25K Mortgage vs 25K Unsecured Loan

krystufer · 5 October 2005 at 11:04AM

Hello group - first time poster - long time reader

Over the years I have saved FURIOUSLY - I am not a boring person, I have my hobbies that I spend money on but I HATE with a passion the debt culture we live in - looks like I am in the right forum. Basically I want to be debt free... totally debt free... I have a young (10 Month Old Lad) family and a stressful job which pays well but to be honest I would rather take less stess & less money so I can enjoy life more. I work to live.

Ok - that is about me - this is my situation:

I have a morgage of £X & savings of £Y. By this time next June I hope that my savings interest + my ongoing saving + potential bonus from work for working close to death will mean that the difference between my mortgage and my savings will mean I only in fact have £25000 of actual debt! Naturally I am very happy about this - BUT IT IS NOT ENOUGH. That projected £25000 debt is rabid monkey on my back and I want rid of it.

My questions are these:

Can I not take out a £25000 (UNSECURED!) loan and pay off the mortgage with my savings + loan?

Wouldn't that be more sensible, i.e. less expense in the long term?

I would have to pay a couple of grand in early repayment charges, but it is still worth it isn't it?

Basically if I stuck with the mortgage and paid it off at the rate I am overpaying it would take about 5 years, a similar monthly payment on a loan would do it in 18 month to 2 years.

I am a bit of a financial dimwit, so I feel I am missing a major flaw in this my master plan.

What are the disadvantages and advantages of what I plan to do? Would it be safer to stick with a mortgage? Please feel free to pee on my carefully planned fireworks

Cheers,

Krystufer

bestyman · 5 October 2005 at 12:13PM

Hi,
Welcome to the board . Im no expert in this so please don`t take what I say as gospel but make do with reading this post till some one smarter comes along.

Our house was bought with a 25k personal loan, although we did not have a mortgage before so slightly different circumstances. We couldn`t get a mortgage ( funny house) but did learn a few things.
In our case the loan rate ( 6.6% I think) was higher than some mortgage rates but we did save on legal fees, searches , surveys etc. The payment protection on the loan from the bank was almost £100 a month, the same can be found elsewhere for around £20.

I think the lowest personal loans are with northern rock etc but some have early repayment penalties, When I took out my loan egg was reasonable apr with no early repayments. Some good links on this site to loan comparisons ( think its (https://www.insuresupermarket.com).

I cannot say which is the best or any pitfalls but Martin ( site owner) has a brilliant guide on remortgaging that can be downloaded from this site
here.

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1045408862,15903,

I always thought that mortgages were cheaper than personal loans as the apr is lower but like I say Im no expert.

Im sure you will get all the help you need from someone on this site.

krystufer · 5 October 2005 at 12:48PM

25K Loan

Thanks for your reply. I guess you are right about mortgages being cheaper over the long term, i.e. lower apr. But the structure of a mortgage is such that you are paying the entire life of the mortgage's interest with every monthly payment and only a very small amount of the capital on a sliding scale. This is why you end up paying back around double the original mortgage loan amount. Although loans are higher APR, over a shorter period my calculations seem to indicate it would be a cheaper option, for example a northern rock loan may only cost you a total repayment of around £26500 over 2 years! That is only £1500 of interest, my mortgage payments I am payment that much in 3-4 months!

Are am I getting this wrong?

I guess it all depends on the circumstances, thanks for the info on EGG. I think the post office also do a great loan with low APR and no early payment charges, I will be looking into them.

Anyone else got an opinion on this?

Krystufer

normski_2 · 5 October 2005 at 1:09PM

I'm no expert but I'm struggling to see how on £25,000 the repayments on an unsecured loan are going to be similar to a secured loan yet you are going to be able to pay the loan of three years earlier.

The over bearing factor should be the a.p.r. which 99 out of 100 will be cheaper on a secured loan (especially as you would apear to have loads of equity in your property) than an unsecured loan.

I'm assuming that you have a repayment mortgage. In essence every month of the morgage term (say 20 years) you pay a sum of money some of which is interest and some of which repays the capital. Therefore in the first few years of say a 20 year mortgage most of your payment goes on interest and a small amount repays the capital. As time passes the amount of capital outstanding decreases and therefore the amout of interest charged decreases and therefore as your monthly payment remains relatively contstant more and more goes towards repaying the capital.

