Welcome to the Financial Column in association with Money Plus, Bridge Street, Boyle.
Q: We have an existing tracker mortgage with Ulster Bank. There is €86,000 outstanding and the mortgage will be cleared in 2024. We have a surplus €45,000 on a 1 year bank deposit, maturing in late April, earning 1.15% before DIRT tax. We don’t think we’ll need this money for the foreseeable future. We also have other some savings in the Credit Union. As the interest rate on our deposit is so low we are thinking of using it to reduce our mortgage. Do you think this is a good idea or would you recommend doing something else ?
A: Last week the European Central Bank (ECB) cut the base lending rate from 0.05% to 0%. This means that the rate of interest on a tracker mortgage is now only around 1% on average. Currently analysts indicate that this rate is unlikely to rise significantly (or not at all ) for the next 18-24 months so the interest rate on your tracker mortgage will remain low.
However the interest rates being paid to depositors will also remain at very low levels, and negligible after DIRT tax at 41%. For example, the best 1 year bank deposit rate that I can find for 1 year is 1.1% gross (0.65% after DIRT) with KBC Bank. The net interest for a sum of €45,000 would be €292 after DIRT.
So when viewed against the tracker rate on your mortgage, the interest rate difference between the deposit rate and the tracker rate is c. 0.45%, assuming your tracker rate is at 1%.
Given the low deposit rates currently available, using a lump sum to reduce your mortgage is one option – however before deciding to do this if it makes sense from a financial perspective only if savings you will make are greater than the potential return which you might achieve from investing the lump sum.
So what are the potential alternatives ?
Firstly I recommend that you sit down with an experienced and impartial financial adviser and go through the options in order to arrive at a solution which suits your particular circumstances.
Your adviser should ask and discuss a number of key questions with you, such as :
Do you need to have access to this money or are you prepared to invest some or all for a longer period of time to achieve a better return ? If so, how long and what flexibility do you need to access this money?
What return would you like to achieve from this sum?
What risk, if any, are you prepared to take to try and achieve your targeted returns and how would this affect your overall financial position if you don’t achieve this?
Other factors to consider include :
You may not be able to borrow this sum in the future if you needed to do so.
If you retain the flexibility to access your surplus deposit, you will have the option of reducing your outstanding mortgage if rates begin to rise again.
For advice on the alternative options and all other aspects of financial planning you should consult Belinda McCauley at Money Plus, your local independent financial broker. Belinda and her colleagues at Money Plus, Bridge St, Boyle would be delighted to assist. Belinda can be contacted at 071-9194000/ 086-7847827 or by email: [email protected]