There has been some coverage of people saying that the PTsb offer of a discount for overpayment is not good value, that the bonus should instead be in the region of 25%.
I don’t know where that figure has been taken from, having tried to work it out several times we just can’t make it stack up.
Is the idea of an overpayment any good?
In the PTsb scheme you have to consider ‘net interest’ rather than just stating that it isn’t a great idea. The figures I have done are based on the clients position rather than what the bank may or may not make – in the same way that I don’t query the margin a shopkeeper gets on a Mars bar – which is where some focus has been on this.
Rules of scheme: you can’t pay more than 50% of your mortgage, every 5k gets a 10% bonus, so take an example as follows €200,000 mortgage on a 2.25% tracker over 25yrs, €100,000 on deposit at 4%
[one flaw in any current demonstration is that deposit rates are not likely to remain high but interest rates will go up] We’ll just look at the interest portion to strip out the capital repayment portion
Mortgage: 200k x 2.25% = €4,500 p.a
Deposit: 100k x 4% = €4,000 then apply DIRT = 4000-27% = €2,920
Net position = -1,580
Now, put 100k against mortgage = 200,000 – 110,000 (100k + 10k bonus)
Mortgage: 90k x 2.25% = 2025 p.a. interest cost [because you are keeping the same monthly repayment, effectively reducing the term
So it looks like you are €445 less well off per year but your capital position is better by 10,000 upon which you are also not paying interest so there is an interest savings there of €225 and to get the €10,000 up front v.s. earning the €445 p.a. means it would take almost 20 years to catch up by earning interest and offsetting it against interest payable (10k/445).
The person now also has only 10yrs left on their mortgage instead of 25 and if they decided to pay it down and then use their old mortgage payment in a savings plan they do better by it. Getting rid of debt is a good idea, and the PTsb bonus scheme just puts a sweetener on it.
Obviously, if you don’t have a rainy day fund then this is not for you, if you have a cash bias or debt elsewhere that is at a higher rate then it is a bad idea, otherwise I think it gives the consumer an advantage as well as the bank, nothing wrong with a win-win situation.