Jill Kerby

OVERPAYMENT CAN KNOCK MONTHS OFF A MORTGAGE

MC from Wicklow:  We have about 15 years and €190,000 outstanding on our 2% tracker mortgage. We have approximately €10,000 saved and were thinking of paying off some of our mortgage. One of your co writers recently commented that we would be better off investing the money in a high interest account (no time period suggested). I would appreciate your opinion.

The first thing to check is whether you can pay off a lump sum from your tracker mortgage without penalty – under no circumstances do you want to endanger the continuation of the tracker and end up being switched over to a variable rate contract. 

High yielding deposit accounts are short on the ground these days, but the conventional view is that if you can achieve a superior, low risk, net return from a deposit account or investment fund, compared to the rate you must pay on your mortgage, it makes sense to opt for the higher return. A good advisor can help you identify deposit accounts and investment options that may fit that parameter.

However, this also only makes sense if you don’t have any other, higher cost outstanding debts, such as credit card balances, hire purchase payments or personal loans.  Credit card balances that typically attract 18% plus compound annual interest rates should be prioritised, especially if you’re in the habit of only paying off the minimum monthly repayment. 

Finally, before you make any decision, make sure your lender or your advisor shows you just how much interest you will save if you do pay off €10,000 capital from the €190,000 mortgage balance. You may find the lump sum  capital payment is a very good, guaranteed, no risk, no cost (hopefully) way of saving a lot of money. 

A once-off overpayment of €10,000 on a mortgage of €190,000 at 2% interest, for example, should save you €3,360 in interest and shave 10 months off the 15 years left on your mortgage. Ask your lender what would happen if you need to get back the €10,000 in future, perhaps to cover a financial emergency. MOst banks treat it as a mortgage top-up, which is increasingly difficult to get as house prices fall, reducing the equity in your home. 

Some lenders, including KBC Homeloans, give you the right to take mortgage overpayments whenever you wish. This flexibility makes the overpayment a lot more attractive. 

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Fixed risk

KP writes from Kildare:  I have been offered a two, three or four year fixed rate mortgage from AIB for a €450,000 mortgage and I’d like to know, first, if you think a fixed rate is a good idea and for how long and then, what will happen to mortgage agreements if AIB is sold.  Finally, what happens to mortgage debt if Ireland goes off the euro?

I asked Karl Deeter of Irish Mortgage Brokers for his view and he thinks the  three year 3.89% fixed rate you’ve been offered by AIB “is a very good deal” and at just 0.2% higher than the two year rate is a premium worth paying.  According to Deeter, ECB interest rates can only go upwards and since they are determined by the state of the German economy and not ours, chances are they will be going up sooner than later as the German economy strengthens and price inflation becomes more of a concern.  Even tracker mortgage holders will have nowhere to hide if that happens. He also suggests that all the Irish banks will be raising their lending rates as a consequence of the latest capitalisation measures and fixing a loan is a way to at least achieve some peace of mind for a few years. 

You do need to consider the consequences of having to revert to a higher variable or tracker rate at the end of the fixed period.  Your lender can project your mortgage cost on a lower capital balance, but at a higher rate, in three years time. You cannot overpay a fixed mortgage if you find yourself with some spare cash. You may also be hit with steep redemption penalties if you need to break out of the fixed deal because the rate is uncompetitive or you decide to move.

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Foreign affairs 

UB writes from Dublin: Further to a query in last week’s Sunday Times regarding transferring savings to another country - what steps are involved in this process?  Is residency a condition of repatriation of funds?  Who would be able to advise as to how to go about this?

There is nothing to stop you from transferring funds from your Irish bank account to a bank account in any other EU country, so long as you have all the access codes for the foreign bank account and you do not violate any money laundering protocols.  Opening that foreign account in your own name is another matter.  Again, there are no EU regulations preventing you from opening the account, (see http://ec.europa.eu/youreurope/citizens/shopping/banking/faq/index_en.htms), but individual European banks can set their own deposit terms, including residency requirements.  You need to check with the specific bank. 

Perhaps the easiest way to open a non-Irish, and non-euro bank account is to cross the border to Northern Ireland and open an account there.  Bank of Ireland, AIB, Ulster Bank in the north, will all open sterling savings accounts for Irish residents who fulfil the correct ID and money laundering conditions.  The main Irish retail banks, including National Irish Bank, can also open non-euro accounts for customers.

Nationwide UK (Ireland), which last week opened its first high street branch in Ireland at Merrion Row in Dublin (it has a drop-in customer centre at the IFSC) says that British building society legislation prevents its branches in Northern Ireland from opening accounts for non-residents.  Like most deposit takers though, it has a branch in the Isle of Man that will open offshore accounts for non-residents. Interest on such accounts is liable to tax at your marginal rate.