Low interest rates mean many Irish people can accelerate repayments and pay off their mortgage early.
But is this the best use of your cash? Or could you make more money by investing?
Moneycube examines the options.
Firstly – well done. If you’re in a position to consider overpaying your house loan, you’re almost certainly doing the right thing with your finances.
The only question is how to get the most out of that extra cash.
Option 1: repaying the mortgage early
Some basic maths will help. Recent data shows the average new mortgage interest rate in Ireland is 3.35%.
Overpaying €250 per month on a €200,000 mortgage would save you a whopping €18,842 in mortgage interest.
On top of that, you would pay off your mortgage 4 years and 8 months early. (Calcs based on a mortgage with 20 years to go and a rate of 3.35%).
Is it possible to beat this? Certainly not in a savings account, where bank interest rates remain derisory.
Option 2: investment funds
Investment funds offer a solid alternative. That’s because over time, fund growth has outstripped the interest rate charged on almost all mortgages.
Investing €250 per month into a diversified investment fund for 15 years could generate a substantial sum.
For example, Zurich Life’s Prisma 4 fund has generated an annualised return of 7.8% since its launch in 2013.
If you placed your money into Prisma 4 via Moneycube, then, assuming this rate of return into the future, you would have an investment account of over €63,000 in 15 years’ time. (Calcs based on 7.8% return to 31 October 2017 and current rates of tax).
Contributing the equivalent cash to your pension fund could be an even better option. Most mortgage holders can claim income tax relief on these pension contributions.
If you’re a higher-rate taxpayer, every €250 you save turns into €417 – and that’s before any investment growth! Your pension pot could increase by around €130,000.
Moneycube can help you put this into action.
How can I decide what’s right for me?
Here are questions to ask yourself if you’re considering paying your mortgage early:
- What interest am I paying right now? If you have a tracker mortgage, the cost of your housing loan might be very low. In that case, investing is an even more attractive option.
- Does my bank allow overpayments? Check first – you could be hit with an early repayment charge if you make an overpayment.
- Have I got expensive debt? Assuming you are not in mortgage arrears, it is almost always wise to pay down debt like overdrafts and credit cards first, as the interest rate will be a lot higher than your mortgage.
- Have I got an emergency fund? A stash of cash is always worth having.
- Have I covered my bases? Being mortgage-free is not the only financial goal in life. If you have extra cash, consider your wider financial position, including pensions, investments to life assurance.
Still unsure? Talk to us.
Action is good
Above all, remember that doing something is better than nothing. Whether you choose to pay down your mortgage early, or to invest, you’re doing the right thing by taking charge of your money.
Get started with Moneycube today.