Morgage overpay question for bad maths folk

angel-fernandez

Hi I have a question on where I should direct my overpayments for best effect. Is it as simple as overpaying the mortgage with the highest interest rate?

I have 2 mortgages. One for the main loan for my house and the other for further borrowing to buy the remaining part of a shared equity. The smaller one has a bigger interest rate and I'm tied in for less time.

M1 £129000 left on a fixed rate deal at 5.73%. Deal ends October 2012. Term ends May 2034. Monthly payment £833

M2 £16,000 left on a fixed rate deal at 6.48%. Deal ends May 2011. Term ends May 2034. Montly payment £127

I can afford to pay £500 extra per month. Where should I put it?

Sorry if obvious question

N

phlash

The quick answer is: Overpay the highest interest rate loan.

But in your circumstances there are some extra considerations:

M1: What is the value of the property and hence what LTV is it at?

It may be that by overpaying M1 you decrease your LTV from say 85% to 75%. The benefit of having a lower LTV could save you £££'s on the remortgage arrangement fees, but could also save you a % point or so on the interest rate you get going forward from Oct 2012.

This will be your key consideration I would say as the interest rate differential is only 0.75% on £16,000 at the moment, this equates to £120 pa extra interest. By overpaying a high LTV you could save you alot more just in arrangement fees, let alone interest rate.

For instance, if by reducing your LTV it lowered the interest rate on M1 by 0.1%, then you would save £129 pa which offsets the £120 pa above. It is likely you would get a greater interest rate saving than 0.1% by significantly reducing your LTV and therefore get an even better saving.

Also M1 is going to exist for much longer therefore has a greater level of risk attached to it. By reducing your LTV on it you are reducing your term and exposure to longer term market risks.

Hope this helps.

Phlash

TrickyDicky

It will depend on what the overpayment limits on each mortgage are what what the early redemption charge are should you complete the mortgage early.

But the usual rule is to pay the highest interest rate first.

getmore4less

phlash wrote: »

The quick answer is: Overpay the highest interest rate loan.

But in your circumstances there are some extra considerations:

M1: What is the value of the property and hence what LTV is it at?

It may be that by overpaying M1 you decrease your LTV from say 85% to 75%. The benefit of having a lower LTV could save you £££'s on the remortgage arrangement fees, but could also save you a % point or so on the interest rate you get going forward from Oct 2012.

This will be your key consideration I would say as the interest rate differential is only 0.75% on £16,000 at the moment, this equates to £120 pa extra interest. By overpaying a high LTV you could save you alot more just in arrangement fees, let alone interest rate.

For instance, if by reducing your LTV it lowered the interest rate on M1 by 0.1%, then you would save £129 pa which offsets the £120 pa above. It is likely you would get a greater interest rate saving than 0.1% by significantly reducing your LTV and therefore get an even better saving.

Also M1 is going to exist for much longer therefore has a greater level of risk attached to it. By reducing your LTV on it you are reducing your term and exposure to longer term market risks.

Hope this helps.

Phlash

Both loans together will determine the LTV since they are most likely with the same lender.

What are the follow on rates on both bits this might make a difference but generaly you pay of the one with the highest interest rate but do check for penalties in the fixed period.

phlash

For some reason, I skipped over that part...Thanks getmore4less.

If they were with different lenders, I wonder if they would amalgamate the lending to work out the LTV? If I was a lender, I would, but just wondering if they would capture this appropriately?