Q My husband and I jointly own our home, which has a €118,000 mortgage left to pay. It has 18 years left and we have 10 months remaining on our current 1.95 per cent fixed rate. Our property is valued at about €315,000 and our equity is about €197,000 due to house prices rising in the past and extensive renovations.We are both 49 and work full time on average salaries. We have no pension apart from state pension and our only asset is the property. We have a plan to downsize once our daughter, who is 10, leaves home to help pay for retirement. My question is, is it worth trying to pay the mortgage off faster? We could probably put a €10,000 lump sum towards it and make an overpayment of €250 each month. This should mean we could pay it off much earlier. Or would we be better off just putting the money into pensions instead?
A You are at a point in your life where a number of goals and requirements are all competing for priority. Even though it may seem a while away yet, you may already be thinking about planning ahead for future costs as your young daughter grows up, including further education. At the same time, it’s not unusual for thoughts to turn to financial provision after retirement.
It certainly makes sense for you to be considering how you’re doing with your retirement savings now, and where you’d like them to be. Everyone should continuously review their current pension pot and be looking at their targets and requirements.
Where are mortgage rates headed?
Your fixed rate is very low and must clearly have been locked in prior to the interest rate hikes which started at the end of 2021. That has given you great insulation against the rise in payments that many homeowners have had to grapple with. With less than a year left to run on your fixed rate, it makes sense to be thinking about how things may look when your deal comes to an end. The ECB base rate is expected to fall as this year progresses and inflation is brought back under control. Even though base rate is expected to ease, there’s no anticipation of a return to the ultra-low rates that existed when you took the current deal. I certainly can’t see rates being as low as your current rate of 1.95 per cent.
How much can you afford?
The lowest five-year fixed rates for are still only a touch below 3.5 per cent, which could add around €86 per month based on your current mortgage. Even this rate is only available if your have a BER rating of A or B and are borrowing less than 50% of the value of your home. They are even more expensive otherwise.
You’re therefore right to want to make the most of the remainder of the current rate to help deal with the higher costs to come. Your lender, ICS, may allow you to make overpayments of up to 10 per cent each year without an early repayment charge. That could give you the ability to make some regular or lump sum overpayments now, whilst your monthly costs are lower – but it is important to check that you won’t go over your allowance.
Alternatively, you could consider saving into a higher-rate savings account. Savings rates are likely to outstrip your current mortgage rate and could help you build a bigger lump sum to pay off when you review your mortgage. Be sure to account for any tax that could be payable on the savings interest. You need to retain a liquid cash balance as an emergency fund, but reducing your mortgage more quickly is unlikely to feel like a bad decision.
While paying down the mortgage is often a top priority, paying into a pension could be more beneficial in the long run.
The difficult bit is getting the right balance, as all your aims are clearly important.
Rather than focus only on the mortgage, you may want to spread your resources. You have a few key considerations. You need to ensure you have an adequate cash buffer in place, so don’t use all spare cash to plough into the mortgage or pension. Take specialist advice on where your pension savings sit, and what you need to do to hit your targets. Ask about the pros and cons of increasing your pension contributions, now or in future.
Aiming to pay off the mortgage more quickly isn’t a waste of assets, and I’d encourage you to try to make inroads once you consider what flexibility you have, and how you may be able to spread resources to better achieve your goals.