Do you overpay your mortgage?

KaneToad · 01-05-2021 11:19pm

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 · 01-05-2021 11:23pm

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 · 01-05-2021 11:25pm

jester77 wrote: »

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

That's not a guarantee.

Amirani · 01-05-2021 11:26pm

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 · 01-05-2021 11:29pm

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 · 01-05-2021 11:35pm

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 · 01-05-2021 11:38pm

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 · 02-05-2021 12:04am

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 · 02-05-2021 9:45am

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 · 02-05-2021 9:47am

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 · 02-05-2021 9:49am

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 · 02-05-2021 9:53am

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 · 02-05-2021 10:21am

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 · 02-05-2021 11:13am

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 · 02-05-2021 11:20am

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 · 02-05-2021 7:11pm

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 · 02-05-2021 7:29pm

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 · 02-05-2021 7:30pm

Overpay the maximum 10% as per the terms

BailMeOut · 02-05-2021 7:48pm

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 · 02-05-2021 7:50pm

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?

StupidLikeAFox · 03-05-2021 1:48am

Tell me if I have my maths correct here.

I went to AIB mortgage calculator and calculated that if you have a mortgage worth 200,000e, with 30 years left at 3%, and overpayed by 200e per month, by the end of the mortgage you have saved e30,815.30

Then I used an s&p calculator with a conservative 6% rate of return (the average is 8%) that came back with this: Investing an initial amount of e0.00 with regular contributions of e200.00 per month could be worth e195,851.18 after 30 years if the annual rate of return was 6.00%.

Even if the rate is 3% for the investment, the return over 30 years is e116,028.02 because of compounding. Even after tax you should be way up?

2lazytogetup · 03-05-2021 7:31am

If investments were always guaranteed to outperform mortgage rate, why would banks loan to you at 3%, when they can invest in etfs etc and "guarantee" themselves 10%

fits · 03-05-2021 7:36am

I thought about overpaying and then I remembered we have two young children in full time childcare, a good ltv, and our house isn’t finished yet. So I’ll hold off until the house is finished at least as we are doing that as we save.

handlemaster · 03-05-2021 7:39am

Paying lumps off your mortgage is a great idea if you have a high interest rate mortgage, i.e. variable or fixed rate mortgage in Ireland. Its less interesting when you have a tracker on a low interest rate. I would however think people should also be looking at other investment alternatives such as stocks directly and people should not be putting eg into their mortgage if it means they do not have a buffer to fall back on if they lose their one source of income. Perhaps an investment on some side hussle would be more meaningful in the long term as a long term mortgage rate will always be cheaper than a personal loan to start a side project to boost your income.

Purgative · 03-05-2021 7:39am

Don't have a mortgage now - that feels great.

When I did, I always overpaid. That kept us out of negative equity in the 90s. We had bought in 85 on a new estate, when we sold in 94/5 we were the only one that could sell, at that time.

So yeah I think its a good idea.

2lazytogetup · 03-05-2021 7:40am

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

Wanderer78 · 03-05-2021 7:47am

2lazytogetup wrote:

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

Will the ecb raise rates , as I suspect it would crash a couple of economies?

GingerLily · 03-05-2021 8:01am

The poll only has one option for mortgage holders who don't over pay - which assumes you pocket any extra cash and not have a prudent reason not to overpay.

It definitely feels like a sneer to me.

I've not had spare cash to over pay as well as being on a fixed rate.

I went literally straight from a wedding to a mortgage, to a honeymoon, home renovations, car and now savings for maternity leave.

Ideally I'll overpay when we finish our fixed rate and we'll renegotiate our payment (split between fixed and variable), but hard to know as its a bit down the line now and I'd prefer knowing we have rainy day money to hand right now if we need it, I've too many responsibilities today that I need to make sure are covered.

Happyhouse22 · 03-05-2021 8:06am

StupidLikeAFox wrote: »

Tell me if I have my maths correct here.

I went to AIB mortgage calculator and calculated that if you have a mortgage worth 200,000e, with 30 years left at 3%, and overpayed by 200e per month, by the end of the mortgage you have saved e30,815.30

Then I used an s&p calculator with a conservative 6% rate of return (the average is 8%) that came back with this: Investing an initial amount of e0.00 with regular contributions of e200.00 per month could be worth e195,851.18 after 30 years if the annual rate of return was 6.00%.

