Where to Put a Lump Sum?

RichardAnd

Hi lads,

I've recently bought my first home. For the house, I paid 300k, but the mortgage is only 175, with the remainder coming from cash assets. I have about 35k let in cash in the bank. I'm on a fixed term mortgage for the next four years, so I would incur penalties if I were to pay off a lump sum early. Thus, I was planning on saving about 1200-1700 a month for the next four years and then making a large lump payment when the fixed term ends.

My question is what I could do with the money that I am saving. It seems bonkers to simply leave it in a current account as there is virtually no interest to be had. I did look at bonds or fixed term deposits, but none of these offer very much. Certainly, I could invest it, but my track record with investing is not great, and I would fear losing my money.

Does anyone know of some guaranteed deposit accounts that offer a higher rate of interest, or any other "safe" investment opportunities that may exist?

Thanks.

Seve OB

government bonds might be about the best option for something safe?

dxhound2005

All the best rates for deposit type accounts are kept up to date on the Ask About Money site.

https://www.askaboutmoney.com/threads/savings-best-buys.90481/

Treppen

Consider extra pension payments for the tax relief!

RichardAnd

Thanks for the replies, lads. No one suggested Bitcoin, however :D

DirectorKrennic

Hi Richard, would you consider slowly dripping those funds into the stock market? You can buy index funds such as the S&P500, or the Dow Jones, or MSCI World. I personally would invest a very small amount each month into something like that but it is a risk obviously. Good luck with your choice!

RichardAnd

https://www.boards.ie/discussion/comment/120243066#Comment_120243066

Hi,

That's a good suggestion. Would you know where to go to purchase such a fund?

DirectorKrennic

Hi Richard,

I use Degiro - they are an online stockbroker in the Netherlands but have clients all over Europe. You can place one ETF trade for free once a month. 1 unit in one of the S&P 500 funds is like E80, so I just invest E80 a month (free of charge). Just one warning: ETF's in Ireland are subject to a 42% surcharge tax every 8 years but your timeline seems to be 4 years. You could also buy some shares in Warren Buffet's company Berkshire Hathaway, that's basically 40% Apple, 10% Coca Cola, 10% Chevron and some American Express and Bank of America. I've personally bought shares in LVMH (the Louis Vutton Group) and an American company called Ulta Beauty (a make up and consumer beauty cosmetics company). Markets obviously go up and down, and sideways, so personally I would only drip in your funds slowly. Finance advisors in this country don't really know what they are doing to be honest, just my opinion.

Another alternative would be you lend your money in crowdfunding ventures. Property Bridges allow you to lend in units of E500 for 6-9% returns although I have never done this. I did used to lend money on LinkedFinance to Irish companies, put in about 1500 in 2016 and got back 2000 by 2021 - the only problem is, everyone has copped onto it so I can't lend money there anymore. I haven't set up autoloan so when I log in most companies are fully funded very soon. Best of luck with the research but fairplay not just putting in a bank account, inflation will erode its value!

RichardAnd

https://www.boards.ie/discussion/comment/120243143#Comment_120243143

Thank you for this!

dxhound2005

Just in case you read that advice to mean there will be no tax if you sell them before 8 years:

• When/If you sell an ETF you will be liable for 41% income tax on any gains made. It doesn’t matter if you keep the money with your brokerage, you still need to pay the tax on the gains.
• If you don’t sell your ETF – then every 8 years you will be “deemed” to have sold it and will be liable for tax at 41% on any gains in the preceding 8 years. This means you will have to find the funds to pay the tax even if you haven’t sold them.

DirectorKrennic

Thanks for adding! Good to see a discussion on investment options!

tom1ie

https://www.boards.ie/discussion/comment/120243480#Comment_120243480

So with this in mind- how does it make any sense investing in stocks in Ireland?

Patches oHoulihan

I just put money with younited.com

3.25% aer

Check raisin.ie

Shank Williams

https://www.boards.ie/discussion/comment/120245727#Comment_120245727

It doesnt

tom1ie

https://www.boards.ie/discussion/comment/120245796#Comment_120245796

Yeah thought that just checking. So where does one invest in Ireland? The dreaded property?

Padre_Pio

It would be worth checking the break fees on your mortgage.

I'm no expert, but I believe the recent interest rate rises play into your favour. It might not cost you anything to pay off a lump sum on your fixed rate

https://www.boards.ie/discussion/comment/120245898#Comment_120245898

This is correct. I done this very thing a few weeks ago. Repayments remain as is, term end date reduced. No fees applied.

dxhound2005

https://www.boards.ie/discussion/comment/120245727#Comment_120245727

It's 41% of the profits. You get to keep 59%.

CPTM

There are a few banks that allow some overpayment on mortgage debt even though you are on a fixed rate. It could be 10 per cent of the remaining balance per year. It is worth checking with your bank. As far as I know, Permanent TSB are the only ones who don't officially offer that 10 per cent over payment allowance, though from speaking with both employees there and also Boardsies here, they in fact don't care if you over pay on your fixed rate mortgage and don't penalise for it either. If you wanted, you could name your bank and see if anyone here can point you to the rules on that.

dxhound2005

This is a calculator for paying extra on mortgages. One of the most sensible things to do if it is available. It often makes more sense to reduce outgoings, than chasing high returns on investments.

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

tom1ie

https://www.boards.ie/discussion/comment/120245929#Comment_120245929

Yeah true, but you’ve already paid nearly 50% tax on what you earned to be able to invest the money left after the initial tax- same with everything I suppose, but 41% is still high imo.

