Wednesday 23 October 2019

Should we create a fund for a rainy day or pay off the mortgage?

 

'Meeting loan repayments is a priority to ensure you keep your credit rating intact' (stock photo)
'Meeting loan repayments is a priority to ensure you keep your credit rating intact' (stock photo)
Charlie Weston

Charlie Weston

Your Questions

Q: We both work and have a couple of loans but no rainy-day money which, as a mother, worries me. I have chatted about this with my husband as I believe we should open a savings account, but he thinks we should focus on our loans first. What do you think would be the best course of action?

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A: Your opinion on the need for a rainy-day fund reflects the feelings of many, according to the chief executive officer of Cuda (the Credit Union Development Association), Kevin Johnson.

He says women are typically better at saving than men. Female members of credit unions in the 50-60 age bracket have the highest amount of savings. Mr Johnson said the answer to your question is that you are both correct, to a degree.

Meeting loan repayments is a priority to ensure you keep your credit rating intact. So your household budget needs to provide for these expenditures first and foremost.

However, if you do have some "discretionary" money left over, building up a rainy-day fund of one to three times the monthly take-home pay of the highest earner should be the next priority. If you save through a credit union, any loan attached to the savings generally attracts a lower interest rate, Mr Johnson added.

Q: I met my fiancé just last year. She is 41 and I'm 44. I own my own home, which we both now live in, and my fiancé owns another property which she rents out, and it covers the mortgage on that property. We are torn between selling the property, clearing her mortgage and putting the remaining funds on the mortgage on my property, which is our home. Or should we just keep it, rent it out and use it as a pension?

A: It is difficult to give advice on this one without knowing more about both of your financial, life and work situations, says Joey Sheahan, who is head of credit at MyMortgages. Ie.

Such a decision can only be based on multi-faceted information like this. However, in a general sense, Mr Sheahan says the decision should be based on your own attitude to a) being a landlord and b) having debt. He says he would not always advise people to "get into property" as a pension investment. However, you have already acquired an investment property. This means you have much of the hard part associated with second properties done - you have the mortgage, you have the tenants, you are managing the letting.

So, you should pause for thought before getting rid of it, Mr Sheahan advises. You must ask yourself whether or not you mind the responsibility and work involved in letting out a property and whether or not you believe the property's value will increase or decrease in the long term.

If you don't mind the work involved in being a landlord, and if its "washing its face" from a cash-flow point of view, then it is worth considering holding on to, he says. But you should review this position on an annual basis.

If, however, you are averse to having debt and have any concerns over the sustainability of your own income, disposing of the second property in order to reduce your overall debt could certainly be a smart move, he said. Take expert mortgage and tax advice as this is a big decision and the implications of income tax and capital gains tax will also impact your final decision.

Q: My wife and I are approaching retirement, within six months of each other. We currently have two mortgages, both relatively small. While my wife has hit the maximum on her pension contributions, I have not. We are wondering if it would be a better to put a lump sum on one of the mortgages to clear it, or to put this money into my pension?

A: It is always a difficult decision as to how much you can balance saving and paying off debt. You should consider getting an overall financial review which will look at your pension, mortgage, other savings and talk to you about your plans for retirement, according to Jerry Moriarty, CEO of the Irish Association of Pension Funds.

There are lots of factors to take into account, such as whether the mortgage is a tracker and on a very low interest rate, the tax relief you can get on your pension, the funds you can invest your pension in and the charges on those, Mr Moriarty added. It is worth paying for some time with an independent adviser who can bring you through all this and recommend the best course of action for you, he said.

Meeting loan repayments is a priority to ensure you keep your credit rating intact. But if you have money left over you should build up a rainy-day fund.

You must ask yourself if you mind the responsibility and work involved in letting a property and whether or not you think it will appreciate in value.

Irish Independent

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