Even if the rate is 3% for the investment, the return over 30 years is e116,028.02 because of compounding. Even after tax you should be way up?

Very interesting, didn’t realize the difference would be so much. Would be great to see the comparison with fees and taxes taken into consideration, I suspect investing is still the “correct” option but think it would be much closer.

Looking online general advice about investing in the S&P 500 suggests an ETF, however purchasing ETF’s in Ireland is not straightforward and the deemed disposal tax (at 41% of gains) every 8 years will really eat into your compound interest.Also the complicated nature of the tax means that if you are investing 200 per month you would probably need to hire an accountant to do your returns as gains will need to be calculated monthly after the 8 year period.

Alternatively in Ireland people purchase managed funds which aim to track the S&P 500, these helpfully avoid deemed disposal but haves fees which can really eat into annual returns. In addition you will pay capital gains tax at 33% at the end which while better than 41% is still quite a bit.

Wanderer78 · 03-05-2021 8:06am

GingerLily wrote:

The poll only has one option for mortgage holders who don't over pay - which assumes you pocket any extra cash and not have a prudent reason not to overpay.

I suspect few have the option to over pay, as many younger mortgage payers would have paid inflated prices compared to older payers, there's also increased precariousness of employment to contend with

Happyhouse22 · 03-05-2021 8:10am

https://www.reddit.com/r/irishpersonalfinance/comments/muzkq6/calculating_the_impact_of_deemed_disposal_and_the/gwr7gmu/?context=3

This is an interesting thread showing effect of taxation in investing:g in Ireland.

lawred2 · 03-05-2021 8:14am

Happyhouse22 wrote: »

https://www.reddit.com/r/irishpersonalfinance/comments/muzkq6/calculating_the_impact_of_deemed_disposal_and_the/gwr7gmu/?context=3

This is an interesting thread showing effect of taxation in investing:g in Ireland.

Makes for grim reading... Difference between here and the UK is staggering.

Cyrus · 03-05-2021 8:18am

BailMeOut wrote: »

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.

Are you factoring cgt or exit taxes in as well I.e. are the gains gross or net ?

Bobeagleburger · 03-05-2021 8:24am

Happyhouse22 wrote: »

https://www.reddit.com/r/irishpersonalfinance/comments/muzkq6/calculating_the_impact_of_deemed_disposal_and_the/gwr7gmu/?context=3

This is an interesting thread showing effect of taxation in investing:g in Ireland.

and yet people pile money into ETFs..

Paying off mortgage early and maxing pension contributions are the way to go. That strategy will build wealth.

Regarding investing after that, Investment Trusts > ETFs. They'll be attract CGT rather than the deemed disposal and 41% tax mess.

Happyhouse22 · 03-05-2021 8:29am

6 wrote: »

and yet people pile money into ETFs..

Paying off mortgage early and maxing pension contributions are the way to go. That strategy will build wealth.

Regarding investing after that, Investment Trusts > ETFs. They'll be attract CGT rather than the deemed disposal and 41% tax mess.

I have actually being looking at Investment Trusts recently, however they seem to hav been removed from Degiro for now so have to decide if it’s worth opening an account elsewhere...

Bobeagleburger · 03-05-2021 8:43am

Happyhouse22 wrote: »

I have actually being looking at Investment Trusts recently, however they seem to hav been removed from Degiro for now so have to decide if it’s worth opening an account elsewhere...

Not all as far as I know.

By the way, the folks over at Askaboutmoney are usually very clued in on the type of OP question,and anything related.

03-05-2021 9:47am

2lazytogetup wrote: »

If investments were always guaranteed to outperform mortgage rate, why would banks loan to you at 3%, when they can invest in etfs etc and "guarantee" themselves 10%

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!

KevinK · 03-05-2021 10:14am

6 wrote: »

Not all as far as I know.

By the way, the folks over at Askaboutmoney are usually very clued in on the type of OP question,and anything related.

I don't see any on there now - have looked for Scottish Mortgages and a few others

The J Stands for Jay · 03-05-2021 10:53am

lawred2 wrote: »

Makes for grim reading... Difference between here and the UK is staggering.

