anyone good with figures please read...please help!

thebaddeleys

IO mortgage to pay off £10k loan:

IO payment per month- £641
repayment at moment- £975

which leaves me with £334 left over to put in a bank account and save up to pay off loan.

i've worked out it would take 17 months to save up enough (£334's) to pay off the loan (obviously continue to pay the loan repayments). (this is a 5yr loan)

how can i work out if this is finacially sensible to go for the IO mortgage just for 17mths to pay off the loan:mad?

sorry to mither you all but i can't get my head around this!

thanks,

K.

Debt_Free_Chick

So, you're thinking of adding approx £10k to your mortgage to pay off the loan? As your mortgage is interest only, you won't actually be paying off the loan at all - you'll just be paying the interest. But, you are going to put aside the saving in the monthly repayment, until you have enough to pay off the loan ....? Yes?

I'm not sure you'll achieve very much - it's difficult to be precise without seeing the interest rates.

To do a true comparison, you should get the figures for an extra mortgage on a repayment basis, which would pay off the loan using monthly repayments of £975. If the term is less than 5 years, then you'd pay the loan off quicker with the mortgage. If the term is more than 5 years, then you'd better sticking with the loan.

But all of this assumes that your mortgage rate does not change in the next five years. If mortgage rates go down and you maintain payments of £975, the balance will be paid off more quickly. If mortgage interest rates go up, then your repayments will go up, unless you extend the term to maintain the current repayments - but then it will take you longer to pay off.

I don't see much point in converting a loan to a IO mortgage, as you will be paying interest on the full amount outstanding until it's paid off. As the mortgage interest rate is almost higher than the interest (net) you would get on a savings account, you are better going with a repayment mortgage so you will be charged less interest as the months go by (as you will have repaid some of the capital in previous months).

HTH

silvercar

I think OP means to go IO for 17 months until this loan is paid off. Then change the mortgage back to repayment.

Broadly speaking you will have just delayed the term of the repayment mortgage by 17 months. you will have paid the interest but not capital for 17 months. At the end of that time you will have the same amount outstanding as now and could either extend the term by 17 months and keep the repayments at the original £975 or increase the payments (to just under £1,000) and keep the original end date.

thebaddeleys

thank you for the advice.. this is pretty baffling, i went on the snowball calculator earlier today, i'll be debt free (£22500 currently in debt) by July 2009. to be honest i'm just looking at options to try and get it paid sooner because people keep saying oh you could save £5 here and there but i need something bigger than that something faster... do you know what i mean? no offense to all the advice people give coz its great!

jamesd

What are the interest rate and payments on the loan? What is the interest rate on your existing mortgage? Have you made overpayments that your mortgage lender would let you use to take a payment holiday or withdraw from the mortgage, in effect adding the loan to the mortgage? For your current mortgage, what is the current equity - or failing that, the amount of the mortgage, the number of years it is for and the year you're in now? Is our mortgage a flexible one that allows you to make overpayments or underpayments easily? Do you have to pay off the whole of the 5 year loan at once or is it possible to pay part of it off?

Have you asked your existing mortgage lender about the options they have for you, which are quite likely to be at their overpriced standard variable rate, not your mortgage rate?

If the mortgage is at a significantly lower rate than the loan it may make sense to add the loan to the mortgage, so long as you switch to making the loan repayments to the mortgage instead of the loan company. Someone here will be able to calculate how long you would need to do that to pay of just the loan part, so you could choose to stop paying the extra then.

You mentioned 22500 of current debt. What are you doing about paying that off? What are the interest rates and current plans for it? We should really consider your whole financial picture, all debts and income, to make sure we really do give you an appropriate suggestion. It's particularly bad to transfer debt you may not be able to pay to a mortgage, since that's the scenario that costs you your home if you don't keep up with the payments. On the other hand, it might also be at a low enough interest rate that it makes it practical for you to do it without hurting...

Debt_Free_Chick

thebaddeleys wrote:

thank you for the advice.. this is pretty baffling, i went on the snowball calculator earlier today, i'll be debt free (£22500 currently in debt) by July 2009. to be honest i'm just looking at options to try and get it paid sooner because people keep saying oh you could save £5 here and there but i need something bigger than that something faster... do you know what i mean? no offense to all the advice people give coz its great!

But you can't save money with a loan by "getting it cheaper"*. Let's say you owe £5,000 and it's an interest-free loan. You are paying it back at £416 a month. So, after 12 months you will have paid it all back.

Let's say you find a "cheaper" loan at £300 a month. This will take you 20 months to pay back, but in both cases you pay back the same amount - £5,000. So the new loan looks "cheaper" but you pay back exactly the same amount.

Now do the same sums with a loan that charges interest ... you simply need to look at the total you pay back over the term of each loan. It's very rare that a loan with a lower repayment works out to be "cheaper" as you simply pay it for a longer period.

What are the current monthly repayments on the loan and how many more payments are there left?

I assume that the figures you originally posted are just those that relate to your existing mortgage and have nothing to do with refinancing the loan ....?

* - You can get a cheaper loan, but the new loan would need to show a decent cut in the interest rate. And you would have to take into account what you had already paid out on the existing loan (if you are refinancing). But the comparison is the same .. you simply add up the total of the repayments you would make with each loan and go for the one with the lower total.