Following on from yesterdays post in relation to the PTSB deal https://festinosolutions.com/demo-sites/prosperous/?p=216 I have now looked at the following case study for a client who has agreed to let me put it onto my website.
- Client has ten years left on their loan
- They are currently paying a 0.75% tracker which means their current rate is 2%.
- The mortgage has €158,000 remaining
- It’s interest only for the full term however PTSB have the right to review it in 2012.
- They are considering paying €70,000 off the loan and availing of the top up of €7,000 from PTSB. (meaning they will clear €77,000 off the mortgage)
- After clearing €70,000 they still have other funds they can rely on (ie this will not clear them out)
They asked me was it the right thing to do. I looked at several scenarios including if interests rates went up.
This is my reply:
I have had a look at a few scenarios for you, the first is that interest rates stay the same and PTSB leave you on interest only after 2012 (both unlikely)
Scenario 1, interest stays the same, you remain on interest only, 10 year term.
If you pay the €77,000 (including top up) off your mortgage it will save you €15,400 in interest payments (approx) over a ten year period.
Just to give you something to compare it too if you were to invest your €70,000 instead your investment would only need to grow by 2.78% per annum after tax to keep pace with the deal.
Scenario 2: interest increases by 1% per annum for next 5 years peaking at 6% for the last 5 years, you remain on interest only, 10 year term
In this instance the deal will save you €38,500 in interest by investing your €70,000.
Again an investment of €70,000 today would need to grow by just 4.3% to make up for the interest and bonus paid.
Scenario 3: interest stays the same, you go capital and interest in 2012, 10 year term
In this scenario if you clear €77,000 off the loan (incl top up) you will pay total repayments of €90,196 over the remaining term of ten years. You will also save €8741 in interest.
However if you do nothing and invest the €70,000 although your monthly mortgage repayments will equate to a total of €175,937, taking everything into consideration your investment would need to grow by 3% per annum after tax for it to make better sense to go the investment route.
I calculated this in the following way:
Total repayment if you do nothing = €175,937
Total Repayments if clearing 70k
Actual monthly repayments €90,196
€70,000 once off €70,000
Total Repayments €160,196
Total repayment saving €15,741
Plus interest saving €8741
Total saving €24,482
If you invested €70,000 today and it grew by 3% per annum after tax over the next ten years it would be worth €94,482 at maturity. This growth would negate your additional repayments and the additional interest you have to pay whilst also leaving you access to your cash.
Scenario 4: interest goes to 6% from 2012 onwards, you go capital and interest in 2012, 10 year term
This is where it gets interesting. Firstly I don’t think 6% from 2012 to 2021 is realistic so this is a bit of and overshoot but let’s play it out.
By putting the €77,000 (incl top up) off your mortgage you will save €24,379 in interest and €101,376 in monthly repayments (or €31,377 in total repayments, which includes the 70k)
Using the calculation in the last scenario an investment of €70,000 would need to grow by 5.87% per annum after tax to negate the additional interest and repayments.
The rates of return required on an investment are low and I feel you need to give this serious consideration. There are pro’s and con’s to this deal and you need to weigh them up for yourself. Ideally we should meet before you make your final decision. As I said on the phone the only thing that is not possible to calculate is the emotional element of the deal.
I can get clients guaranteed rates of return for investments and I can even get the interest paid out annually if necessary.
Note: The client has been told that her repayments would reduce following the lump sum payment. This is because she is on interest only. In the above example it was assumed in all scenarios that the repayment would reduce however it is questionable that this would actual happen.