Do you overpay your mortgage?

lawred2

A Tyrant Named Miltiades! wrote: »

Er, no it isn't.

If you're 45 years of age on a salary of 70k, with no pension, you pay about €17.5k per annum in tax.

If you put €12k into a pension instead, you'll pay €12.8k in tax. Lets say your employer matches that with €5k, maxing out your pension limit – now you have 17k per annum in a pension, and you're paying less tax than the guy paying down his mortgage.

It's true that you might lose that money in a freak crash, but about 5k of it was going to the taxman anyway. You were never getting that back. It's as if you are putting about 7k into a pension fund worth 17k.

And at those rates, you're not paying any BIk on your employer's contribution.

Even if your employer isn't making any contribution, and your pension contributions are personal, you're reducing your taxable income significantly, ie investing money you would never otherwise have laid eyes on.

I thought employer contributions didn't count towards the pension limit?

Louis Friend

A Tyrant Named Miltiades! wrote: »

Er, no it isn't.

If you're 45 years of age on a salary of 70k, with no pension, you pay about €17.5k per annum in tax.

If you put €12k into a pension instead, you'll pay €12.8k in tax. Lets say your employer matches that with €5k, maxing out your pension limit – now you have 17k per annum in a pension, and you're paying less tax than the guy paying down his mortgage.

It's true that you might lose that money in a freak crash, but about 5k of it was going to the taxman anyway. You were never getting that back. It's as if you are putting about 7k into a pension fund worth 17k.

And at those rates, you're not paying any BIk on your employer's contribution.

Even if your employer isn't making any contribution, and your pension contributions are personal, you're reducing your taxable income significantly, ie investing money you would never otherwise have laid eyes on.

See those words “personally held investment account” in my post?

And where I talk about prioritising pension investing over mortgage overpayments and personal investing?

There are clues in the terminology.

lawred2

lawred2 wrote: »

I thought employer contributions didn't count towards the pension limit?

They do when it comes to BIK, depends on pension type.

lawred2

A Tyrant Named Miltiades! wrote: »

They do when it comes to BIK, depends on pension type.

Not on occupational as far I was advised

Going to check again tomorrow at work to be sure.

Louis Friend

lawred2 wrote: »

Not on occupational as far I was advised

Going to check again tomorrow at work to be sure.

No need to check. It’s fine for an occupational pension.

It’s a PRSA that gives rise to BIK on an employer contribution, with the contribution then deemed to eat into the personal age-related allowances.

dotsman

Louis Friend wrote: »

This is nonsensical.

Repaying mortgage debt at a rate of 3% is like getting a GUARANTEED return of 6-7% on a personally-held investment account.

Tax arises at rates of 33%, 41%, and 52-55%.

Wow, talk about "playing" with figures.

Firstly, mortgage interest rates are below 3%. With Avant etc, many people are on <2% and with trackers, many people are on < 1%.
Secondly, with CGT @ 33% and the first €1,270 of profits tax free each year.
Thus, a much more realistic comparison would be that the investment returns need to average ~4% per annum to beat overpaying a mortgage.

Typical stock market returns average ~10%

Louis Friend wrote: »

Plus it costs money to invest in terms of management fees and transaction charges.

With Degiro etc, the fees amount to a few euro per annum and are, thus, negligible.

Louis Friend wrote: »

And returns aren’t guaranteed; there is the potential to lose money.

As has been stated many times, that is why one looks at the average returns, which are ~10%. When investing, one does not care about how much it went up or down in a given day/month/year. All that matters in the overall return over the investment period. Here we are talking many years -> decades, which sees the overall returns align to the "average".

Likewise, as stated before, there is no guarantee on the returns from the mortgage overpayments. The returns will fluctuate with interest rate changes.

Louis Friend wrote: »

So behind Door A is a guaranteed return of 6-7%, and behind Door B is a potential return or loss; I know which one I’d choose and advise people to choose.

As per above, there is no guarantee with Door A, and the percentage is much closer to ~4%. Door B, over a long period of time offers ~10%. With the power of compound interest, with Door B, you will end up with many multiples of the money offered from Door A. Given the size of the money we are talking about, for the average person, this will likely be hundreds of thousands of euro.

Door A is the wrong choice, by far.

