Making Cents: More Limerick readers questions answered
Question
LIAM, I have a tracker mortgage of sorts. I brought it with me from a previous mortgage but my lender added on 1% above what the previous margin was. So, it went from 1.1% to 2.1%. In light of recent interest rate hikes, I’m wondering should I move from this tracker rate and into a fixed rate instead? I owe €230,00 and I have 12 years left to repay and if it means anything my property has an energy rating of B2 and my loan to value I think is about 50%.
Answer
Ordinarily I’d say to people who have a tracker mortgage to hold on to it, because even if fixed rates are lower in the short term, over time i.e. 15 years +, a tracker should always cost less.
But in this instance because 1% was tacked on to your original margin, you’ve a tracker in all but name. The lowest your rate can ever go to is 2.1% because if the ECB reduce their rate to 0%, you’ll always be paying 2.1% at a minimum. Given that your current rate is 3.35% and is about to become 4.10% following last weeks’ rate increase, when you stand it alongside fixed rates, it’s now quite expensive which is why I’d personally have no difficulty moving to a fixed rate and locking into a good 5- or 10-year rate.
Your lender is currently offering a 5-year fixed green rate at 2.60% and a 10 year at 3.60% assuming your loan to value is in fact 50% or lower. By locking into a 5-year fixed, which is the one I’d personally choose, you’ll see your monthly repayment reduce by €164 per month or €1,968 every year and it will probably be a lot more by the time the ECB is finished with more rate increases.
But more important than anything else is the peace of mind you’ll have knowing that whatever the ECB does, you are protected from it and you’ll have certainty knowing what your next 60 or 120 monthly repayments will be.
Liam, I’m thinking of selling some company shares I’ve built up over the years. Our share price has taken a hammering since the start of year i.e. -32%. And that’s my reason to sell. I’m worried that they will fall further and I’m thinking should I cut my losses and get them out and leave them sit in cash for a while until things rebound. What do you think?
The above was just part of a much longer email this gentleman sent, where he mentioned the company he worked for but asked me not to mention who they were.
There’s a saying that you should never sell in the red or buy in the green.
And red is the colour when stocks have fallen in value and green is when they’ve risen.
I’ve looked at your company’s share price and how it has performed over the past 5 years and in that time, it has grown in value by +96%.
So, you can look at your share values two ways i.e. I’m down 32% since the start of the year or I’m up 96% over the past 5.
Some investors are looking at your company’s share price and seeing a different picture than you are. They think because your company’s share price is trading at its lowest level for over 10 years, it’s a fantastic opportunity to buy this share, if you’re keeping it for the long term that is. They’re looking at its core revenue stream which they believe is strong as is its’ advertising income.
And your company’s share price, along with many others, is being impacted by higher interest rates, higher operating costs, and reduced consumer spending and that’s why its earnings are down by about 7% and why it’s share price is being impacted. However, its revenue is expected to rise by 11% next year and sales expected to grow by 10% next year as well.
So, whilst this year has been painful, no doubt, it’s been seen by some as a great opportunity and rather than selling your stock, they’d tell you, you should be buying more.
That mightn’t sit well with you, so maybe take some profit out of what you’ve invested, might be an option. If you personally invested say €15,000 over the past 5 years, that should now stand at €29,400. You could take out some gain and leave the original €15,000 invested and if that makes you feel better, then great. But if you do this, I’d say have some purpose for those funds you extract. Don’t just leaving them in an account earning nothing.
And if there wasn’t as much growth in your company’s share price over the past 5 years and in fact your shareholding was down by say 30%, you should always have your exit number so that when it reaches it you’re out. Having this in place prevents you from selling too quickly and regretting what you did at a later date.
Liam, I’m wondering how early can I retire?
In my pension pot there’s about €200,000. I'm 49, single and have no dependants. I have worked since the age of 22. I am currently contributing 25% of my wages to my pension. When I turn 50 next year, I expect to increase that by an extra 5% as well. If I needed a yearly income of €25K at what age could I get there?
The amount you need to accumulate to pay yourself a yearly income is about 25 times the amount you’ll spend each year or 300 times your monthly spend, either will give you the same outcome.
So, if you need €25,000 a year, you'll need a fund value of €625,000 i.e. €25,000 x 25.
If you contribute what you say you will, along with what you have accumulated to date and your fund averages a 5% annual return over the next 13 years, you’ll hit that €625,000 mark and you’ll be able to retire at 62.
However, you could fast forward retirement to 60 if you wanted to as well.
At that age, you’d have a fund value of €552,474 which would pay you c.€22,099 per year.
It's a little shy of what you need i.e. just €2,901 and if you were able to spend that amount rather than €25,000 then you'd be fine to retire at 60.
And that income would increase further when you reach 66 when the state pension would kick in.
So, age 60 to 65 you'd have €22,099 and from age 66 onwards that might become somewhere between €34,000 and €35,600, it will depend on your average yearly PRSI contributions.
And at 60, perhaps €22,099 will be enough?
If it isn’t, if you had other non-pension savings they could help bridge the gap.
If you did, you'd need €14,505 because you could take €2,901 from it each year to bring yourself up to the €25,000 mark and after 5 years the state pension would then kick in.
And if you didn’t have any other savings, and you needed €25,000 per year, then the age you should be able to retire at is 62.
Also, I have only worked off your personal contributions but if there is also ones coming from your employer, then you might be able to retire sooner.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie