Charlie Weston: Reducing debt can pay off for borrowers
Thursday May 06 2010
SHOULD you overpay your mortgage if you are lucky enough to have spare cash and a good value tracker?
Our feature last week, which concluded that those with spare funds would be better off putting the money into a high-interest-paying deposit account and then using this to pay down the mortgage when European Central Bank (ECB) rates rise, caused quite a stir.
People with trackers are benefiting from low ECB rates, as the interest rate they pay on their mortgage can only rise when the ECB rate rises.
The point of the piece was that it is important to remain flexible at the moment, given the economic uncertainty we are experiencing.
In response, a number of personal finance experts pointed out that once you put money into a mortgage it is very difficult to draw it out again if it is needed for an emergency.
However, mortgage broker Karl Deeter, of Irish Mortgage Brokers, was among those who questioned this advice.
Mr Deeter says that if you do not have a rainy-day or buffer-zone fund then you should save.
But he goes on to point out that, assuming you do have a fund, reducing your debt burden is a better option.
He warns that as interest rates rise the interest due on your mortgage will also increase.
Mr Deeter gives an example of a person with a €200,000 mortgage over 25 years on a tracker rate of ECB plus 1.1pc. This means that they are on a rate of 2.1pc.
If this person saves €200 a month for two years they would have about €4,900 after DIRT (deposit interest retention tax) on a mid-table savings rate.
If instead this person opted to pay extra against their mortgage, they will have lowered their overall debt burden (including interest) by more than €7,800 over the term of the loan.
Trend
The trend we are coming into is one where deposit rates will drop as banks recover, diminishing the return you can expect from a safe option like cash deposits, he added.
But mortgage rates will likely increase via the ECB rate and for those not on trackers via the profit margins charged by lenders.
Mr Deeter stressed that saving is vital, but, at the same time, debt is a wealth killer.
"If you have a choice, don't underestimate the power of reducing your debts. With no debt, life becomes much cheaper," he added.
- Charlie Weston
Irish Independent
