Buy car or redeem mortgage?

usignuolo

I am planning to take early retirement next year. I have a very small elderly car which is increasingly expensive to keep on the road and frankly on its last legs. I had set aside £10,000 to replace it but am now increasingly wondering if I should instead pay down the mortgage - which is currently £13,500 and has 8 years to run. (It is a repayment mortgage and I am paying around £230 per month, which is an overpayment. I think the interest is around 4.5% and it is a standard variable rate.)

I spoke to my building society - former A+L - who said the redemption fee would be £195 and as the interest is charged annually, if I redeemed say next month, the interest would be pro rata'd on a daily basis. They also offered to review the loan "for a better rate". I am a bit apprehensive about that as at previous reviews they have tried to sell me all sorts of extra insurance policies I neither want nor need plus have heard bad reports about the general efficiency of Santander who now own A + L.

My council tax is very high in my area as I have a large old house which has increased in value over the years. The money I am currently paying on the mortgage would be very useful therefore when I retire, to cover the council tax but I desperately need a new and reliable car and would like one with a good extended warranty. I can't afford to do both. What should it be, car or mortgage?

tbourner

I'd go for the car. You'll need one eventually in the next 8 years and the finance you'll end up having to pay will be a higher interest rate than the mortgage. Get a new Vauxhall and you get lifetime warranty too.

LilacPixie

once you take early retirment can you still afford to service the mortgage? Could you afford to if the SVR increases to 12%?? Any chance of you overpaying more on mortgage or building more savings between now and retirment? Is a car essential for you?

Thrugelmir

No need to spend £10,000 on a car. A low mileage second hand model would most likely suffice. Then you could reduce the mortgage and have a "new" car.

usignuolo

Obviously once I retire then servicing the mortgage would be harder but not impossible. On the other hand, I know nothing about cars at all and am at the mercy of anyone selling me a second hand one. I bought a nice low mileage used car once before from a local main dealer and thereby hangs a tale so traumatic I still don't like to think about it, but I was well and truly stitched up. The labour charge alone round here is £60 hour. So a nice new car with an extended warranty does have its appeal.

I do need a car btw, as I have a hobby which involves driving into the surrounding countryside and carrying stuff in the boot. If a car is a better bet than paying down the morgage, would anyone care to suggest how I could find someone to advise on a good used second hand one with a warranty. None of my immediate friends or family are any more knowledgeable than me.

tbourner

You seem to be pretty savvy on here, so I'd suggest asking on here first off for suggestions of cars based on what you want it to do (economy, space, performance, are you gonna tow a caravan, are you gonna go up snowy hills, etc. etc.) then join the car forum for that make and model of car and ask on there. They'll either have some for sale which will be pretty trustworthy if they're long term members, or they'll look over adverts from traders and advise you on what it's worth.

dimbo61

When you take early retirement will you get a lump sum ?
Enough to pay off the mortgage and get a new car ?

cautious_bob

I have no useful view to offer on your dilemma -but the mention of A+L and a £195 redemption fee reminded me of something.
I too had an A+L mortgage- taken out in 1988- and when I repaid early they charged a fee- which I think was £195- then thru this site I learnt that their redemption fee had gradually been increased and was not a feature of my original mortgage , so I was able to reclaim the fee.
I don't know how this stands today - certainly my not having ever re-mortgaged was important, so I had never entered into a new agreement.
Don't know if this is relevant to yr situation
Hope someone will be along who has better or more recent knowledge
of this.
Good Luck
Bob

Sunnyday

Just had a think about this and if it was me in this situation then i would definitely pay off the mortgage, there is too much uncertainty regarding interest rates in the future and if they ever went up to 15% as they did when i had my first mortgage then i know that i would probably fight a losing battle with the repayments on a fixed income.

Re the car, new cars (if that is what you have your heart set on) can be found much cheaper than £10,000 and with care can last a very long time. Some of the smaller greener cars are extremely cheap to run and the car tax is cheaper (mine dropped to £20 this year) quite a saving over the years.

I`m rather a cautious person these days and i would pay off the mortgage first and then buy the car BUT i would consider working an extra year to get what i want. You may not wish to do this but it would be one more option to consider.

HTH

SD

usignuolo

I can't afford a car and to redeem the mortgage. My original A+L mortgage was quite a long time ago, but I had it increased at one stage and I think this made it a second mortgage added to the first - although I paid that off later and was not charged a redemption fee.

I suppose I shall have to reinsure the buildings once I redeem the mortgage, as it is currently included in mortgage.

Car loan is definitely higher interest rate than mortgage. But I do really need a car.

Sunnyday

I wouldn`t consider a car loan, i would work the extra year and save for it thus retiring with no debts which is the best way to go. Even better would be retiring with savings to cover things that need replacing or emergencies - have you thought about doing this?

TBH if you are only just thinking about the cost of house insurance seperately then i think that you need to sit down and do a proper budget of all your outgoings to get a realistic view of how things are going to be.

Retiring early is very attractive but if you arn`t prepared for every eventuality then you could get into deep water in a short space of time.

Sorry - i`m not trying to put the dampers on your plans but when i saw your comment on insuring the buildings it set off alarm bells in my head that maybe you hadn`t thought your plans through.

SD