Louis Friend wrote: »

My own approach is simple:

1) Build a cash reserve equal to 6 months’ expenditure
2) Maximise my pension contributions
3) Maximise my mortgage overpayments
4) Invest personal cash

Even this doesn't make sense/ There are no limits on the mortgage overpayments. If you are "maximising" them, then there is no spare cash for 4).

dotsman

2lazytogetup wrote: »

Reckon there is a bull market, when interest rates rise, I can see etf values dropping cira 10%. Go with overpaying mortgage

If that is your understanding, then you probably are better of overpaying your mortgage! Or, better yet, I would advise you to get a responsible adult to manage your money for you

SPDR S&P 500 (one of the more popular ETFs) Historic Performance

lawred2

dotsman wrote: »

Wow, talk about "playing" with figures.

Firstly, mortgage interest rates are below 3%. With Avant etc, many people are on <2% and with trackers, many people are on < 1%.
Secondly, with CGT @ 33% and the first €1,270 of profits tax free each year.
Thus, a much more realistic comparison would be that the investment returns need to average ~4% per annum to beat overpaying a mortgage.

Typical stock market returns average ~10%

With Degiro etc, the fees amount to a few euro per annum and are, thus, negligible.


As has been stated many times, that is why one looks at the average returns, which are ~10%. When investing, one does not care about how much it went up or down in a given day/month/year. All that matters in the overall return over the investment period. Here we are talking many years -> decades, which sees the overall returns align to the "average".

Likewise, as stated before, there is no guarantee on the returns from the mortgage overpayments. The returns will fluctuate with interest rate changes.


As per above, there is no guarantee with Door A, and the percentage is much closer to ~4%. Door B, over a long period of time offers ~10%. With the power of compound interest, with Door B, you will end up with many multiples of the money offered from Door A. Given the size of the money we are talking about, for the average person, this will likely be hundreds of thousands of euro.

Door A is the wrong choice, by far.


Even this doesn't make sense/ There are no limits on the mortgage overpayments. If you are "maximising" them, then there is no spare cash for 4).

yes there can be

if you are on a fixed rate - then there may be no allowed overpayments... UB allow 10% overpayments on a fixed rate. But not all banks do.

dotsman

lawred2 wrote: »

yes there can be

if you are on a fixed rate - then there may be no allowed overpayments... UB allow 10% overpayments on a fixed rate. But not all banks do.

But then, you would just overpay as a lump sum at the end of the fixed period.

Louis Friend

dotsman wrote: »

Wow, talk about "playing" with figures.

Firstly, mortgage interest rates are below 3%. With Avant etc, many people are on <2% and with trackers, many people are on < 1%.
Secondly, with CGT @ 33% and the first €1,270 of profits tax free each year.
Thus, a much more realistic comparison would be that the investment returns need to average ~4% per annum to beat overpaying a mortgage.

Typical stock market returns average ~10%

With Degiro etc, the fees amount to a few euro per annum and are, thus, negligible.


As has been stated many times, that is why one looks at the average returns, which are ~10%. When investing, one does not care about how much it went up or down in a given day/month/year. All that matters in the overall return over the investment period. Here we are talking many years -> decades, which sees the overall returns align to the "average".

Likewise, as stated before, there is no guarantee on the returns from the mortgage overpayments. The returns will fluctuate with interest rate changes.


As per above, there is no guarantee with Door A, and the percentage is much closer to ~4%. Door B, over a long period of time offers ~10%. With the power of compound interest, with Door B, you will end up with many multiples of the money offered from Door A. Given the size of the money we are talking about, for the average person, this will likely be hundreds of thousands of euro.

Door A is the wrong choice, by far.


Even this doesn't make sense/ There are no limits on the mortgage overpayments. If you are "maximising" them, then there is no spare cash for 4).

You literally have no idea what you’re talking about.

https://www.google.ie/amp/s/www.irishtimes.com/business/economy/irish-mortgage-rates-remain-stubbornly-high-new-figures-show-1.4531009%3fmode=amp

The average variable rate for a new mortgage is currently 3.41%. The average fixed rate is 2.65%. The average blended rate is 2.78%.

Avant only allow overpayments of 1%, their maximum LTV for the 1.95% rate is 60%, they’ll only lend to people in cities, and they do crazy stuff at underwriting like treating your credit card limit as credit card debt.

Average returns are NOT 10%, you’re just making that up.

And as for your CGT point, again it’s at best misguided. Investment returns come in a number of forms, capital gains, dividends, etc. Platforms like De Giro don’t allow people to buy US ETFs because they don’t comply with EU rules around documentation. So investors can’t access diversified ETFs unless they’re in the EU, in which case they’re taxed as funds at 41% with no scope to use the €1,270 annual exemption. So the investor can always buy single stocks and blow themselves up as stockpickers tend to do.

Equally, you seem blissfully unaware of the restrictions around overpayments for people on fixed rates; 1% with AvantCard as outlined above. 10% with Ulster Bank who I’m with. Hence, my steps as my income rose were to save €50k in cash first, then to lob €23k a year into my pension, then to repay 10% of the mortgage each year, and only then to invest any surplus in my own name.

As I said at the outset, you have no idea what you’re talking about.

2lazytogetup

A Tyrant Named Miltiades! wrote: »

Well that's a bit like asking your local newsagent why he doesn't simply become a major retailer, and take on the big boys.

It's true that profit margins are tighter in retail banks, but they have high volumes, and this is where their skills lie. They also generate income from banking fees, personal/business lending, and other lines of credit. It's a type of banking that requires low levels of skill to manage risk — much of the work is done for them the likes of the ECB.

Having said that, it's no surprise that we do, indeed, have more investment banks operating here than retail banks. Retail banks have been deserting the Irish mortgage market precisely because of low returns, and (perhaps more specifically) a risk of deteriorating returns, because of their almost unique exposure to non performing mortgages. That's a whole other debate.

But the short answer is, they have built their reputation — or what is left of one— in retail banking. It would be a bizarre and mammoth operation to leave that behind and morph into an investment bank. Better to be a big fish in a small pond than a minnow who tries to run with the sharks, to absolutely stretch an analogy!

No don't mean a retail bank become an investment bank. If investments are guaranteed 10 percent. Why would a mortgage provider give you money at 3 per cent when they can go to a investment bank as a customer and get a "guaranteed" 10 percent

2lazytogetup

A Tyrant Named Miltiades! wrote: »

Well that's a bit like asking your local newsagent why he doesn't simply become a major retailer, and take on the big boys.

It's true that profit margins are tighter in retail banks, but they have high volumes, and this is where their skills lie. They also generate income from banking fees, personal/business lending, and other lines of credit. It's a type of banking that requires low levels of skill to manage risk — much of the work is done for them the likes of the ECB.

Having said that, it's no surprise that we do, indeed, have more investment banks operating here than retail banks. Retail banks have been deserting the Irish mortgage market precisely because of low returns, and (perhaps more specifically) a risk of deteriorating returns, because of their almost unique exposure to non performing mortgages. That's a whole other debate.

But the short answer is, they have built their reputation — or what is left of one— in retail banking. It would be a bizarre and mammoth operation to leave that behind and morph into an investment bank. Better to be a big fish in a small pond than a minnow who tries to run with the sharks, to absolutely stretch an analogy!

To use you example, why would a local newsagent sell me a paper for 2 euro when a large institution will buy them for 3 euro

2lazytogetup

dotsman wrote: »

If that is your understanding, then you probably are better of overpaying your mortgage! Or, better yet, I would advise you to get a responsible adult to manage your money for you

SPDR S&P 500 (one of the more popular ETFs) Historic Performance

You sound like a taxi driver in 2005 patronisingly saying I should be buying gaffs in Bulgaria and releasing equity from my house. It was that ignorance that has the country where it is

The J Stands for Jay

Louis Friend wrote: »

This is nonsensical.

Repaying mortgage debt at a rate of 3% is like getting a GUARANTEED return of 6-7% on a personally-held investment account.

Tax arises at rates of 33%, 41%, and 52-55%.

Plus it costs money to invest in terms of management fees and transaction charges.

And returns aren’t guaranteed; there is the potential to lose money.

So behind Door A is a guaranteed return of 6-7%, and behind Door B is a potential return or loss; I know which one I’d choose and advise people to choose.

My own approach is simple:

1) Build a cash reserve equal to 6 months’ expenditure
2) Maximise my pension contributions
3) Maximise my mortgage overpayments
4) Invest personal cash

You need to run your numbers again.

To overpay a mortgage by €1,000 you need to earn €2,222 gross. Taking my mortgage rate of 2.6%, you'll have made €26 in a year.

For an investment, assuming a return of 8% (well below the average of 10% to allow for any charges) gives a profit of €80. After CGT, that becomes €54, well ahead of the overpayment return. We can assume an investment in Berkshire Hathaway, so no dividends are paid, and no ETF issues.

For a pension investment, €2,222 gross gives an initial investment of €1,978. Add on 8% growth and you're at €2,136.

The mortgage overpayment is not looking like a great investment.

The J Stands for Jay

lawred2 wrote: »

I thought employer contributions didn't count towards the pension limit?

They only count on a PRSA.

Louis Friend

McGaggs wrote: »

You need to run your numbers again.

To overpay a mortgage by €1,000 you need to earn €2,222 gross. Taking my mortgage rate of 2.6%, you'll have made €26 in a year.