On current information, the only time I can think of you will be better of with the unsecured loan switch is if you have reached the limit of the overpayments your mortgage company will allow whereas with an unsecured loan you could set the repayment level again. A way around this is to reduce your morgage term which will then make your mortgage payments higher and thus you can flex your inflexible mortgage a little.

Please feel free to post again. Remember there's no such thing as a stupid question!!

Normski

krystufer · 5 October 2005 at 1:22PM

25K Loan

You are right - I do have a repayment mortgage which is at the moment not £25000, it is around £100000, my savings which I plan to pay off my mortgage with are going to be around £75000 by next June. At this point I was thinking of moving my savings out of my standard (not very good interest) savings account to pay off my mortgage.

I suppose what you are saying is that if your mortgage is flexible then flex it to a few years and use the low APR to your advantage. The problem I have is that my mortgage is fixed for few years (my stupid fault) and must be one of the most inflexible mortgages on the planet (a company based in Chelthenham... or is it Glocester... not sure). If I consolidate (hate that word) all my savings / debts into that mortgage I am still going to get stung for early repayment. My savings don't really earn enough interest to really come into the equation. It is all very confusing.

Even if I did make my mortgage only a few years, would I still be paying off the interest first, doesn't it work out still to be more than a loan?

I guess an online mortgage calculator will help me answer that one. I am just going to play with the new one at Smile which is really excellent: http://www.smile.co.uk/servlet/Satellite?cid=995187687918&pagename=Smile%2FPage%2FsmView&c=Page&loc=l

Cheers,

Krystufer

Krystufer

CaroleK_2 · 5 October 2005 at 3:44PM

Just a couple of minor points from a non expert!

As well as any early redemption penalties on your mortgage, be aware of any hidden charges on redemption. A lot of mortgage companies are now charging "admin fees" when you redeem your mortgage.

The other thing I would say, is always keep an amount of your savings back on instant access, or at least where it is accessible. You never know when a rainy day may come along!

I've actually got a current account mortgage, which I know some people think that you pay over the odds for, but my savings are all in the account, which means I don't actually pay tax on the interest I am earning. This account suits me because my earnings fluctuate and are eratic, but it means I'm only paying interest on the daily balance. Something that may be worth thinking about.

Good luck!

normski_2 · 5 October 2005 at 3:50PM

Hello Krystufer

Thanks for your post. You have reassured me that lack of sleep from two little Normskis hasn't destroyed all of my 'little grey cells'.

Whether secured or unsecured a loan is always going to contain a mixture of interest and capital in each repayment. I don't think you can get away from the lowest a.p.r. being the cheapest way to borrow the money.

You may have helped answer your own question anyway. I'm not familier with C&G and the ins and outs of their T&Cs but if you are going to have to remortgage then there aren't many morgage providers who offer mortgages to new customers which are less than £25K. Therefore an unsecured loan may be your only option.

However please double check with C&G that you can not alter your mortgage term even on a fixed rate mortgage. A few months ago I was looking at a long fix with Nationwide and the broker (who I trust) advised me that the reducing and expanding the mortgage term was still possible even though the mortgage was on a fixed rate. I assume this will only work if you do not repay the whole mortgage before the fixed period expires.

You could possibly drop your mortgage length to say the date when you tie-in expires. This will then make your mortgage payments a few thousand pounds a month which you will meet from your savings.

Maybe see if C&G will be flexible with the early exit penalty if you re-mortgage with them and make the period very short and use the above method to pay everything back very quickly.

I wish you every success.

krystufer · 5 October 2005 at 4:08PM

25K Loan

Yes you have made a very good suggestion there - Thanks - I am not sure how strict C&G are when it comes to altering the term length. It may be that I have to pay some charges, but at least I would feel happier about not paying 75% interest each month.

I am going to call them now and ask. I always find their customer service department a bit - well - arsey

Krystufer

normski_2 · 5 October 2005 at 4:59PM

Krystufer

All the best, don't ask don't get!

Do post how you get on.

Regards

Normski

25K Mortgage vs 25K Unsecured Loan

Which is the quicker option for a debt free life? 8 votes

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