herald

Saturday 16 December 2017

Dan White: Use that €100k legacy to pay off mortgage early

Dan White answers you financial questions

We currently have a 30-year variable rate €250,000 mortgage on our home. We took out the mortgage five years ago. Recently we inherited €100,000 from a relative. We are thinking of using some or all of this money to reduce our mortgage. If we did, should we maintain our monthly repayments and pay the mortgage off early, or should we reduce our monthly repayments?

JENNIFER

AT the current variable interest rate of about 2.4pc the monthly repayments on a 30-year €250,000 home loan would be about €975 per month.

After five years, the amount outstanding on such a mortgage would have fallen to about €219,760. If Jennifer did nothing with her €100,000 and continued with her existing repayments she would pay a further €72,785 in interest over the next 25 years.

By using the €100,000 to pay off her mortgage early, she would reduce the term of her mortgage by 13 years and two months, which instead of being fully repaid in 2035 would have been cleared some time in 2022. This would save her almost €55,000 in interest payments over the life of her loan.

On the other hand, if Jennifer continued to pay off her mortgage over 30 years and used the money to cut her monthly repayments instead, she would then see her monthly mortgage repayments fall from almost €975 to just €531.

However, the interest saving would fall to just €33,000. In other words, Jennifer would save a further €22,000 in interest payments if she used the money to pay off her mortgage early rather than to reduce her monthly repayments.

The other thing Jennifer could do with the money is to invest it in DIRT-free savings bonds or certificates.

Savings bonds pay the equivalent of 3.23pc per annum over three years while savings certificates pay the equivalent of 3.53pc per annum over five-and-a-half years.

You can invest up to €120,000 in either savings certificates or bonds.

If Jennifer invested her money in savings certificates instead of paying off her mortgage, her money would have earned approximately €45,600 in interest by the time the mortgage would have been fully repaid in 2022.

While superficially receiving €45,600 in tax-free interest over 12 years looks more attractive than saving €55,000 of interest over 25 years, this ignores the fact that, once she had paid off her mortgage, Jennifer would have freed up €975 per month.

My advice to Jennifer would be to use the money to pay off her mortgage early rather than reduce her monthly repayments if she can possibly afford to do so.

With the first charging points for electric cars now having been launched, is now the time to purchase an electric car? Where can I purchase one of these and how much do they cost?

FIACHRA

Last week the first four charging points for electric cars were launched in Dublin by the ESB. It is hoped that 1,500 charging points will be running by the end of next

year. That's the good news.

The bad news is that none of the mainstream manufacturers are likely to be selling electric cars to private buyers before 2012.

Until then the only electric cars on offer are niche products such as the Reva electric car, which retails for approximately €13,000.

Even when models from the mainstream manufacturers come on the market problems will remain. It takes eight hours to fully charge an electric car and it has a maximum range of 120 kilometres (75 miles).

Until there is a major reduction in charging times and a significant increase in their range, electric cars are likely to remain a rare sight on Irish roads.

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