Instead of committing yourself to some elaborate new year’s resolution, which may be all but impossible to keep, why not think about taking some small steps over the coming weeks and months to put your finances in better shape?
Little steps, which are not too overwhelming, can deliver significant financial awards so keep the below in mind as you step into 2023.
Review your mortgage
At a time of rising interest rates, it makes more sense than ever to think about switching your mortgage this year. Given that the European Central Bank (ECB) has signalled further rate increases in the new year – ECB vice-president Luis de Guindos most recently said that “increases of 50 basis points may become the new norm in the near term” – all homeowners with a mortgage outstanding need to take some time to review their options.
As it stands, Irish banks have been slow to apply rate increases to mortgages in line with European increases – perhaps because Irish rates remained stubbornly high while European rates slumped. Nonetheless, this is a situation that is unlikely to remain the norm for too long.
Switching – even if it’s only to a new rate with your own mortgage provider – can offer significant savings.
Take someone with an outstanding mortgage of €250,000 over 20 years at a current rate of 3.2 per cent variable. Repayments are €1,412 at present, meaning a total interest bill of €88,798 over the remaining 20 years. By switching to a fixed rate of 2.7 per cent, repayments drop to €1,349 a month, and the interest bill falls to €73,820, yielding total savings of about €15,000, assuming both rates stay the same over the full 20-year period.
This may now apply also to those on tracker mortgages. Once the jewel in the financial crown, the sharp recent rise in rates means you may now be paying over the odds if you’re on a tracker.
Someone on one of the best tracker rates of ECB +0.5 per cent for example, is now paying interest at 3 per cent, while someone on ECB+1 per cent is looking uncompetitive, at 3.5 per cent.
Given that mortgage holders on trackers are likely to have a very low loan to value ratio (given that trackers were stopped about 15 years ago), there are better deals to be had.
With a loan to value (LTV) ratio of 60 per cent or less for example, you can switch to a rate of 2.7 per cent with Permanent TSB, fixed over four years.
And, if you have locked into a decent rate, you could consider overpaying your mortgage on a monthly basis, a move which will both cut the term of your loan and save you money in the process.
For someone with 20 years to go on their €300,000 mortgage, increasing their monthly repayment up by €200 to €1,864 will cut the total interest bill by €15,006, and knock two years and nine months off the term of the loan.
Remember, doing this doesn’t have to be permanent: many banks take a flexible approach, even if you’re on a fixed rate, so if you’re feeling too stretched each month, you can revert to your regular payment.
Get ready to move savings
Given those hikes in interest rates, it must surely be only a matter of time – right NTMA? – before interest rates on deposits start to increase.
Interest rates on savings are abysmal – you’ll still only earn zero on instant access accounts – but they are starting to move. So, it may make sense to hold back on committing your funds to long-term savings products in the short-term as rates should start to rise.
Bunq, for example, is now paying a rate of 1.05 per cent on deposits; the only caveat being that it only applies on savings of up to €10,000.
Meanwhile Permanent TSB pushed its rates up in November, and now offers 0.75 per cent on its 18-month account (on deposits of up to €1 million), 1 per cent annually on its three-year account, and 1.25 per cent on its five-year product. These rates are now better than that offered by State Savings (although remember the latter are free of tax).
And AIB is now paying 0.5 per cent on a 12-month fixed term (as long as you have a minimum balance of €15,000).
So better rates are starting to come on stream. Shop around before you make your decision for the best rate.
Get a grip on my pension
Rather than get overwhelmed by all things pension-related, why not take a few simple steps this January. First, make sure you’re not leaving any money on the table by checking what is the maximum contribution your employer will make and seeing if you can afford to get this by making a matching contribution.
For example, if you’re on a salary of €50,000, and your employer will pay 8 per cent into a pension as long as you pay 6 per cent, then you will get €4,000 a year from your company if you can contribute €3,000. And thanks to tax relief, this €7,000 annual contribution will only cost you €1,800. So do the sums and see if you can afford to maximise your contributions. It will likely work out much better for you than saving €200 a month in a deposit account and earning zero interest on it.
Secondly, consider whether or not you can afford to increase your contributions to your pension via additional voluntary contributions (AVCs), and whether or not you want to as part of your long-term financial planning goal.
To get tax relief on such payments, you need to stay within the age-related limits on the total contributions you are making to pension savings as a proportion of your earnings: under 30 (15 per cent); 30-39 (20 per cent); 40-49 (25 per cent); 50-54 (30 per cent); 55-59 (35 per cent) and 60 or over (40 per cent).
Thirdly, check what you’re invested in. You should be able to find the breakdown of your pension funds through your company portal. An old rule of thumb would suggest that by subtracting your age from 100, you get the percentage of your portfolio that should be in stocks. So, if you’re 25 for example, you should have 75 per cent in equities; if you’re 40 you should have 60 per cent in equities; and if you’re 55, you should cut it back to 45 per cent. Of course this is a bit arbitrary and may also be on the conservative side, given that people tend to live longer.
In any case, it’s worth checking to make sure you’re not too conservative when you’re young and have plenty of time to weather markets – or, on the other hand, signing up to too risky a strategy if you’re approaching retirement. If you are in the latter group, and within 10 years or retirement, 2023 should be the year you consider paying for some financial advice to guide your transition out of the workforce.
Reduce my debt
If you have personal debt outstanding, it will likely make good financial sense to pay this down – particularly while waiting for deposit rates to rise to give you a decent return on your savings.
The advantages of clearing – or paying down – personal debt are significant; you will be able to borrow more if you’re looking for a mortgage; you won’t have monthly repayments stealing your ability to invest, improve your quality of life etc; and you won’t have the psychological overhang of knowing you’re carrying debt.
Particularly after Christmas, your credit card might be carrying more weight than you’d like – but if you are just paying off the minimum amount each month, it will take some time to clear. According to the Competition and Consumer Protection Commission (CCPC) for example, if you have €1,000 on your card and you pay off just €50 each month, at an interest rate of 17 per cent, it will take you two years to clear that debt, and at significant cost. And if you keep using the card, that date moves ever further away.
It may make sense to move your debt to a provider offering a zero per cent introductory period – Bank of Ireland for example offers 0 per cent over seven months on balance transfers, while An Post offers a 0 per cent rate for 12 months.
Then, increase the repayments to a level you can afford; in the aforementioned example, increasing the monthly repayment to €100 will see the card paid off in just 11 months, rather than two ears.
If you have a personal loan, doing the sums on what you can afford to over-pay mean that you can cut the term of the loan – and save money.
Of course at the same time, you will want to monitor taking on any new debt – be that in the form of sales shopping through a buy now pay later vehicle like Klarna, or taking out new loans.