For an investment, assuming a return of 8% (well below the average of 10% to allow for any charges) gives a profit of €80. After CGT, that becomes €54, well ahead of the overpayment return. We can assume an investment in Berkshire Hathaway, so no dividends are paid, and no ETF issues.

For a pension investment, €2,222 gross gives an initial investment of €1,978. Add on 8% growth and you're at €2,136.

The mortgage overpayment is not looking like a great investment.

See the way pension investment is ahead of mortgage overpayment in my post?

And I’d love to see that average return of 10% a year…

And you’ve almost hit on the nub of the argument…one typically has to earn over €2,000 to make a €1,000 mortgage repayment.

So avoiding 3% interest is like a >6% return.

The J Stands for Jay

Louis Friend wrote: »

See the way pension investment is ahead of mortgage overpayment in my post?

And I’d love to see that average return of 10% a year…

And you’ve almost hit on the nub of the argument…one typically has to earn over €2,000 to make a €1,000 mortgage repayment.

So avoiding 3% interest is like a >6% return.

https://www.nerdwallet.com/article/investing/average-stock-market-return

Louis Friend

McGaggs wrote: »

https://www.nerdwallet.com/article/investing/average-stock-market-return

That’s the S&P and we don’t live in the US.

Plus there have been prolonged periods where it wasn’t that.

Eircom_Sucks

Borrowed €305k on my own in May 2007 , had €60k savings at the time , house was 345k plus 16k stamp

€975 a month on a tracker

21 years left and im 40

The J Stands for Jay

Louis Friend wrote: »

That’s the S&P and we don’t live in the US.

Plus there have been prolonged periods where it wasn’t that.

What has where you live got to do with your investments? That's the kind of logic that leads to 100% of your pension fund being in Irish equities, overweight on banks, and wondering why your returns are poor.

Louis Friend

McGaggs wrote: »

What has where you live got to do with your investments? That's the kind of logic that leads to 100% of your pension fund being in Irish equities, overweight on banks, and wondering why your returns are poor.

Are those returns in USD or EUR?

I think my investments are fine, thanks.

2lazytogetup

2lazytogetup wrote: »

To use you example, why would a local newsagent sell me a paper for 2 euro when a large institution will buy them for 3 euro

No, it's more like why are they selling newspapers when they could sell vintage wines?
Because they don't have the expertise or the client base for that activity on the same scale as their retail operations. Their clients want newspapers — well, lets switch back to banking – clients want mortgages and retail-banking services – and importantly, owners are confident to hold, or buy, shares as long as the company does what it's good at.

Those owners include the Government of Ireland. The other owners are a relatively small number of shareholders – 200 shareholders own 90% of BoI. They're not going to keep their money in a bank that drops its main source of income.

Irish retail banks get involved in corporate and investment activities to an extent they can, for example they own a lot of Irish Government debt, hold derivatives to protect themselves from interest and exchange rate fluctuations, and they do a certain amount of other investment activity for semi-state companies like the ESB or maybe RTE. But just don't have a competitive advantage, so they don't have major investor clients.

They're doing quite well with what they know. Bank of Ireland last reported pre-tax profits of €700-odd million euro. When you consider that Britain's biggest retail bank (Lloyds) has pre-tax profits of about £1bn, it's impressive in a world where retail banking is coming under greater and greater stress.

EmmetSpiceland

lawred2 wrote: »

I thought employer contributions didn't count towards the pension limit?

They don’t.

McGaggs wrote: »

They only count on a PRSA.

A PRSA is a personal arrangement so whatever goes into it is deemed to be an “employee” contribution.

Cyrus

EmmetSpiceland wrote: »

They don’t.



A PRSA is a personal arrangement so whatever goes into it is deemed to be an “employee” contribution.

There are plenty of smaller company pensions set up as prsa rather than occupational schemes. In that case employers contributions do count towards your threshold.

Cyrus

McGaggs wrote: »

You need to run your numbers again.

To overpay a mortgage by €1,000 you need to earn €2,222 gross. Taking my mortgage rate of 2.6%, you'll have made €26 in a year.

For an investment, assuming a return of 8% (well below the average of 10% to allow for any charges) gives a profit of €80. After CGT, that becomes €54, well ahead of the overpayment return. We can assume an investment in Berkshire Hathaway, so no dividends are paid, and no ETF issues.

For a pension investment, €2,222 gross gives an initial investment of €1,978. Add on 8% growth and you're at €2,136.

The mortgage overpayment is not looking like a great investment.

The moral of the story investing in your pension up to your max threshold is the most lucrative thing to do but being mortgage free in your 40s is appealing from a lifestyle perspective.

dotsman

Louis Friend wrote: »

You literally have no idea what you’re talking about.

I'm sorry you are getting very upset. And don't worry, nobody is expecting you to apologise or correct your extremely misleading figures.

Louis Friend wrote: »

https://www.google.ie/amp/s/www.irishtimes.com/business/economy/irish-mortgage-rates-remain-stubbornly-high-new-figures-show-1.4531009%3fmode=amp

The average variable rate for a new mortgage is currently 3.41%. The average fixed rate is 2.65%. The average blended rate is 2.78%.

dotsman wrote: »

Firstly, mortgage interest rates are below 3%

Louis Friend wrote: »

Repaying mortgage debt at a rate of 3%

You have just proven my point, thank you. Oh, and by the way, those figures are for new mortgages. Most people's mortgages will be cheaper (lower LTV's and trackers etc).

Louis Friend wrote: »

Avant only allow overpayments of 1%, their maximum LTV for the 1.95% rate is 60%, they’ll only lend to people in cities, and they do crazy stuff at underwriting like treating your credit card limit as credit card debt.

Not sure what the relevance of this is?

Louis Friend wrote: »

Average returns are NOT 10%, you’re just making that up.

OK, this is just beginning to get silly. If you even read my posts, you clearly see the evidence. S&P 500 has returned an average of 10.37% since 1994. This includes the Dot Bomb, Enron, 9/11, 2008 Financial Crisis and Covid Pandemic.

dotsman wrote: »

SPDR S&P 500 (one of the more popular ETFs) Historic Performance

And here is another example of the S&P 500 returning an average of ~12.2% between 1986 and 2019.

And, you can of course, just quickly google it yourself. It doesn't matter whether yo are looking at the Dow Jones, S&P 500, Nasdaq etc, over any lengthy period (>10 years), you will typically see returns ~ 10%.

But please, please, please, do not apologise for accusing me of "making it up".

Louis Friend wrote: »

And as for your CGT point, again it’s at best misguided. Investment returns come in a number of forms, capital gains, dividends, etc. Platforms like De Giro don’t allow people to buy US ETFs because they don’t comply with EU rules around documentation. So investors can’t access diversified ETFs unless they’re in the EU, in which case they’re taxed as funds at 41% with no scope to use the €1,270 annual exemption.

How was it misguided? Was I incorrect to state that CGT is 33%? Or that the annual exemption is €1,270? I was simply stating that the figures you were using were absolute BS which is clear, and even shown to be so by your contradictory post above!

~99% of the profits from a diversified stock portfolio will be taxed at 33% (with the first €1,270 tax-free). The ~1% of profit from the dividends is treated as income, so taxed at whatever they normally pay.

Louis Friend wrote: »

So the investor can always buy single stocks and blow themselves up as stockpickers tend to do.

Not sure what this even means?

Louis Friend wrote: »

Equally, you seem blissfully unaware of the restrictions around overpayments for people on fixed rates; 1% with AvantCard as outlined above. 10% with Ulster Bank who I’m with.

Nope, I'm perfectly aware thank you. But, are you aware, as someone who seems to think that overpaying your mortgage is such an amazing financial decision, that you can make lump repayments when the fixed period expires? I mean, it's not like you are fixing for the life of the mortgage.

Louis Friend wrote: »

As I said at the outset, you have no idea what you’re talking about.

Yes, and it was very rude, and very wrong.

But you are clearly upset and not thinking straight, so I'll let it slide.

Louis Friend

“99% of the profits from a diversified stock portfolio will be taxed at 33%”

Right…

And you’re implying that stock portfolios only go one way. Just because 1994 until now was a decent period it doesn’t mean that the next 27 years will be similar.

EmmetSpiceland

Cyrus wrote: »

There are plenty of smaller company pensions set up as prsa rather than occupational schemes. In that case employers contributions do count towards your threshold.

If it’s an “occupational” scheme then any money the employer puts in, on your behalf, has no effect on, your own, personal limits.

If the company is paying you an additional amount intended for your own “arrangement” then that will be paid across, by you, into the pension and will be considered an “employee” contribution.

No “employer” contribution affects your own, personal limits. How could they?

dotsman

Louis Friend wrote: »

“99% of the profits from a diversified stock portfolio will be taxed at 33%”

Right…

And you’re implying that stock portfolios only go one way. Just because 1994 until now was a decent period it doesn’t mean that the next 27 years will be similar.

I'm afraid I really can't help you at this stage.

barney shamrock

Once the bickering starts in an otherwise interesting thread, I lose interest very quickly.