Do you overpay your mortgage?

dotsman

Arealred wrote: »

I overpay on the mortgage. It's a guaranteed poor return.

FYP

Arealred wrote: »

Knowing you will own the roof over your head no matter what is a great piece of mind.

But you will have that without overpaying anyway.

Arealred wrote: »

Investing is all well and good but the taxman gets his cut.

Yes, but he only gets a cut of the large returns.



Put it another way. A common thread being mentioned here is that the mortgage will be cleared earlier.

For example, on a 30 year mortgage, a person could overpay and have it cleared after 26 years. However, if they were to put that overpayment into an investment portfolio, they would likely have enough to clear the balance of the mortgage after, say, 20 years.

The pertinent points here are A) the returns (~2.5% on mortgage overpayments vs ~10% on stocks) and freedom (overpayments are locked away and you only get the benefit at the end of the mortgage vs being able to cash in some/all of the investments at any stage with should you require additional funds at some stage in your life).

And returns matter. The power of compound interest is phenomenal - Every additional percent you are gaining per annum will drastically increase the return over a long period. The people who subscribe to overpaying do so because they have been shown how great a long-term return can be achieved due to compound interest when the annual return is ~2.5%. What they need to see is just how incredible the long-term returns are when the annual return averages 10%!

bee06

Overpay by about €200 a month and then make lump sum overpayments as well when we can. Pensions are maxed out, lots of savings and no other debts. The aim is to have the mortgage paid off by the time the kids start college. I really should be investing as well but don’t have a clue where to start.

Galwayguy35

Yeah I overpay by about €50 a month, it might not seem a lot but it adds up over the lifetime of the mortgage and I don't want to have one foot in the grave before its paid off.

dowhatyoulove

I’ve only got a mortgage in the last year and I do plan to overpay - but only after I’ve bought a coffee table first 😅

Jim_Hodge

No mortgage now but when we had we paid off as much extra as we could. As rates reduced we kept paying the older higher amount. Ended up clearing the mortgage 4 years early and saved 'ooos in interest.

Jim_Hodge

dotsman wrote: »

FYP


But you will have that without overpaying anyway.


Yes, but he only gets a cut of the large returns.



Put it another way. A common thread being mentioned here is that the mortgage will be cleared earlier.

For example, on a 30 year mortgage, a person could overpay and have it cleared after 26 years. However, if they were to put that overpayment into an investment portfolio, they would likely have enough to clear the balance of the mortgage after, say, 20 years.

The pertinent points here are A) the returns (~2.5% on mortgage overpayments vs ~10% on stocks) and freedom (overpayments are locked away and you only get the benefit at the end of the mortgage vs being able to cash in some/all of the investments at any stage with should you require additional funds at some stage in your life).

And returns matter. The power of compound interest is phenomenal - Every additional percent you are gaining per annum will drastically increase the return over a long period. The people who subscribe to overpaying do so because they have been shown how great a long-term return can be achieved due to compound interest when the annual return is ~2.5%. What they need to see is just how incredible the long-term returns are when the annual return averages 10%!

The mortgage payment and savings are guaranteed. The investment is a risk - and I've invested, for the good and bad, over the past thirty years so have seen it's volatilities.

The J Stands for Jay

TomSweeney wrote: »

- Pension contributions maxed out - eh I've zero pension contributions, why would I put money away for 30 years to have them tell me at the end that they blew it ? this has happened so much there is no way i'd risk it.

Never = happened so much?

The J Stands for Jay

blue note wrote: »

.

I'm an accountant. I know that a mortgage is the cheapest money you'll ever get. I know that putting it into a pension is probably the sensible financial decision. However, the idea of clearing your mortgage early is nice. Being mortgage free in my 50s would be great.

My pension lump sum will pay off what's left of my mortgage.

Jim_Hodge

McGaggs wrote: »

My pension lump sum will pay off what's left of my mortgage.

