cost you another 5% net after the tax relief)

userfriendly2

jonnybravo wrote: »

I'd also put some of your lump sum into your mortgage and instead of building up your savings again I'd increase your monthly payments. You can save more in interest by paying it off per month rather than in lump sums.

I've heard this before but i'm extremely confused about it. Can anyone explain to me how the increased repayments save more in interest as opposed to the lump sum option. The reason I ask is because I am weighing the pro's and con's of lower monthly repayments allowing me to save more for a rainy day fund and if it's not needed after a set amount of time then I can knock it off the mortgage as a lump sum. Alternatively, I can pay more per month; I just don't understand how it's cheaper.

Blacktie.

userfriendly2 wrote: »

I've heard this before but i'm extremely confused about it. Can anyone explain to me how the increased repayments save more in interest as opposed to the lump sum option. The reason I ask is because I am weighing the pro's and con's of lower monthly repayments allowing me to save more for a rainy day fund and if it's not needed after a set amount of time then I can knock it off the mortgage as a lump sum. Alternatively, I can pay more per month; I just don't understand how it's cheaper.

Because you're accruing interest daily. If you reduce your principle by a larger amount each month there'll be less principle to charge interest on while if you only do it once per year up until the point of payment the interest is charged on the the full principle amount.

AndrewJRenko

Blacktie. wrote: »

Because you're accruing interest daily. If you reduce your principle by a larger amount each month there'll be less principle to charge interest on while if you only do it once per year up until the point of payment the interest is charged on the the full principle amount.

Surely this depends on the timing of the lump sum payment?


If you make your lump sum payment up front, then you get the benefit of the reduced interest cost from day 1, as opposed to a gradual benefit over the 12 months of the year.

Blacktie.

AndrewJRenko wrote: »

Surely this depends on the timing of the lump sum payment?


If you make your lump sum payment up front, then you get the benefit of the reduced interest cost from day 1, as opposed to a gradual benefit over the 12 months of the year.

O well yeah I just assumed it was saving up a lump sum and paying it when you have a certain amount. If you have the lump sum ready to go then yes that's the most cost effective solution.