Pummeled by 10 rate hikes over the past two years, tracker mortgage holders deserve to splash out on a takeaway following the European Central Bank’s (ECB) recent quarter point interest rate cut. More cuts are slated to follow, but what’s the best thing to do with the savings?
Do the maths
There are about 170,000 tracker mortgage holders in Ireland who will benefit from this first cut. There’s no windfall, but it’s a step in the right direction.
If you have a tracker mortgage, it’s set at a low rate that ‘tracks’ the ECB rate. The ECB’s main interest rate had been at or below 1 per cent for the decade from 2012 to July 2022. Then it shot up quickly to 4.5 per cent. This first drop, a cut of 0.25 per cent to 4.25 per cent, took effect on June 12th.
Tracker mortgages were heavily sold between 2001 and 2008. Take, for example, a first-time buyer in their early 30s who took out a tracker with a margin of 1.25 per cent in 2006, borrowing €350,000 over 30 years. Their monthly repayments rose rapidly from €1,233 in June 2022 to €1,635 in May this year as their interest rate climbed to 5.75 per cent. That’s an increase of €402 a month, and a lot of extra after-tax income.
After this first rate cut, a person with a €250,000 mortgage will save around €33 a month, or just over €350 a year.
There may be another two rate cuts this year, financial markets speculate. This will depend on inflation targets being reached. That could mean a further half a percentage point fall by December. This would leave tracker holders about €100 better off a month.
Don’t count your chickens of course, but don’t fritter away these savings either. Putting them to constructive use will leave you better off.
Pay off your credit card
The past two years have been tough for mortgage holders. If you’ve had to use your credit card more to get by, it’s time to sort it out. If your mortgage repayment is €33 less next month, throw that money at your credit card bill.
If you’ve got €1,000 outstanding on your credit card at 22 per cent interest for example, and you are only paying the minimum of €50 a month towards the balance each month, it will take more than two years to clear. Pay that minimum balance and add a €33 a month mortgage saving to it and you’ll clear it a year faster.
Only paying the minimum balance on your credit card each month is costing you – you pay interest of two to five per cent on the total amount you owe. Try to pay off the balance in full as soon as you can, to avoid interest charges.
If you can afford to, set up a direct debit to pay your credit card bill every month before the due date. You can set up a direct debit for a certain amount every month so that you are not tempted to only pay the minimum balance.
Save it
So you’ve got about an extra €33 in your pocket from July? If ECB rates play ball, you’ll have an extra €100 a month by December. This can easily get absorbed into household spending. If you coped with the rate hikes in recent years, why not keep the savings out of your spending by funnelling them into a savings account?
Online bank Bunq, for example, offers a good rate of 2.46 per cent whilst giving you flexibility.
After a year of saving €100 a month for example, you’ll have €1,200 squirrelled away and €16 in interest. That’s not a fortune in interest, but the Bunq app is quite pleasing and shows interest trickling in on a weekly basis. It makes a refreshing change from the interest drain of recent years. Remember, interest is subject to Dirt tax.
You can open the account online, deposit flexible amounts and you are allowed two withdrawals a month. There are no fees and your money is guaranteed up to €100,000.
Some of the main banks offer savings rates of 3 per cent, but some require a minimum monthly lodgement of €5 or €10. If you can cope with that, and you’re not browned off with Irish banks, you’ll get €19.50 in interest after a year.
Top up your pension
If you’re in a pension scheme through your employer, think about using the interest savings to chuck an additional voluntary contribution at it. Do it before you get used to having the money back in your pocket.
A pension is arguably the most efficient way of saving money.
Put that €33 a month, or €100 a month you will save if rates continue to fall, into a pension and it will be an investment in your future self. And you get tax relief on it.
If you pay 40 per cent tax, and you put €100 into your pension, it only costs you €60, so you are getting €40 back in tax relief.
Revenue sets a maximum amount you can contribute from your taxable earnings, which is based on your age. Tracker holders who bought in 2006, for example, are probably aged about 50 now. For an employee aged between 50 and 54, up to 30 per cent of their taxable earnings is allowable for income tax relief on pension contributions.
Decide what you can afford to contribute, then tell your employer who will input the figure into the payroll system, which will automatically apply the appropriate rate of tax relief. Your employer will then send the payment to your pension provider for investment into your retirement account on your behalf.
Claim your tax credit
If you are entitled to the mortgage interest tax credit announced in Budget 2024 and haven’t yet claimed it, do it now. It was intended to help households struggling with spiralling interest rates.. The credit was open to taxpayers with mortgage balances of between €80,000 and €500,000 as of December 31st, 2022 and is available for the 2023 tax year only.
It’s based on the increase in interest paid in 2023 compared to 2022. You must have paid income tax to get the credit as the credit reduces the tax you pay. For example, if Mary paid €3,000 more in interest on her qualifying loan in 2023 versus 2022, her tax credit is 20 per of that, or €600.
Only 17,000 people have claimed the credit so far. Claim today by making an income tax return using Revenue’s Ros or MyAccount service and do something constructive with the money.
Pay down the mortgage?
So you’ve paid a rapidly inflating mortgage payment for a few years now, and you’ve lived to tell the tale. Perhaps you had to trim spending elsewhere to do it. With this interest rate drop and potentially more on the horizon, the danger is your spending creeps up to absorb the extra money.
You could be brutal with yourself and instead of pocketing the reduction, continue paying the larger amount to pay down your mortgage faster. Just don’t throw too much money at your mortgage balance if you can get a better return elsewhere.
Also, there is little point in putting money towards paying down the mortgage early if it means you have to borrow at a more expensive rate for other things. For example, your mortgage rate might be between 3 per cent and 5.5 per cent, but you could be paying a rate of 8 per cent for a personal loan or more than 20 per cent for credit card debt.
For now, the €30 or so in mortgage savings will be needed by many just to cover the basics. It’s worth noting, too, that interest rates are unlikely to return to the super low rates of the previous decade. Get that takeaway if you can to celebrate a tough few years. If rates continue to drop, and you can afford to do so, put the savings to good use.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