It doesn't have to be one or the other. My mortgage cleared early and I had the full pension lump sum to spend on myself. Just do the maths and spread the spend accordingly. I'd hate to have had to use the lump sum to pay the mortgage

dxhound2005

There are massive amounts of money in savings accounts which are paying very low interest. If any of those people have mortgages, they should put some of the savings into the mortgage. Far better than risking it on the stock market or on gold.

https://www.ccpc.ie/consumers/money-tools/extra-mortgage-payments-calculator/

KaneToad

murpho999 wrote: »

Find an investment fund that returns more than the mortgage interest rate on your mortgage and then you're making money and then you can pay off your mortgage with the profits.

Really think people are foolish just overpaying their mortgage.

Name me an investment fund that's guaranteed to pay 3% per year.

jester77

KaneToad wrote: »

Name me an investment fund that's guaranteed to pay 3% per year.

The S&P 500 Index originally began in 1926 as the "composite index" comprised of only 90 stocks.1

 According to historical records, the average annual return since its inception in 1926 through 2018 is approximately 10%–11%.[cite] The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8%.

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

KaneToad

jester77 wrote: »

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

That's not a guarantee.

Amirani

jester77 wrote: »

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

Do you understand what guaranteed means? It doesn't mean "what is the long run average likely to be based on historical performance?"

jester77

Amirani wrote: »

Do you understand what guaranteed means? It doesn't mean "what is the long run average likely to be based on historical performance?"

I can guarantee you one thing, anyone that was investing €200 a month in that fund over the life time of their mortgage will be a lot better off than someone who just used that €200 to overpay their mortgage.

Amirani

jester77 wrote: »

I can guarantee you one thing, anyone that was investing €200 a month in that fund over the life time of their mortgage will be a lot better off than someone who just used that €200 to overpay their mortgage.

You can't guarantee that though. You can think that it's likely, but that's not the same thing.

In finance, a "guaranteed return" has quite a specific meaning. It doesn't simply mean the outcome with the highest likelihood.

Leg End Reject

KaneToad wrote: »

Name me an investment fund that's guaranteed to pay 3% per year.

I'm very risk averse, so overpaying my mortgage is more attractive than investing the money.

StupidLikeAFox

Its not guaranteed but its a high probability. Over a laong period of time the s&p fund will provide a decent return. Bar the occasional shock it will curve upwards.

For example, if you had invested in November 2007 when it was at its height, so the worst possible time before the 2008 financial crisis, you would still be up an average of 8% annually today, or 178% in total. That time period includes the 2008 financial crisis and covid. You can check it here: https://dqydj.com/sp-500-return-calculator/

Blackjack

There’s another consideration in the life insurance policy that is required for most mortgages, you can reduce the premium paid or eliminate it altogether which is a considerable saving.
There are indeed other benefits of having such a policy but not having to pay that particular policy or being able to choose another, or simply do something else with the money should be included in the calculations.
In my own case the joint life first death policy I pay amounts to around 10% of the mortgage payment monthly.

The J Stands for Jay

Jim_Hodge wrote: »

It doesn't have to be one or the other. My mortgage cleared early and I had the full pension lump sum to spend on myself. Just do the maths and spread the spend accordingly. I'd hate to have had to use the lump sum to pay the mortgage

There'll be plenty left over after the mortgage is paid off.

The J Stands for Jay

KaneToad wrote: »

Name me an investment fund that's guaranteed to pay 3% per year.

There are pension funds that gaurantee 4% minimum. But they're long closed to new customers.

The J Stands for Jay

StupidLikeAFox wrote: »

Its not guaranteed but its a high probability. Over a laong period of time the s&p fund will provide a decent return. Bar the occasional shock it will curve upwards.

For example, if you had invested in November 2007 when it was at its height, so the worst possible time before the 2008 financial crisis, you would still be up an average of 8% annually today, or 178% in total. That time period includes the 2008 financial crisis and covid. You can check it here: https://dqydj.com/sp-500-return-calculator/

There's always a high probability that investing in equities will outperform mortgage overpayment. The interest rate on the loan is linked to the costs of funds, which is highly influenced by interest rates. Those same interest rates have an effect on equity returns due to investors seeking an equity premium (if equities don't give a higher return than government investments, investors will not take on the additional risk for no additional return).

