Last November, we took out a 20-year mortgage with Bank of Ireland for £72,000 with a one-year fixed rate of 6.2 per cent. We intend to revert to the variable rate when the year is up which will obviously lead to lower monthly repayments. However, we are considering maintaining our repayments at their current level in order to either pay off the mortgage sooner or to draw down at a later stage the accumulated additional mortgage payments for future home improvements. Would this course of action have a negative impact on the mortgage interest relief we receive as first time buyers? Is our lender likely to agree to such an overpayment on the mortgage in the first place and to our possibly later drawing down the surplus? If we were to draw down the surplus, would we get back just the amount we had overpaid at that stage or would we also have earned interest on this amount? Finally, would it be better to reduce our mortgage repayments in line with variable interest rates and use the excess cash to take out a savings policy with a life assurance company, preferably one that may demutualise in the future?
Mr G.O'R., email
You are not alone among mortgagees in looking to set aside the money you already spend on your home loan once you leave your current fixed rate before you get used to the idea of spending it elsewhere. However, the solution may not be quite as simple as it seems.
You can of course oversubscribe to your mortgage loan account but I am afraid you would not have the flexibility you mention. . . and, in any case, it would not be a way to maximise any income you may have.
In the first instance, you would not be allowed to draw down at a later date any sum you pay into such a mortgage account. What might happen is that you could negotiate a payment holiday in case of family crisis. But you would need to have a clear and written understanding with the bank that this was the case before embarking on any such course.
What essentially happens is that any money you put in to your mortgage account when it is subject to a variable rate of interest will be offset against the capital sum in the account. This brings us to a second point you raise and which you certainly need to consider is the issue of mortgage interest relief. As the name suggests, this relief is available only on mortgage interest paid. Even if you could decide to put extra money into the account against the interest liable to maximise such an allowance, it hardly seems to make much sense. What would happen and what makes greater financial sense, if extra money is available once you switch to a variable rate and if you want to use it to pay off the mortgage, would be to use it to eat into the capital sum owing on the mortgage. That would immediately reduce the amount of interest due on the account, which might impact on your mortgage interest relief. However, such a move could both reduce the amount of time over which you have to repay the loan and reduce the amount you have to pay. The sums involved are sure to be higher than any marginal gain you might make on maximising the mortgage interest relief.
A point you might consider when switching to a variable rate and committing your resources to oversubscribing your mortgage account is the future direction of interest rates. While every indicator at present points to a period of low interest rates, at least in the medium term, there is no guarantee and you are facing a 20-year loan, as it currently stands.
Should any of the several crises affecting the markets now or in the future lead to a global recession, there could be consequent problems for employment, especially in a country where so many jobs rely on the health of multinational enterprises. You only have to look at Seagate or Fruit of the Loom even in these buoyant times, to recognise the risks.
Alternatively a crisis of confidence in the euro, such as the one afflicting Brazil recently, could lead to the possibility of higher interest rates or even imported inflation should the value of the currency fall relative to our non-euro zone trading partners. Even within the euro zone, inflation in the longer term is not as certain as the current stable position in the Republic might lead one to believe. Advice from a number of sources suggests that, if you do have money to save after you switch to a variable rate mortgage, you should seriously consider paying off your most expensive loans rather than the mortgage which might well be the cheapest money you are borrowing. Credit card balances, overdrafts, and even term loans and credit union borrowings are all eating in to your resources faster than mortgage interest rates; faster too than anything you might make by way of interest in a demand deposit account.
Of course, if the amount you have available is substantial enough, there are savings products on offer which will yield reasonable returns in the current low interest rate environment. However, it is still true that you rarely get something for nothing and the higher the possible return, inevitably the greater the risk. Still PIPs and PEPs are alternatives as are various special savings accounts and even the Post Office.
However, given that your current fixed rate is 6.2 per cent and the variable rate at Bank of Ireland after its most recent reduction last week is 5.74 per cent, the amount of your money which will no longer be earmarked for the mortgage is unlikely to be great. As such, you would need to examine very carefully any savings options on offer, including the yield on any insurance product given the sums involved, provider's commissions and the fact that you might be looking to withdraw the money before maturity for home refurbishments or in the event of a substantial rate rise.
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