Home Economics: Answering your property questions. While people might be tempted to pay off their tracker mortgage, Sinead Ryan recommends tackling other debts first.
Q - With interest rates falling again I am in a position to pay a little extra off my tracker mortgage. I have approximately €200,000 and 18 years remaining on it at 1pc and could afford an extra €100 a month which I take to be a prudent thing to do. What do you think?
A - Overpaying your mortgage is generally something I encourage, and indeed, have done myself when possible.
However, when it comes to a tracker already at rock-bottom rates, to be perfectly honest, it's a bit of a waste if there is something more useful to do with the extra money you have.
The mortgage is now effectively "free", as the interest rate is being eaten by inflation and the recent rate reductions by the European Central Bank. As such, it makes little sense to pay it down since you are only repaying capital at this stage.
An extra €100 per month would shave off only one year, nine months and a paltry €1,865 in interest savings from your overall loan.
If you have any other debts, eg credit card, personal loans, overdrafts etc, my instinct would be to use the extra cash against these. They will be inevitably at higher interest rates and therefore €100 a month would go a long way toward getting your repayments lowered.
Where to keep house deposit
Q - We have €40,000 put by on deposit in anticipation of buying our first house. We want to wait a year until we get married and will have more money saved. Our question is where best to keep it? At present it's split between two deposit accounts in each of our names but getting no interest. Is there a better way?
A - Firstly, well done on saving so much. It will really make a difference when you go mortgage shopping to have evidence of a good savings track record.
I'm not sure there is a 'better' way of saving it. Savings products generally fall into two categories – short term deposits which you want safe and secure but which generate little by way of return, and longer term equity based products which don't carry the same guarantees but over 10 or so years might be expected to return a profit. You clearly fall into the former category.
The ECB's decision to effectively move into negative interest rate territory – where they are charging banks for holding cash on deposit, will undoubtedly be fed into local banking rates.
However, Irish banks are caught between a rock and a hard place. They want to attract money like yours, but are paying over the odds for it. Use this to your advantage by shopping around on sites like www.bonkers.ie.
Maximum interest is earned where you allow a notice period before withdrawing it. As you won't need the cash until next year, 60 days would seem more than fine. Permanent TSB offers 2.25pc on its Booster Bonus account but you'll need to keep it a year. KBC has 2pc while Bank of Ireland's 1.95pc is on 30 days' notice. Rabo offers 1.75pc. Always check conditions attached in terms of withdrawals, and remember DIRT tax amounts to 41pc off returns.
The Ryan Review
Ho hum. Welcome to Japan. No need to get introduced to Sushi; we're talking finance. The ECB's decision to employ negative interest rates on central banks is both alarming and serious.
With inflation a full 2pc below its 2pc target (ie, zero, for the mathematicians out there), echoes of Japan's appalling economic stagnation in the 1990s can be heard all the way to Frankfurt.
Here's how it will play out for Joe and Josephine Soap: With a tracker mortgage they'll be feeling a bit smug. Yet, the meagre €5 pm saving per €100,000 borrowed won't be sending them shopping any time soon. Indeed, their plight could worsen alarmingly. It's entirely possible that banks will start heaping pressure on those interest-only loans hubristically granted during the boom. Will hints be dropped about ... ahem, paying off more of the capital now?
Those Soap families with variable rate mortgages might think their repayments will drop now, but they shouldn't hold their breath. Banks need to recover the cash lost on trackers and will be looking to variable rates to do it. They will, most probably, and ironically, see their mortgage repayments rise ... again.
Savers are glum. If they're living on fixed income pensions, they shouldn't plan a holiday any time soon. Although banks really need deposits, they simply cannot continue to afford five times the rate of inflation to pay for them. Expect cuts to rates all round.
Finally, as inflationary measures go (and a bit of inflation wouldn't hurt anybody repaying the national debt in Ireland), it's moot whether it will work. Because scared savers aren't economists – all evidence is that they hoard, rather than spend. Watch this space.