In this climate, what would you do???

Laws777

Hi all, advise greatly appreciated.

We have a mortgage, currently with Northern Rock, ending in Dec 09. I know that seems a long way away and plenty of time for things to change, even slightly but....

3 yr fixed rate, taken out in 06:

House valued at £180,000
£171,000 - Mortgage
£30,000 - Unsecured loan

We've scrimped and saved and....

Figures as at July 08
£168,420 - Secured
£13,240 - Unsecured

Our plan from now until 'shopping for new mortgage time' in Sept 09 was to clear the unsured loan completley and knock another £6k off the mortgage, bringing the LTV down to 90%, thus leaving us more options on the mortgage market.

Now, rumours being 'mortgage rates will go up' and 'mortgages will be harder to renew' - I'm wondering, are we wise to pay off the loan or should we be targetting the mortgage instead?

Not sure if this is a benefit or not but our house is an 'odd' on the street we are on. A 5 bed, detached, large garden, lots of outbuildings, on a house full of terraces. Thus making it a hard property to value.

We have done more work to the house since the NR valuation but will a new lender, in Sept 09, value at a potential 10% less or even more by then? Should we reduce our LTV before clearing the loan?

Sorry for rambling! I hope someone can advise as best they can, although I know obvioulsy none of you are psychics! Thanks in advance
(Also posted in Mortgages & Endowments Forum)

Daft_Pegasus

Assuming that the interest rate on your unsecured loan is higher than your mortgage interest rate I'd reccomend you continue with your current plan to pay it off rather than the mortgage.

The economic environment is up in the air at the moment and whilst interest rates may go up, the government also need people to start spending again and therefore the BoE are under pressure to reduce rates.

As you say, no one has a crystal ball, so I would concentrate on paying off the debt that costs the most (unsecured loan) so that once it's gone you can plough more into paying off the mortgage if you need to. Worst case scenario is that you go onto NR's SVR for a while whilst you get the LTV down.

Laws777

Thanks Daft Pegasus, we are paying 5.99% for both mortgage and loan at present. Would you still advise the same thing? Thanks in advance

Daft_Pegasus

I think I'd still pay off the loan personally. When applying for a remortgage they will take into account any loans you already have so I don't think you'll get a better mortgage deal if you paid off the mortgage instead of the loan. However you might find a more accurate answer by speaking to a financial advisor.

EssexHebridean

If I remember rightly NR told us when we remortgaged to a new deal with them that they consider the mortgage itself and the associated Unsecured loan to go hand in hand - ie, you couldn't take mortgage elsewhere and still leave the loan with them at the same interest rate. (I assume that yours, like ours, is both at the same interest rate?). We amalgamated the two when we got our new deal. Being with NR means that most likely you will only have two options when your deal ends - stick with them on the variable rate, or move elsewhere. It's possible that by then they might be in a position to offer new fixed rate deals but the way things look at the moment, that's doubtful. With that in mind, I'd work to get rid of the loan portion ASAP if I were you I think.

ailuro2

If they are the same rate it doesn't really matter in monetary terms which one you pay off first.

You have about 14 months before the mortgage deal runs out - how much will you be able to pay off between now and then, given that prices for fuel, food and everything else is rising ever rapidly.

Having a good LTV rate will get you a cheaper %interest rate, but having an outstanding loan might count against you on the amount banks want to lend you , so you need to look at salary multiples too, to see how attractive you are as borrowers.

Sorry to ramble, but it's more than just one issue you need to take into account..

Laws777

Hello everyone, thanks for your input so far. We are currently on fixed rate at 5.99% for both secured and unsecured.

My understanding was that at the end of the term (Dec 09) we can sit tight with NR and pay (if current situations stick) a high SVR for both parts.

I did think, (but do not know for sure so some investigation needed I think, I had read a number of posts on MSE that lead me to think you could split the 2 - maybe I'm wrong....) that we could remortgage and leave NR with the loan, pay a very high interest rate on this and subsequently move it to another loan lender.

After a few sums: our current budgets mean we are aiming to 'overpay' £12650 between now and Sept 09. With regular payments, this means we can clear the loan and some of the mortgage or leave the loan to reduce on its own to £11500 and pay the £12650 off the mortgage.

With £12650 coming directly off the mortgage and regular payments (already taken interest off) of £2608 in that year, the mortgage will stand at £153,161 - obviously 15% less than the value of the house in 06.

I can't emphasise enough how hard the house has always been to value so I'm hoping this will be our saving grace.

Obviously not a good situation either way but I figure, we need to make a decision now about where our overpayments go. There is no question the overpayments will be made but where?

As far as borrowing amounts go, our total income is app £80k before tax per year and a fairly good credit score of late (ie: last 3 years)

Thanks for all the help so far... I do appreciate it!

dimbo61

as you are paying the same rate on both loan and mortgage it will not matter which one you overpay on.
well done on reducing the secured loan by nearly £17,000
I would overpay on both loan and mortgage and hopefully you can get a good deal when you remortgage