wind fall - pay off loan or put towards mortgage?

dazbear

I have recently had a windfall of £10,000 and wondering whether to pay of a loan or put towards my interest only mortgage.

I have 2 years left on a 5 year loan with a redemption figure of £7,950 at the moment. By paying off 2 years early I would save £550 compared with paying each month until the end of the term. Apparently I have paid most of the interest off in the first years of the loan.

According to this site's over-payment calculator I could shave 2 years off my mortgage by putting the £10,000. However paying off the loan would release £370 per month, which I could point towards my mortgage as well.

I keep hearing Alvin Hall in my head saying "pay off the loan first". In my mind this would make things simple...but is it financial sense?

Which option do people think is best?

holly_hobby

You pay off/reduce the borrowings with the highest costs (interest rate) - which I presume is the personal loan.

Your loan was front loaded ... is the redemption fig you have quoted just what is outstanding, or have you obtained a true redemption figure from the provider (which has to take into account an adjustment for the front loading)

Hope this helps

Holly

dazbear

it is a true redemption figure valid until the end of the month.

My leaning is towards paying off the loan (although I only say £550) as it will keep things tidy. Paying the lump sum towards my mortgage saves £2100.....but it doesnt seem that simple.

holly_hobby

Well on the face of things, and if you can afford to maintain the personal loan, and it won't affect your affordability if you want to move in the next 2 years .... then there is an obvious winner !! (if the saving has been compared over the same period)

However, beware (depending upon the type of mge you have) once you have paid the monies off your mortgage you can not redraw them again .

I would always suggest that what ever you decide to make sure that you have an emergency fund in place (keep in a tax free immediate access isa), so if you elect to pay it off your mortgage, you may want to use all of your windfall funds or just some of it ... also check that there are no penalties for making a lump sum payment off your mge. (that could be a nasty surprise !!)

Hope this helps

Holly

opinions4u

Pay off the debt with the highest rate first (almost certainly the loan).

Then use the reduction in outgoings to overpay your mortgage.

ViolaLass

See how much of the loan you can pay off without triggering any penalties. If you can pay it all off with no penalties, then do and throw the extra money at the mortgage. That will save you more in the long term (assuming the loan has a higher interest rate than the mortgage).

ViolaLass

dazbear wrote: »

it is a true redemption figure valid until the end of the month.

My leaning is towards paying off the loan (although I only say £550) as it will keep things tidy. Paying the lump sum towards my mortgage saves £2100.....but it doesnt seem that simple.

That's because your loan ends well before the mortgage so you're not comparing like with like.