Liam has done the numbers, and yes that electric car can be cheaper to run than a petrol or diesel Picture: Pixabay
THIS week, I’d like to share with you, three questions I received recently from readers and the answers I gave to each.
Question Number 1
Question: Liam, I’m a teacher and planning for retirement although it’s sometime away yet. I requested quotations from the DOE pension dept and I’m attaching a copy of what I received. I would appreciate your advice on whether I should increase my rate contributions i.e. buy back years and if so, whether by lump sum or periodic deductions, or both.
Answer: Thank you for your question and after reviewing what you sent on, it appears your pension is calculated at a rate of 1/80th of pensionable salary, up to a maximum of 40 years’ service.
If you didn’t buy back years, at retirement you’d have 33 years’ service which would pay you a pension, based on current income and it’s trajectory of c. €31,677.
If you bought back years i.e. 6.8 to bring you to the max number of years, that would pay you an income of c. €38,397.
The difference is obviously €6,720 per year but that comes at a cost to you of €132,328 if notional service is at age 60. So, your break-even point in this instance, and what I mean by that, is the length of time it takes you to get back what you put in is 19.69 years i.e. €132,328/€6,720.
If you retire at 60 and live past 80, you’ll get back more than what it cost you, and if you don’t you won’t.
The same applies to age 65.
The cost here to buy back years and to bring you to the maximum amount is €82,407, so the break-even point in this scenario is 77 i.e. €82,407/€6,720 =12.26 plus 65 (your age) = 77.
In both instances it’s a very big outlay for not a huge difference each year and whether this cost is deducted from salary, or you decide to pay the amount upfront is nearly a by the way. Before you make any decision, you’d have to question and investigate whether you really need that extra €6,720 in retirement and only you will know whether you do or not. It will depend on how much you’ll spend in retirement and whether you have additional sources of income and if you have a partner what income they’d have etc.
If you never bought back years and the lower amount you receive is enough then I’d probably choose not to make those contributions but that’s not to say you shouldn’t either, it’s just my personal opinion. I think the upfront cost or ongoing deduction from your salary is just too high for a higher future pay out that perhaps you may not need. And you’d have to question whether those monies would be put to better use now by paying down debt, pay off a mortgage, use as income if you decided to retire earlier etc.
Question Number 2
Question: Liam, my husband, and I are considering buying an electric car, but we are not sure whether it's the right time. On average my commute to work is about 110km per day, although I will be able to work from home at least 2 days a week. The car we’re considering buying is about €40,000 and my question is, if we bought it, would the car pay itself in time? Any help would be much appreciated. Thank you.
Answer: I have been asked a similar question by many others recently who were looking at buying an electric car versus a diesel or petrol car.
And when I run the numbers from what you've outlined in both instances, factoring in things like energy use per kWh, electricity cost per kWh, distance travelled, petrol price per litre etc. the cost to you if you chose a diesel or petrol car where your daily commute is 110km, is about €26.90.
The same journey with an electric car, I calculate is €9.34.
So, the differential is €17.56 per journey and over a year, based on 46 working weeks in the year and a 3-day, 110km daily commute, it's €2,423.
I looked at the cost of an electric car and a diesel one recently and the difference was €6,350 and if the same applied to the car you're thinking of buying, it would pay for itself in about two and a half years, but again that will depend on the difference in the cars cost and your daily commute, whether that becomes longer or shorter. If your daily commute is longer or becomes more frequent, the car begins paying for itself quicker and if the commute is shorter and less frequent, it takes longer.
Question Number 3
Question: Liam, I have a variable rate mortgage which is currently being charged at 3.5%. I owe €279,500 and there’s 23 years remaining. I’m considering switching to a 5 fixed rate which would reduce the rate to 2.70%. However, my lender told us, that if we made a lump sum lodgment against our mortgage in the amount of €30,000, it would bring the rate down even further to 2.65%, because we’d move to a lower loan to value band. We have this money sitting in an account earning nothing and we have our emergency fund locked away, so we can afford to do this, but wondering should we?
Answer: I’m not sure if your lender told you what the monetary impact this partial redemption of €30,000 would have on your monthly repayment? It sounds good that you’re moving into a lower interest rate bracket but when you run the numbers, you’re effectively giving up €30,000 for .05% which based on the amount you owe, and term remaining is only a monthly saving of €7.
It’s not a significant saving and I wouldn’t be motivated to give up that amount of money for such a small monthly reduction. And the difference that .05% has on your total interest payback, if the differential remained the same for the term remaining on the mortgage is small at just €1,938.
The bigger advantage to making that reduction with your present lender is not a lower interest rate, but the impact it would have on reducing your term and the interest savings, it would achieve anyway.
When you look at the impact, you’d discover that you’d reduce the term by 3 years 2 months and save c. €22,727 in interest payments.
And that’s the big win with making that lump sum. It’s knowing that you’re getting a guaranteed return of €22,727 from your lodgment of €30,000 and knowing you’ll be done in 20 years rather than 23, and you’ll have 38 fewer monthly repayments in the process.
One final thought for you
I’m not sure whether you’ve explored what rates other lenders are charging?
Well I have and when I compared your lenders 5-year fixed rate and what others are offering, you can do much better.
One lender is currently offering a 5-year fixed rate at 2.05% with a loan to value of between 60% and 70% and 2.15% if it’s between 70% and 80%.
Either rate is significantly better than your current lenders offering and even at a 2.15% rate, if you moved without making any lump sum lodgment, you’d save yourself €191.28 each month.
That’s a serious saving and something I’d certainly pursue.
And if you applied that saving as an overpayment each month along with your lump sum of €30,000, now you’re taking 6 years 2 months off the term of your mortgage, and you’d be mortgage free in 17 years, not 23.
Now we’re talking!
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie
Subscribe or register today to discover more from DonegalLive.ie
Buy the e-paper of the Donegal Democrat, Donegal People's Press, Donegal Post and Inish Times here for instant access to Donegal's premier news titles.
Keep up with the latest news from Donegal with our daily newsletter featuring the most important stories of the day delivered to your inbox every evening at 5pm.