It probably makes more sense to overpay your mortgage and lower your debt as opposed to investing.

tom1ie

https://www.boards.ie/discussion/comment/120245933#Comment_120245933

Avant allow you to overpay 10% on your mortgage.

dxhound2005

https://www.boards.ie/discussion/comment/120246033#Comment_120246033

The effective tax rate on wages is nowhere near 50%. And not everyone investing in stocks will be using earned money.

https://www.boards.ie/discussion/comment/120245727#Comment_120245727

Those taxes apply to ETFs, not single stocks

tom1ie

https://www.boards.ie/discussion/comment/120246113#Comment_120246113

Oh ok.

What’s the effective tax rate?

If people don’t use earned money- what do people use? Loans?

tom1ie

https://www.boards.ie/discussion/comment/120246250#Comment_120246250

So what’s the tax on single stocks?

dxhound2005

https://www.boards.ie/discussion/comment/120246264#Comment_120246264

People could get a family inheritance tax free, or a Lotto win also tax free. There are different calculations for the effective tax rate. You could work out your own from your P60 figures.

https://www.socialjustice.ie/article/effective-tax-rates-after-budget-2022-and-why-ireland-remains-low-tax-country

In my own view, I would prefer if someone making a killing on Crypto pays more tax than a PAYE worker.

daheff

https://www.boards.ie/discussion/comment/120246033#Comment_120246033

Sorry but I have to disagree with you on this.

It only makes sense to overpay your mortgage if it's on a really high rate.

Once you've paid the money back to the bank you can't get it back without remortgaging. What if you need that money for an unexpected expense?

Say your mortgage was ~3%. If you earn interest you pay 33% dirt. Roughly speaking you need interest to be ~4% to earn enough net of tax to be in the same position. If your mortgage rate is lower that interest rate doesn't need to be as high.

Work the numbers before deciding to early repay or or invest.

Or find a decent company that pays a good (rising) dividend. Dividends are taxed at marginal rate.

tom1ie

https://www.boards.ie/discussion/comment/120246406#Comment_120246406

If you overpay your mortgage you reduce your monthly payments also.

If your mortgage is 3% and you have spare cash, and you use that spare cash to overpay, you are getting a rate of 3% on that cash you have used to overpay.

I don’t think there are any savings schemes that give a return like that at the minute.

Also if you invest, the risk is higher as you could lose your capital if stocks plummet etc.

Im no expert though so I like to hear other peoples view- I just think the idea of getting out of debt and having your mortgage paid off early with no risk- vs high risk in investments looks better- but again just my opinion.

CPTM

https://www.boards.ie/discussion/comment/120246406#Comment_120246406

You might agree though that there are other considerations away from just maximising the total money earned in life before you die? For example, I've opted to overpay my mortgage because the value of being debt free and having an extra 1200 per month to spend while my children are young is worth way more to me than having say 30 per cent more money during retirement when I probably won't need a lot of money to enjoy life at that stage.

I would also argue that if you over pay on your mortgage, and a random massive payment is required elsewhere, you can take a holiday on mortgage repayments and borrow a small loan if needs be. Higher interest rate sure, but it probably won't happen and if it does the balance of the small loan probably won't really be impacted by an interest rate which is 3 or 4 percentage points higher.

Padre_Pio

https://www.boards.ie/discussion/comment/120246493#Comment_120246493

I calculated that if I put 10k into my mortgage now, it would save me 13k in interest payments and knock 1.5 years off my term.

The same 10k would take 17 years at a 5% interest rate to reach the same level of savings.

I think it makes more sense to put the money into an index fund, but my mortgage interest rate is 2.5%. If it was something like 4%, then I'd put the 10k towards the mortgage.

Hibernicis

https://www.boards.ie/discussion/comment/120246543#Comment_120246543

CPTM I think you are on to a good thing here. This is my experience:

My mortgage started at 8% give or take. In the first few years the rate dropped 7%, 6%, 5%, 4%. I never decreased my monthly repayments. I also threw in the benefit of a few income tax reductions and pay increases over the years. The impact of all of these overpayments was significant - remember that overpayments go 100% against the principal and have a compound effect on interest due in future years. Net result was that in year 11 (of a 20 year mortgage) I was able to use a small inheritance to pay off the mortgage balance. I won't pretend that it was all easy, or that there weren't some sacrifices. But I will never forget the day I drove into the bank and collected the deeds which were now 100% mine, nine years ahead of schedule. At that moment the sacrifices over the years seemed very very insignificant and definitely worthwhile.

Financial savings apart, the big positive for me was some years later when I had an "annus horribilis". The circumstances aren't relevant, but the relief of being able to make some pretty major decisions without having a mortgage around my neck saved me. Yes I had forgone a few fancy holidays, and kept a couple of cars a year or two longer than the neighbours, but the simple gesture of being able to turn MY key on the inside of the front door of MY house when all outside looked bleak was powerfully positive. I've never regretted overpaying, not once.

Fieldsman

Richard if I were in your shoes I'd contact Credebt Exchange

https://www.boards.ie/discussion/comment/120246317#Comment_120246317

Capital gains tax of 33% with no deemed disposal rules

AndrewJRenko

https://www.boards.ie/discussion/comment/120246993#Comment_120246993

And same for most shared funds, non ETF funds, which are another option for the OP.

daheff

https://www.boards.ie/discussion/comment/120246543#Comment_120246543

its not just about maximising money earned. its about using it wisely.

My point on a random unexpected expense -what if you lose your job and thats why you need the money. you won't be able to borrow anything in that situation. maybe you could have lived on savings for a while until you get a new job.

also to your point on spending money on children....you are only really moving the deckchairs around. pay out of savings or pay out of current income.

My point still stands that using a lump sum to pay off debt isn't necessarily the 'no brainer' option. You need to look at the figures. I get a lot of people prefer not to have the debt hanging around their neck, but if they use their money wisely they can get rid of it cheaper & quicker than just using spare cash to pay off a loan.