Neither a Borrower Nor a Lender Be

By Marc Westlake

Published on: June 18, 2020

Good advice does not need to be complicated to have a dramatic impact on an individual’s financial position and save them thousands.

As an example, let’s look at a client who had €130,000 in bank savings and a mortgage of €314,000 at a rate of 3%, costing over €16,000 pa in repayments with just under 30 years to run.

To be sure of making a better return than the mortgage, an alternative investment would need to be making enough to cover both tax and charges.

Assuming exit tax at a rate of 41% on profits, a 3% mortgage rate is equivalent to a 5.08% gross of tax investment return.

The investment would also be subject to charges, so let’s be generous and assume a 1.5% pa charge (in reality, it could be as high as 5% pa).

So, in order to make not paying off the mortgage the best option, the investor would need to average a return of at least 6.58% pa. Remember, that’s just to break even.

To put that into context, over the last 15 years, the annualised return on Global Equities, as measured by the MSCI All Country World Index, has been just 6.27% pa.

Source: FE

Whilst there may be some client specific mitigating factors such as:

  • low rate tracker mortgages
  • capital gains tax losses which could offset tax on gains
  • making pension contributions with tax relief

In general, we can conclude that many people would be better served by repaying debt rather than from making taxable investments.

In this case, the client now has reduced the mortgage to around 13 years left to run and are projected to save over €110,000 in mortgage interest.

 

Source: AIB

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