Louis Friend

The point which a lot of people seem to be missing is that you pay your mortgage out of after-tax income.

So an investment needs to be guaranteeing you 6%-ish a year to keep-up with the mortgage overpayment, especially when costs are taken into account.

KaneToad

jester77 wrote: »

I can guarantee you one thing, anyone that was investing €200 a month in that fund over the life time of their mortgage will be a lot better off than someone who just used that €200 to overpay their mortgage.

No you can't. I'm not sure you understand the meaning of guarantee.

I can guarantee that, if you overpay on 3% mortgage, you will definitely save a finite/quantifiable amount.

Investing money is always risky (to a greater or lesser extent), if there was no risk to it there would be no return. Returns may be greater than the return on overpaying your mortgage - but you could also lose the lot and still need to pay off your mortgage.

Finding the right balance is key.

BailMeOut

If you are not maxing out your pension contributions and most people do not then putting this money tax free into some EFT or the likes in a PRSA would be a much smarter use if this money.

dotsman

KaneToad wrote: »

No you can't. I'm not sure you understand the meaning of guarantee.

I can guarantee that, if you overpay on 3% mortgage, you will definitely save a finite/quantifiable amount.

But, I don't think you understand the meaning either. We need to be clear here. YOU ARE NOT GURANTEED a finite/quantifiable amount when overpaying your mortgage.

The amount will vary due to changes in interest rates over the course of the loan. The exact same way the returns from the stock market will vary over time (and be more volatile). However, over the long-term (which is what we are dealing with here), the average stock market return will be several multiples of the return from mortgage over-repayments.

KaneToad wrote: »

but you could also lose the lot

I'm not sure what investments you are thinking of that involves "losing the lot". When talking about investing, we are talking about maintaining a balanced/diversified stock portfolio or buying into several ETFs such as S&P 500 etc. If a portfolio such as this loses money over the course of many years, then you have much bigger problems than a mortgage (we are talking major economic collapse of western economy that would make the 08' Financial collapse look like a minor blip). The only way to "lose the lot would" be a "complete end of all life on earth" scenario.

KaneToad wrote: »

but you could also lose the lot and still need to pay off your mortgage.

In either case, we are paying off the mortgage. What we are talking about is the potential returns from the excess money after the standard monthly repayment has been made. We can use that excess to "overpay" the mortgage and aim to save a small amount of money over the life of the loan, or we can invest that excess and make a vastly larger sum of money in that time period.

Louis Friend wrote: »

The point which a lot of people seem to be missing is that you pay your mortgage out of after-tax income.

So an investment needs to be guaranteeing you 6%-ish a year to keep-up with the mortgage overpayment, especially when costs are taken into account.

I'm not quite sure what you are saying here.

CGT is 33% on all profit over €1,270 per annum. Your ~10% returns on the stock market, even after tax, still greatly outweigh the minuscule returns from mortgage overpayments.

Vestiapx

If you believe in inflation from all the FIAT printing that's currently happening then you would want to be asset and debt heavy and not be worrying about overpaying teh mortgage. Ok I can see the logic if you are "bad with money" in paying down the mortgage but if you can invest and hold and let your investment rise to the value of your remaining debt then you can exit that position if you want. I'm seeing inflation in the double figures coming down the road and price increases already reflecting this so personally I'd be happy to hold debt.
I like the idea of being able to pay in extra and draw it back down if nessicary it looks like a very sensible option and a handy way to pass a means test.

lawred2

Overpay the maximum 10% as per the terms

BailMeOut

If anyone wants a real life example my personal investments which are very conservative with just a few equities with most being in mutual funds and efts is averaging +16.13% per year over the last ten years. Anyone could have made a killing recently with very little market or investing knowledge. This €200 would be the equivalent of €300 to €400 if added to pension yielding €100k over that same ten years or 4x difference. Over time and based on past history this 16% will in most likelihood be closer to 7% but still a better return.

suicide_circus

Off topic but is there a rule of thumb on using savings vs a loan for home improvements? I could do the work with my savings but then be flat broke. Is there a loan to saving ratio?