UK decided to get money from the people by selling them shares in privatised industry. Our shower decided to cream off the gains on others investments. Less work to get the tax money on their part.

starbaby2003 · 03-05-2021 11:05am

[Deleted User] wrote: »

This is the most important post in the thread

Why do people say this. Your pension is a risk unless you invest in cash only bonds. Paying down on an asset is much less risky. Outside of the tax benefit I don’t see the obsession with prioritising a pension contribution over a mortgage. Especially so, if you are on the lower tax bracket.

lawred2 · 03-05-2021 11:07am

starbaby2003 wrote: »

Why do people say this. Your pension is a risk unless you invest in cash only bonds. Paying down on an asset is much less risky. Outside of the tax benefit I don’t see the obsession with prioritising a pension contribution over a mortgage. Especially so, if you are on the lower tax bracket.

Why is this an either/or?

The Mighty Quinn · 03-05-2021 11:31am

lawred2 wrote: »

Why is this an either/or?

Exactly.

I both contribute to private pension and over pay mortgage.

The J Stands for Jay · 03-05-2021 11:37am

The rational decision is to invest and not overpay the mortgage (assuming appropriate emergency funds are in place). But people are not rational. It still makes sense to pay down your mortgage for the peace of mind it might bring (again assuming emergency funds are in place).

There's room for investing and paying a mortgage. A fair chunk of the funds for my deposit when trading up came from investment gains.

SteM · 03-05-2021 12:40pm

I think many people believe that they need a large lump sum to invest and that could be lost whereas they see a tangible benefit to paying off a mortgage early. I'd never laugh at someone overpaying their mortgage over investing, at least they're not wasting their spare money.

AndyBoBandy · 03-05-2021 12:51pm

We're paying it down early (term will end up at 10 years as opposed to the 20 year term we took), because we are both in well paying jobs now, but don't want to be doing the same job in 5-10 yers, as they are quite stressful jobs..... So being mortgage free will allow us to take the foot off the gas, and not be so hung up about earning good money.....

We are also doing various home improvements to reduce our overall bills (Driving an EV, Solar PV, Heat Pump, etc.....) while the sun shines...

By overpaying the mortgage and bringing it from 20 down to 10 years, we're saving €50k in interest, which is what the EV cost us, so were looking at that as the result/reward for paying off the mortgage early... and with driving an EV, we are now saving around €2,500 a year on tax/diesel...

03-05-2021 1:01pm

AndyBoBandy wrote: »

By overpaying the mortgage and bringing it from 20 down to 10 years, we're saving €50k in interest, which is what the EV cost us, so were looking at that as teh result/reward for paying off the mortgage early... and with driving an EV, we are now saving around €2,500 a year on tax/diesel...

I assume you bought that vehicle outright, and not with a car loan.

I can understand people not wanting to invest in a pension when they have a mortgage, if they are uncertain about the future. But I wonder how many people here are paying down their mortgages while paying perhaps twice the rate on a car loan, or are using credit cards to pay bills.

Louis Friend · 03-05-2021 1:35pm

McGaggs wrote: »

The rational decision is to invest and not overpay the mortgage (assuming appropriate emergency funds are in place). But people are not rational. It still makes sense to pay down your mortgage for the peace of mind it might bring (again assuming emergency funds are in place).

There's room for investing and paying a mortgage. A fair chunk of the funds for my deposit when trading up came from investment gains.

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

lawred2 · 03-05-2021 1:42pm

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

Almost identical to our own but we're happy enough with a 3 month cash pile

PHG · 03-05-2021 1:50pm

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

Agree with this.

We just bought and will move in in June. Our emergency fund will be down to about 2/3 months, which makes us nervous. This is because here you have to put down 15%. We are building a bigger emergency fund, which will take us about 9 months (due to having to buy stuff), then plan to overpay an average of about 1200/1500 per month. We live abroad atm so our average rate is 1.11% so want to take as much advantage of that now for when we sell and come home.

We could only get a 50year mortgage here as its not common to pay your mortgage off like at home. However, we can pay it down and haev budgeted to pay it like a 15-20 year.

03-05-2021 2:16pm

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.

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.

Do you overpay your mortgage?

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