“Neither a borrower nor a lender be”
I was working on a new matter with my colleague John from Ethical Financial and we highlighted the fact that good advice does not need to be complicated to have a dramatic impact on one’s financial position.
This client had €130,000 in bank savings and a mortgage of €314,000 at a rate of 3% costing over €16,000pa in repayments with just under 30 years to run.
To be sure of making a better return than the mortgage, an alternative investment would need to be making enough to cover both tax and charges.
Assuming exit tax at a rate of 41% on profits, a 3% mortgage rate is equivalent to a 5.08% gross of tax investment return.
The investment would also be subject to charges, so let’s be generous and assume a 1.5%pa charge (in reality, it could be as high as 5%pa)
So, in order to make not paying off the mortgage the best option, the investor would need to average a return of at least 6.58%pa. Remember, that’s just to break even.
To put that into context, over the last 15 years, the annualised return on Global Equities as measured by the MSCI All Country World Index has been just 6.27%pa.
Whilst there may be some client specific mitigating factors such as
- low rate tracker mortgages
- Capital gains tax losses which could offset tax on gains
- Making pension contributions with tax relief
In general, we can conclude that many people would be better served by repaying debt rather than from making taxable investments.
In this case, the client now has reduced the mortgage to around 13 years left to run and are projected to save over €110,000 in mortgage interest.
This calculator is for illustrative purposes only and does not provide a precise calculation, it is only intended as a guide. All results are approximate and are based on information provided by you. They may not take into account any daily interest rate differences that may affect your New Monthly Repayment Amount shown on the calculator.
You may be charged an early breakage cost if you make overpayments while on a fixed rate mortgage. If you are considering making an overpayment and you are currently on a fixed rate, please contact your Bank for further information.