Just added 7 /12 years to my mortgage term to save money...

Lifes_Grand_Plan · 9 February 2012 at 10:22AM

:eek::eek::eek:

As in title folks, I have just added 7 1/2 years to my mortgage term to save me some money... hope i've done the right thing.

My reasoning - I have reduced my overpayment from £627 a month, down to only £127 a month. I have done this so that I can put the extra £500 a month towards a car that we need (yes need) to reduce the amount of loan I have to take out for the car.

Even a very low 6.0% loan rate needs to take presedence over my 2.89% mortgage.

However as soon as the car is sorted then i'll be sticking that £500 a month back on the mortgage so the goo thing is I know that it is well within my power to change the 7 1/2 years back to much less again very soon.

I still feel like a terrible moneysaver though for reducing my mortgage pverpayment, it just feels wrong even though I know in the end it is saving me money.

gingeralan · 9 February 2012 at 10:46AM

Sounds sensible. If you need a new car and that is the higher interest rate you are doing the right thing.

While it's nice to aim to clear the mortgage quickly you also need to live and sometimes this means adjusting long term plans to accommodate changes. Sure you'll get back to overpaying the mortgage soon.

All the best

downsizer3 · 9 February 2012 at 1:39PM

I know its hard when you're focusing on OPing but that's the wise choice - avoid interest before saving IMO.

abouttimetoo · 9 February 2012 at 5:11PM

Hi LGP

Hope u don't mind me adding my two penneth worth in. I completely understand what you are trying to do but have you worked the figures out or just based your decision on the interest rates involved?

You haven't mentioned what your mortgage balance is or how much you need to save for the car but it may be that if you have a higher mortgage balance then you will be charged more interest than you will pay on the car loan even if the car loan apr is higher than the mortgage.

Hope that makes sense? What I'm trying to say is that the outstanding balances must also be taken into account not just the interest rates.

Regards
ATT

Lifes_Grand_Plan · 10 February 2012 at 1:23PM

abouttimetoo wrote: »

Hi LGP

Hope u don't mind me adding my two penneth worth in. I completely understand what you are trying to do but have you worked the figures out or just based your decision on the interest rates involved?

You haven't mentioned what your mortgage balance is or how much you need to save for the car but it may be that if you have a higher mortgage balance then you will be charged more interest than you will pay on the car loan even if the car loan apr is higher than the mortgage.

Hope that makes sense? What I'm trying to say is that the outstanding balances must also be taken into account not just the interest rates.

Regards
ATT

Hi ATT...

I'm affraid I don't understand, although if I might have missed something then I am definately keen to understand...

My mortgage is about £80k left to pay...

The car is likely to be £10k - £12k.....

I will need the car in the next few months so won't have time to save the whole amount, but was thinking I might be able to get a loan of £7.5k rather than £11.5k?

Does the above help you to explain what you meant more?

DominicJ_2 · 10 February 2012 at 1:32PM

Why do you need a £12k car?
You can buy a great second hand car for £3k

abouttimetoo · 10 February 2012 at 2:52PM

Hi LGP, no problem and first let me say you must do whatever you feel comfortable with, this board has a varied mix of approaches, some posters will always take the course of action that makes the most financial/mathematical sense and others (me included) work it out but then also throw in the 'what makes me most comfortable' factor e.g. I overpay my mortgage although I know I could make a little bit more money putting it into a savings account because I prefer seeing the mortgage balance go down rather than savings going up and I also don't have the temptation to dip into the savings money

We don't know the type of mortgage you have, how long the remaining term is or how long you intend to take the car loan over so in the meantime let me know if this very simplistic example helps any

1. You borrow £100 from me and I want 10% interest so you will pay back a total of £110
2. your borrow £1000 from me at 5% interest so you will pay back a total of £1050

So even though you are borrowing less money in the first example and at a higher interest rate (the same scenario as your car loan) the second example is cheaper borrowing because you are borrowing 10 times the money but only paying back 5 times as much interest and if you were overpaying it would have even more of an impact ( a bit of a wobbly example granted because I haven’t mentioned a term)

So just because the car loan apr looks higher that the mortgage interest rate you also need to take into account the balances of £12,000 and £80,000 i.e. if you don’t overpay the £500 a month to the mortgage will you pay more or less monthly interest on the mortgage at 2.89% than you would on a car loan of £12,000 but at a rate of 6%

Can you look at your mortgage on-line, do you keep any records of how much interest per month you pay to the mortgage (if you've had a mortgage statement recently this may help)

I think you need to have a play with a few loan and mortgage calculators and work out what the real difference is should you reduce your mortgage overpayments. If you buy a car for £12k and stop overpaying the £500 for 24 months (assuming you repay it back at £500 per month) do you fully understand the implications of the 12k not going to the mortgage in terms of how much interest you might have saved versus what you will pay to the car loan

Have you also thought of other ways of financing your car such as credit cards for example

As I said it is entirely your decision and I always believe it is the sensible approach to save for things and reduce the amount you need to borrow

Oops, another thought, we don't know how long you have left on your mortgage as the earlier the overpayments are in the term the more beneficial they are as they are eating into more of the capital

Having done the above example I'm still not sure whether I've helped any so if it still doesn’t make sense please shout up as I’m sure someone else will be able to explain it better than me

Finally, I'm sure you will have done your homework and I know you said you need the car but it does seem rather a lot of money to spend on one?

