The recent deal from PTSB where they will top up any amount you decide to clear off your mortgage has started people wondering if they should consider it. I touch on an area similar to this in a recent post on debt forgiveness. http://prosperous.ie/?p=214
I am going to look at the specifics of the deal and take you through an example.
What PTSB are offering is that for every €100 extra you pay off your tracker loan they will give you a further €10 off your capital amount provided you continue with your current repayments i.e. you don’t then look to reduce your monthly repayments.
This makes sense for the bank because it means they are getting you to reduce the loan amount on a loan that is costing them money. It costs PTSB about 5% to borrow the money they are lending to tracker customers at anything up to 3%.
Let’s step through an example and see how it works. Let’s assume Joe has a €400,000 mortgage and he has €100,000 to pay off the loan.
If he does nothing the mortgage will run for 20 years and he will pay total interest (assuming a flat 3% interest charge) of €132,413.
If however he simply used the €100,000 he has and paid off this amount of his mortgage (ignoring the special offer for a moment) he would reduce his term to a little less than 14 years and only pay €65,508 in interest. A saving of a whopping €55,978 in interest compared to leaving the mortgage alone.
If we take the current deal into account and he clears €100,000 and the bank clears a further €10,000 he would end up paying total interest of €61,803 saving interest of €70,610.
It’s probably a little clearer here
|Does nothing||Pays €100,000 off||Pays off €100,000 and avails of the 10% bonus|
|Total interest paid||€132,413||€65,508||€61,803|
|Total interest saved compared to doing nothing||N/A||€66,905||€70,610|
So it is clear it saves Joe money on interest but does that mean it is the right thing to do? In my opinion for some people it is the right thing to do but for most it is not. If Joe were to take the €100,000 and invest it the interest accrued (provided it was greater than the interest on his mortgage) would be more beneficial.
For example if he achieved 5% per annum (I can currently get guaranteed rates for client in and around this amount) in 14 years time the fund would be worth just shy of €170,000 before tax. Compare this to the total interest saving of just over €70,610 mentioned above and I think he is on to winner. This is because he has access to the funds throughout in case of an emergency and he also leaves himself open to a better return than this. For example if he achieved 6% growth per annum his fund would be worth €201,000 in 14 years time (before tax).
It is my belief that the option will be very attractive to people however you need to be aware the bank are doing this to get themselves out of a hole and I don’t think this offer goes far enough. Be careful something better may be coming around the corner.
If you are deciding to go ahead, spend some time with an independent financial advisor first, ask them to review all of your finances. They will be able to take a holistic approach and make sure you are not missing something else. Do not rely on the bank to provide you with the advice you need.