My wife and I have 18 months left on our mortgage, which is about €31,000. It is fixed in until next month at an interest rate of 2.75 per cent. Loan to value (LTV) is >80 per cent. Our current mortgage provider will offer 4.15 per cent rate at the end of the fixed term.
What are our best options once our term runs out in February?
We are undecided on what to do with the extra cash once the mortgage is paid off.
My wife is a public servant and can retire in five years at 55 and I work in the private sector. My wife also makes additional voluntary pension contributions (AVCs). I am maxing my pension contributions. We are also regular monthly savers.
With the extra money when the mortgage is paid off, we are considering some of the following: investing more into AVCs, buying a rental property, buying bonds or upgrading to a bigger property with the possibility of renting out a portion of the property.
Which of these would be the best option for us to secure our future?
Mr M.K.
You find yourself in the same position as tens of thousands of homeowners who are coming to an end of a fixed rate and are running into the impact of the series of interest-rate increases put in place by the European Central Bank (ECB) between July 2022 and September 2023 as it battled inflation across the euro zone.
Yes, rates have started coming down, but the three quarter-point cuts since last June have put only a small dent in the 4.5 percentage point jump over the previous two years. So, you are facing into a climate where the rates on offer to you now are well above the 2.75 per cent you have been paying.
Your options are limited by the short time you have left on your home loan – just 18 months, you say. If you had three years left to go, you could get a rate of 3 per cent from AIB, or 3.15 per cent over two years. However, there are limited options on periods of less than that.
Comparison site Bonkers.ie says the best one-year fix is 4.4 per cent – again with AIB. You will get better value on variable rates, though, as you have found.
Again, AIB at 3.75 per cent is offering the best value here, along with its subsidiaries Haven and EBS. All are better than the 4.15 per cent you are being offered, presumably by Bank of Ireland.
One small note: you say your loan to value “is >80 per cent” – ie, greater than 80 per cent. I am assuming that is a mistype, given the amount outstanding on your loan and the time remaining.
Normally, we would be big fans of switching, but there are occasions when it may not make sense and you appear to fall into that bracket. Even though a better rate is available elsewhere, you would only save a few euro each month – between €5 and €7. Over the 18 months, that’s less than €125 all told.
The costs involved in switching – a property valuation and some modest legal fees – would amount to more than that, so you are probably best biting the bullet and sticking with the 4.15 per cent variable rate, not least as falling interest rates over the next 18 months should see that rate drop, presuming the bank passes on the benefit. They are already making a healthy one-percentage-point margin on the current ECB rate.
Moving forward 18 months, you will have around €1,775 a month that you no longer need to spend on your mortgage. What are your options?
I am certainly limited in the advice I can give as I am not a qualified financial adviser, so the Central Bank of Ireland would not take kindly to my pretending to be one. I do think it is worth your while investing in some professional financial advice.
From what you say, depending on how long you want to continue working and your other financial resources, you have a decent investment window to play with here.
You clearly budget assiduously: you are investing strongly in your retirement pots and are putting money by each month even on top of the mortgage and your day-to-day bills, so you are well set up.
[ How can you make your savings work harder? ]
If there is spare capacity to invest in AVCs – additional, voluntary contributions that top up your pension pot – then that is certainly worth considering as it will give you access to tax relief of up to 40 per cent, which is never to be sneezed at.
Buying rental properties, or upgrading your own property to allow you rent out part of it, are more complex arrangements and, given the prevalence of rent pressure zones and other red tape, existing landlords claim they are finding it difficult to get a return in net income terms that rewards their investment.
That leaves investment in financial products such as bonds and in passive unitised funds that might give you exposure to a broader range of assets, including equities.
All are worthy of consideration. It would even be worth considering splitting your €1,775 a month into more than one type of investment.
But given that you are talking about over €21,000 of hard-earned cash annually here, it would be foolish to proceed without getting professional advice – ideally from someone or group that is not tied to promoting only its own products.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
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