Good luck with your plans

Regards
ATT

Lifes_Grand_Plan · 10 February 2012 at 3:00PM

Hello again,

Really sorry but my brain is now spinning after reading the above...

To clarigy your questions - my mortgage is a HSBC tracker and currently at 2.89%

It was £125k to start with and I have always overpaid since I took it in June 2006 so now owe about 80k on it.

One thing I didn't say in the OP which may have misled - My normal payment is £489 a month since my fixed rate ended (June last year) and I went onto the tracker but I have always paid £1100 a month since that time. So taking the £500 off the payments I will be paying £600 a month on the mortgage.

I also didn't say but I have only reduced the payments for a few months to get a bit towards the car, as soon as I have that bit I will stick the £500 straight back on the mortgage so back up to £1100 a month, so I won't actually add 7 1/2 years really unless I decide not to put the payment back up...

Lifes_Grand_Plan · 10 February 2012 at 3:08PM

DominicJ wrote: »

Why do you need a £12k car?
You can buy a great second hand car for £3k

I will assume these are genuine questions.... although I don't think they have too much relevance here as surely its personal choice...

1. We are having a baby in July and want a safe car and one with sufficient room.
2. I do a lot of driving for work so need a reliable car, plus the mileage payments I get will offset some of the cost. I also want it to be comfortable and not make me resent the job that makes me travel those miles.
3. Because a £12k Kia Ceed comes with a 7 year warranty - a £3k car will not. So 7 years hassle free motoring with the Kia, or potential big repair bills with a £3k car.
4. Because the Kia (diesel) that I am looking at does 62.8mpg combined cycle.

I'm happy to listen to any suggestions you may have for suitable cars that meet the above category or could offer suitable alternative options.

Trentenders · 10 February 2012 at 8:32PM

Just remember that you don't always get the best advice when asking for it on a forum :rotfl:

My opinion is thus:

You're saving money doign what you are, effectively paying for a 6% loan with a 2.something% mortgage.

After the car is paid, you can always overpay the mortgage again/reduce the term back down. If I was you though, I would forget about overpaying and fill your and your partner's cash ISA allowances first every year (assuming that you can get a higer amount than your mortgage rate). This offers liquidity and the savings can always be used to pay chunks off your mortgage at a later date, it rates move in the wrong direction (assuming no early repayment charges).

financialbliss · 10 February 2012 at 11:49PM

Hi Lifes Grand Plan,

Had a heads up from ATT, so I’m going to join the mix to see if I can offer any advice (probably not).

abouttimetoo wrote: »

You haven't mentioned what your mortgage balance is or how much you need to save for the car but it may be that if you have a higher mortgage balance then you will be charged more interest than you will pay on the car loan even if the car loan apr is higher than the mortgage.

I'm with ATT - I believe you have to take the interest over the whole of your mortgage term into account when reducing your payments vs car loan. I’m going to do some calculations, but I’m making some assumptions.

You don’t have to pay £1,100 a month, but you’re making a £600 standard payment and a £500 overpayment. You’re discussing dropping the £500 OP temporarily to part finance a car.

Lets take a look at your situation before the car.
Start January 2012 with a mortgage of £80,000 at a rate of 2.89%

Assume loan continues at 2.89% for the remainder of the term and you continue paying £1,100 a month towards the mortgage until it completes.

I’ve calculated you would complete your mortgage in September 2018 and this will cost you approximately £8,062 in mortgage interest for the remainder of the mortgage term.

Situation with dropping overpayment to part finance car.
Start January 2012 with a mortgage of £80,000 at a rate of 2.89%

Assume loan continues at 2.89% for the remainder of the term and you drop your £500 OP for 12 months, ie the whole of 2012 at £600, then start from January 2013 paying £1,100 a month again towards the mortgage.

I’ve calculated you would complete your mortgage in March 2019, ie adding 6 months on to your mortgage and this would cost you £9,290 in mortgage interest for the remainder of the mortgage term.

So, you’ve took a 12 month overpayment payment holiday and this has cost you £9,290 – £8,062 ie £1,228 in additional mortgage interest. You have saved up 12 x £500 overpayments, ie £6,000 to put towards a car.

Say you were to take out a £6,000 car loan over 12 months. Say you were offered a loan at 10%

Total car loan interest over 12 months would be £600.

Due to compound interest in effect over the remaining term of the mortgage, you could potentially be paying more if you stopped overpaying on your mortgage, ie £1,228 being greater than £600.

In reality though, it’s about balance. Not disputing the fact you need a car, but as you’re in the mortgage forum, you’re interesting in cutting your mortgage too.

Please check my sums yourself – I don’t know your full facts and figures and perhaps model the situation yourself with a spreadsheet. There will be probably be an optimal payment split for your circumstances.

If you’re interested, try creating a spreadsheet yourself – you’ll understand much better what is going on and the effect on your mortgage long term and your completion date. See two posts in my diary containing instructions on how to create a sheet, then take a copy for reduced payments and compare the two and compare with taking out a car loan, funding part of the purchase on a 0% credit card etc.

http://forums.moneysavingexpert.com/showpost.html?p=14965035&postcount=534
http://forums.moneysavingexpert.com/showpost.html?p=14966029&postcount=536

Hope this helps,
Financial Bliss

Just added 7 /12 years to my mortgage term to save money...

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