In general – No – don’t do it !
Most Banks will offer the option for customers to make overpayments on their mortgage. Some people wish to do this so that they can be “mortgage free” a few years earlier. It’s understandable that people don’t like being in debt so they try and pay off the mortgage as fast as they can.
But is that in your best interests?
Say you are 32 and have a 30 year mortgage – you decide that you want to overpay the mortgage by a few hundred euro a month so that you can clear it within 28 years. Sounds good right?
The issue is what do you forgo now to get no mortgage in 2049 ? Remember that your mortgage payment per month will be roughly the same in month one (2020) as month 350 (2049). But your salary in month one will, most likely, be dramatically lower than in 30 years time.
Consider your parents – they bough a house in 1978 for say £25,000 (which was a lot of money at the time ????). Their monthly repayment in 1978 was say £100 a month. That was say 20% of their salary. In 2008 – they would also still be paying roughly £100 – less than 1% of their salary.
If they overpaid in 1978 an extra £25 a month – that would have been a noticeable % of salary gone. That would have restricted holidays, cars, children and social life materially at that time. And the pay off – £100 a month better off from 2004-2008 – would that really impact their lives?
Also, in your thirties you will be experiencing the greatest pressure on your finances – you may well be starting a family or a business with all the cost that entails. You will be most likely be lower down the career ladder than in your 50s. Putting more pressure on yourself at this age so that you can save £100 a month in your late 50s would be madness.
People have this vision that they will get to 58, be mortgage free and have loads of spare money. I’ve never met anyone who didn’t find something else to spend it on. Costs always find a way of increasing to meet a higher disposable income. I bet your parents don’t holiday in their 60s like they did in their early 30s!!
When is it appropriate to overpay?
One point your parents will undoubtable make when they see this is – what about the interest rates in the 80s? By paying off debt you do save if rates go up significantly. But that now is highly unlikely to happen in 2020 Ireland. Low interest rates are here to stay – how can I be so sure? It’s simple – if interest rates go to say 8% or 9% then the entire Eurozone will go bust. Governments have far, far, far too much debt to pay those rates. So the European Central Bank is forced to keep rates low into the long term. Don’t worry about those rates. Be more concerned with inflation!
There are a couple of scenarios where I would suggest overpayments. If you are on contract or in short term, risky/high paid positions it would be appropriate to reduce the mortgage to an amount you can sustain long term. Think of a professional footballer – makes €100,000 a week now but in 3 years could be €1,000 a week. Better not have a big mortgage by then. In most cases I would recommend not overpaying but if you have any questions you can always contact Pangea Mortgages for advice specific to you and your circumstances.