Mortgage Overpayment Vs Paying off Loan

BadgerMan78

I was torn between posting this under Mortgages or Debt but as this is a manageable debt I thought this was the best option. Apologies if my decision was incorrect!

I've saved £14k to pay off a car loan which, as far as I understand from the paperwork, has no early repayment charges. This is at 8.3% APR (with a rate of interest on the credit of 7.74% APR) and is currently costing me £350 per month with a further 42 months (3.5 years) to go.

However, my mortgage is +.99% with First Direct so has now dropped to 2.49% (or still just 2.99% if they don't pass it back on). My mortgage is £70k over 19yrs but with the rate so low I'm planning on significantly overpaying each month and have worked out that overpayments of around £350 per month could see this reduce to 8 or 9 years. Would it be of benefit if I were to make one huge overpayment on my mortgage next month of the full £14k I've saved or should I pay my car loan off with this, so that once this is cleared I can focus on making overpayments on my mortgage of around £500/600 per month?

As far as I can see my mortgage has no restrictions on overpayments so making such a large payment shouldn't be a problem.

I can't seem to get my head around which will save me more money in the long term and would really appreciate anyone's thoughts and advice.

Thanks in advance.

Welshlassie

Firstly I'd check what the situation with your car loan is. Was it front loaded (ie was the interest added on at the beginning so even if you paid off early you'd pay the same interest amount) if not ask how much it would be for early settlement? You may be surprised.

If the loan is front loaded and you are managing the repayments with no problems and the same is to continue for the forseeable future, I'd pay the lump sum off the mortgage, but do check there aren't any penalties.

CLAPTON

In general pay off the debt with the highest APR... unless there are fees etc

If the 'car' loan is simply a personal loan then pay off the loan.

Any ordinary loan taken out after May 2005 and under £25,000 can't be 'front loaded' and any early settlement fees are determined by the CCA rules... so pay off the loan.

TighterThanTwoCoatsOfPain

Does the "Pay off the highest APR apply unilaterally across all types of debt including mortgages or just Credit Cards / shorter term Loans etc?

Just thinking out loud and totally making up numbers BUT

If the paying the short term loan off early will save 8k in interest, but paying the 14k off the mortgage will save 25k in interest over the term does that not make sense assuming that you are not struggling the make repayments?

Obviously for people living hand to mouth then paying the loan and releasing the £350 per month TODAY makes more sense but does that still apply if you look over the next 20 years?

Just my rambles and havent actually "crunched the numbers" before myself..

TotallyBroke

It can seem sometimes as swings and roundabouts.
Why don't you use https://www.whatsthecost.com and then choose snowballing. Put in all different scenarios like interest order then balance order and see what comes up.

BadgerMan78

[QUOTE: If the paying the short term loan off early will save 8k in interest, but paying the 14k off the mortgage will save 25k in interest over the term does that not make sense assuming that you are not struggling the make repayments]quote]

This is exactly what I'm thinking and want to take the option that is going to save me the most money long-term, not short-term. I guess I need to do the maths as to the interest I'd save off both options by making this payment based on any additional charges.

As Totally Broke suggested, I've just done the calculations on www.whatsthecost.com but this hasn't actually helped make it any clearer as it groups the interest together for the total loan amount, rather than sliting it for the two.

I'll phone and get a settlement figure for the loan and think that this will bring some more clarity. I'll share the details on here as I'm sure you can all offer further insight but hope that this will focus my mind too (fingers crossed).

TotallyBroke

You could do the snowball calculator twice with just one debt. Do it showing paying as normal, then with the lump sum payment for the loan. Then do the same for the mortgage and look at the difference in interest.
It may help slightly.

BadgerMan78

Right, I’ve done some number crunching and here’s what I’ve found. (See if you can get your head around these!)

PERSONAL LOAN (CAR)

The settlement figure I’ve obtained today is £12,765.07 so it looks like I won’t have to pay the full interest chargeable over the term of the loan if I pay this off early. This looks like it will save me just over £2k in interest charges if I pay this off in the next few weeks.

MORTGAGE

On a £70k mortgage over 19 years on a First Direct +.99% Tracker (currently at 2.49%) I would pay around £22k interest over the term if I didn’t make any overpayments. However, if I were to make a large overpayment of £14k next month and then no further repayments (I’m hopeful I’ll continue to do this in the medium term future by at least a few hundred pounds each month), the mortgage would reduce by 4.5 years to 14.5 years and the interest charged over this term would be just over £11k.

CONCLUSION

In theory, this mean that I’d save over £10k in interest charges over the term of the mortgage by putting what I’ve saved against it, rather than paying off my Personal Loan, which would only save me £2k in interest.

Firstly, can someone confirm that I’ve done my calculations correctly and haven’t missed anything and if so, does everyone agree that putting this money to my mortgage whilst the interest rate is so low makes more longer term sense?

One additional point is whether anyone expects the Bank of England interest rate to fall again as if so, surely it would make sense for me to wait until it’s fallen again before making this overpayment as it would have even greater implications on the overall saving?

I hope my figures above are clear enough for people to follow and if I’ve made any glaring errors or oversights, please let me know.

I look forward to your feedback……..

BadgerMan78

Anyone? I need a sanity check on this.

Many thanks in advance.

Wookey

We can't be certain there will be more BoE cuts and can you be certain they would be passed on in there entirety? Mortgage rates could and will most likely rise in the medium to long term again, getting rid of a sizeable chunk of your mortgage now allthough the interest rate isn't large will stay pay a large dividend and should they rise even by a very small percentage over the next 2-5 years then it could potentially save you an awful lot more. It's your call at the end of the day, play a bit more with snowball calculators for best/worst case scenario's and base your decision on work/save life balance.

TotallyBroke

Ok by paying off the car loan you would save £2000 in interest and the £350 payment each month.
By paying off the mortgage you could save £10000 if the rates stayed the same for the rest of the mortgage and reduce the term by 4.5 years

What would your mortgage come out as if you didn't pay the lump sum but made extra payments on it each month of £350 (loan payment each month)? You said in your first post it could possibly knock 8 years off the term. So you could save almost £20000 by doing the overpayment on the mortgage after paying off the loan first. Thank paying the lump sum now.