Paying off your mortgage in full not always the best plan

I currently have a mortgage outstanding with one of the top five banks in Ireland. I have been regularly saving over the last 10 years and I now have enough money to pay off the balance of my mortgage.

My mortgage is on a fixed rate of 3 per cent where this will expire in December 2020.

I am assuming , once this expires, the loan will automatically kick onto the variable rate, where I then have to opportunity to pay off the balance.

My questions are if I proceed with this:

Inherited home likely to leave you with a capital gains tax bill

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Brother is dragging his heels as executor of uncle’s will - is there anything I can do?

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Executors may not see eye to eye over mother’s estate

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Joint accounts: if one of us dies, can the other access the money?

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– Are the Irish banks obliged to inform the Revenue Commissioners of this possible once off payment ?

– Do the banks have the authority or ability to decline my offer of a lump sum once off payment ? (They will miss out on quite a lot of interest).

Mr P.S., email

Paying off a mortgage early is always a juggling act. As the largest financial commitment most people undertake, mortgage payments are a regular concern for readers. The attraction of paying off your loan and finally owning your home outright is easy to understand.

But, on the other hand, mortgage debt remains the cheapest money you will borrow, even if it remains considerably more expensive to borrow for a property here than in the rest of the euro zone.

You are currently paying 3 per cent on your mortgage and fixed rates are now even lower than that – as low as 2.25 per cent over five years.

The cheapest personal term loan available, according to price comparison website, bonkers.ie, depending on the sum borrowed, is around 5.9 per cent from An Post. Among the big five banks, rates seems to vary from 6.3 per cent to 8.95 per cent – that's between twice and three times what you are now paying.

And credit card debt is a multiple of the best personal loan rates.

So paying off the mortgage makes sense only if you foresee no need to borrow (more expensive) money in the medium term.

Your existing fixed rate loan agreement expires in December. I wouldn’t assume anything. It is likely that the loan would default to the standard variable rate from your lender. Those currently vary from 2.75 per cent to 3.5 per cent, depending on the lender – a significant difference in itself. However, it is certainly possible that the lender will offer a rollover into another fixed rate. Check your paperwork and contact the lender for clarity.

Assuming you are on a variable rate, there is absolutely nothing to stop you paying off the loan in full whenever it suits you. And no, the bank cannot refuse to allow you do so, even though it would clearly benefit in terms of additional interest from you remaining on your payment schedule.

On the flip side, it releases funds for the bank to lend on to a new mortgage borrower.

Even on a fixed rate, you retain the right to pay off the loan in full or pay off a lump sum to reduce it, although the bank will impose a penalty to reflect the lost revenue to it during the remainder of the fixed term.

I am fascinated by your concern about the bank informing the Revenue Commissioners of your payment.

I cannot seem to get a straight response but I would assume that the answer is yes. The common reporting standards in place oblige banks to notify Revenue of all sorts of details, including the identity of customers, interest payments (by the banks), and account balances.

If these savings you have built up are housed in an account, Revenue will know. If they are not, Revenue is likely to want to know where the money comes from.

If these savings are from properly taxed income, you have nothing to fear: if not, you have – whether you use it to pay off the home loan or otherwise.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.