If you have taken up a chunky mortgage in the past five years, the idea of paying the whole thing off can seem outlandish.
Rather than focusing on a lifetime of mortgage repayments, it might be better to look at how you can reduce the term of the loan. The best way to do this would be to lob a lump sum at the lender and ask them to knock it off the original loan. This might be out of many homeowners' current reach, but it could be a realistic prospect when the Government-sponsored SSIA matures and about 1.2 million people come into possession of a lot of money.
Illustrations drawn up with the mortgage calculator on www.simplymortgages.ie show that, if a homeowner with an initial mortgage of €300,000 over 25 years at 3.6 per cent paid a lump sum of €15,000 back in year four, they could knock one year and eight months off the term by maintaining repayments at the original level. This would result in an overall saving of more than €30,000 on the mortgage. The benefits diminish if it was taken later in the loan's life, with the same measure generating a saving of €26,000 or so if it came in year 10.
Before you decide to use your mature SSIA to pay down your mortgage, be aware of a few key considerations. First, it will not make sense to use a lump sum to reduce a mortgage if you will be taking out a loan for another purpose in the near future. This is because mortgages represent the cheapest form of borrowing, with other loans, like car loans, usually applying a higher rate of interest.
Paying off a cheap loan and subsequently taking out a more expensive one (this could even be an outstanding Visa balance) will thus be hard to reconcile with sound financial management.
Homeowners should also consider other uses for their lump sum. You may make better use of the cash by investing it elsewhere. Mortgage broker, Mr Liam Ferguson of Ferguson & Associates, points out that the benefits or disadvantages of investments will always vary according to an individual's personal circumstances, acknowledging that paying down a home loan may not be the best option for everybody with a lump sum. One better use for the funds may be a pension investment.
Mr Ferguson uses the example of a person who has a €200,000 mortgage over 25 years at 3.5 per cent. Five years into the term (with 20 years to run), they knock €16,000 off the outstanding capital but continue to pay the original repayment. This would take two-and-a-half years off the term and save €30,037 in repayments and interest. If the same person was 42 when their lump sum landed, they could invest roughly the amount they would have saved on the mortgage into a pension by allocating the €16,000 there instead. This is, Mr Ferguson points out, because an investment of €27,586 would have a net cost of €16,000 after tax relief at 42 per cent.
After 17 and a half years (the term that would remain on the mortgage if an overpayment of €16,000 was made in year five) of 6 per cent growth on the pension, it would be worth some €65,750. Even after tax on retirement, it would be worth more than €50,000.
"In this instance, the pension works far better," says Mr Ferguson, adding however that the example is merely that since it ignores future interest rate movements, pension fund volatility, tax rates and all the other factors that could skew either picture.
