Mortgage or Investment – Use Your Lump Sum Wisely

It wouldn’t be a lie to say that after the recent harsh financial crisis that many of us if not all of us are broke and suffering financially. However there seems to be an increase in property sales on the property market.

If you are one of the lucky few that have a cash sum at hand, you could find yourself wondering what to do with it. Interest rates are at an all time low, so you might want to do something a bit more productive with your savings rather than leave it gather dust in a bank account.

Perhaps you have a mortgage and that money might clear away that burden pretty handy, but is it wise to clear it away?  Well this can depend of the type of mortgage you have.

Variable Rate

If you’ve got an expensive mortgage and come into quite a sum of money, than it would make sense to pay it off now that you can afford to do so, as more often than not you can save thousands by paying off your mortgage early.

It is very common knowledge that mortgages are a lot more expensive than they were lets say six years ago, they are also a lot more harder to get.

Let’s say that you are borrowing more than 80 per cent of the value of your home, with a variable rate mortgage, you will be service to an interest rate around 5 per cent. Now say that last week you bought your home with €200,000 that you borrowed. Let’s also say that you came into a significant lump sum, enough to clear away that debt. You’d save somewhere between €100,000 and €110,000 by using the lump sum to clear your debt.

By this logic is very sensible to use your lump sum to clear away your mortgage loans, but this is subject to your rate and you should check your rate before attempting to do so.

Tracker Rate

Now this type of mortgage might not apply to a lot of people as the banks stopped offering them to clients around 2008, however the interest rate on this type of mortgage can be quite low. In this case it doesn’t make much sense to pay off your mortgage early, as you won’t save very much. However if you expect your financial situation to deteriorate, then paying off your tracker mortgage makes quite a lot of sense in the long run.

The founder of the personal finance website the Irish Financial Review Frank Conway has said. “Interest rates are so low today; if you’re on a cheap tracker mortgage, I’d hold off using a lump sum to pay down your mortgage. You can deal with the Threat of interest rates pushing up the cost of mortgage repayments later.” This does not mean that the rates won’t change and if you find yourself facing a higher rate, Frank had this to say. “If interest rates start to rise, revisit whether or not you should use your lump sum to repay your tracker then.

Be Prepared

If you are about to lose your job, or are struggling to keep your head above water financially, it would not be very wise to invest your money, nor would it be useful to repay a cheap tracker mortgage.

Paying off a cheap mortgage, or even making a significant financial dip in your mortgage loan, however it is very wise to keep a small cash sum aside. People often underestimate their expenses and what they can afford, you need to be prepared, especially in this financial climate where prices are fluctuating and services such as private health insurance, property tax and education are on the rise.

Remember what I said earlier about mortgages being harder to get than 6 years ago? Well the same is true for loans. Banks are not lending as much as they used to, so if you unexpectedly needed money, it can be hard to find. For this reason we would advise setting some of your money aside for a rainy day.

As always if you are dealing with a large sum of money, it is very important to receive financial advice. Sometimes there can be a fee, but this helps safe guard your money from being squandered.