Overpaying Mortgage

Simon_Pugsley

Hi all, with the recent interest rate cuts, i have been let with a dilema, and your help would be well received.

Me and my partner have £21800 of credit card debts, and the minimum payments total £474 a month which i can afford to pay, and i have been paying £250 extra for the last few months. All the credit card debt is on 0% for the bext 8 months at least.

Our mortgage payments were £935 a month, this was on repayment. I changed this to interest only which brought the payments down to £720. This is the reason i have been able to pay more on the credit cards.

Me and my partner both felt that we wanted to clear some of this credit card debt.

Now with all the rate cuts, it has made my interest only mortgage payments around £490 a month.. a big drop from £935 a month.

So my question is should use the spare money from the mortgage and pay an extra £450 a month to clear our personal debt, or should I go back on to repament mortgage and then also overpay by roughly £250 a month.

Thanks for your time

Simon

Welshlassie

Do you have the £21k in an account somewhere to pay off when the 0% deals finishes, if not I would recommend that you get yourself a high rate savings account and pay as much as possible in to it, just paying the minimum payments off on your credit cards. Thie way you will build up a fund to start paying off the credit card debts in 8 months. You will also then have a better credit rating to have more chance of being able to get further 0% deals to switch.

Have a look at a snowball calculator plug your figures into it, it will tell you the best order to pay off your debts (you can include the mortgage).

Jesthar

Personally I'd say do a combination of both - I'd definitely switch back to a repayment mortgage, as that will still be costing you extra interest as long as you are not paying off capital.

Then you have a choice - either put all your spare money towards paying off the cards (Welshlassie has a very good idea about putting the money in a high interest savings account then using that to pay things off when 0% deals are coming to an end! ), or overpay part of it off the mortgage to catch up on what you missed paying off over the last few month whilst saving the rest to throw at credit cards, or overpay it all off the mortgage.

I'd say it really depends how many credit cards you have, whether you think you will be able to switch them all to another 0% deal at the end of the fixed periods (well, OK, we can't really predict that!), and what the APRs would be if you discovered you couldn't. You also need to consider what would happen if interest rates went back up again and you needed more spare cash for the mortgage - having the savings would help there, too.

Me, I'd probably go with option 2 (overpay the mortgage a bit, maybe by £100, to catch up, then save up the rest to pay off cards), as it would both get the mortgage back on track and help clear your debts quicker - but that's just my preference.

Hope that helps a bit,

~Jes

Welshlassie

Jesthar wrote: »

Me, I'd probably go with option 2 (overpay the mortgage a bit, maybe by £100, to catch up, then save up the rest to pay off cards), as it would both get the mortgage back on track and help clear your debts quicker - but that's just my preference.

This isa good option, but remember that once you pay off your credit cards yuo will be in the habit of paying out that sort of money every month so could therefore overpay the money you were spending on credit cards off your mortgage and you will find that your mortgage will go down very quickly.

Have a peek at the mortgage free wannabe board for an idea of how qiuckly you could be mortgage free if you wanted.

The snowball calculator will show you this aswell if you include your mortgage.

tyllwyd

If it was me, having gone through the process of changing to interest only on the mortgage, I'd stick with that for six months or a year, and throw as much money as possible to paying back the credit card debt. At least that way if mortgage rates go up again, you haven't got the credit cards hanging over your head. OK you will pay more on the money you borrow on the mortgage, but its swings and roundabouts because you will pay less on the credit card debt (which is potentially much higher APR when your deals run out). I guess if you are worried about the pennies, you could save up the cash in a savings account until the deal is coming to an end to get maximum interest, but to me that is more faffing about for a relatively small benefit - I'd prefer to see the total borrowed coming down.

Jesthar

tyllwyd wrote: »

If it was me, having gone through the process of changing to interest only on the mortgage, I'd stick with that for six months or a year, and throw as much money as possible to paying back the credit card debt. At least that way if mortgage rates go up again, you haven't got the credit cards hanging over your head. OK you will pay more on the money you borrow on the mortgage, but its swings and roundabouts because you will pay less on the credit card debt (which is potentially much higher APR when your deals run out). I guess if you are worried about the pennies, you could save up the cash in a savings account until the deal is coming to an end to get maximum interest, but to me that is more faffing about for a relatively small benefit - I'd prefer to see the total borrowed coming down.

The capital which is not being paid off the mortgage will still be costing interest, though, and his cards (for now) are not, and whilst cards can potentially be switched to low or 0% APR when the initial transfer rates are up, you can't do that with a mortgage! That's why I'd as a minimum switch to making repayments again, as that resumes paying off an interest earning debt, rather than just treading water with it.

Sticking the money in a savings account is optional (I hadn't thought about it until Welshlassie mentioned it), but even if it only earned a few pounds of interest before a card had to be paid off, that's still a little extra off the debt. Guess it depends if you want to do the extra step, or just go straight for the debt reducing.

~Jes