maths question.. overpayments??

stinky_5000

Hi, i have 2 mortgages and would like to overpay on one if i have spare cash at the end of the month (s) can any one tell me which one to overpay on.. i couldn't decide if it was better to deal with the higher debt or the higher percentage rate...?

1. 40k with a rate of 0.75 - £176 a month
2. 33k rate of 2.5 - 168 a month

thanks.. i'm sure it's a simple one for you experts....

jayphe

The simplistic answer is to pay off the one with the highest interest rate.

The more complex answer would require a little more detail on how long the mortgages are likely to stay at the current (very very low) rates and how overpayments and balance transfers/bulk replayment/extra borrowing are handled.

For example, if the 2nd mortgage at 2.5% is fixed at that rate for the life of the loan, but the 1st mortgage that is currently at 0.75% is variable and likely to rise to higher than 2.5% for the majority of the loan period then you should pay off the 1st one because of the higher future costs.

Overpayment terms affect it because sometimes overpayments attract a fee and maybe the amount you have to overpay will be over the free overpayment threshold and then you might want to spread the overpayment to both.

Balance transfers/bulk repayment/extra borrowing affect it because you might be able to transfer some of the balance from one mortgage to another, though this is less likely to be of major importance.

Post more details if you want; total mortgage length, duration of current deal, are they fixed, trackers, variable, how much you expect to have available for overpayment, etc...

If you don't want to post more details I'd suggest you do the following...

- Check how much you can overpay on each mortgage without incurring a fee

- Estimate which mortgage is likely to have the highest interest rate over the total life, to be honest, unless either deal is a long term fix you can probably assume that it's the one that is currently highest, as trying to guess future SVRs or base rates is impossible, so you have to assume that when current deals end they'll both be very similar

- Overpay up to fee free overpayment on your estimated highest interest cost mortgage, if your overpayment budget has anything left, overpay on the next one

To throw another option in here, the interest on these loans is so low that you might be better off putting the overpayment money into a savings account that pays more than 2.5% after tax, then repaying a lump sum from the savings when your mortgage allows it. It's also nice to have a cash available as insurance against unforeseen events.

Anyway, it's very good for you that you've got 2 historically very cheap mortgages and the ability to overpay them.

Mrs_Bumble

Run your figures through an overpayment calculator, this is an example of them
http://www.whatmortgage.co.uk/calculators/fleximortgage.html

Gorgeous_George

You could be better off paying into a regular saver account or even a(cash) ISA.

GG