Overpayments - secured vs unsecured loan

Athers11

When we took out our first mortgage we had to go for a 100% deal, made up of about 90% secured mortgage and a 10% unsecured loan. Both are on the same variable interest rate.

We're now in a position to make regular overpayments :j, but we're not sure whether we would be better to get rid of the unsecured loan, or build up equity in the house by targeting the secured mortgage.

We suspect we'd be better off paying off the mortgage as we want to move in a couple of years, and it'll be easier to do that with more equity in the property, but would value any thoughts on the subject from anyone who's been in a similar position!

Aside from this we're debt-free at the moment, so there are no other priorities to pay off...

Thrugelmir

Who is the unsecured loan with? Northern Rock now NRAM?

DVardysShadow

It is hobson's choice. By paying off the secured component, you may think you are building up equity. But when you sell, the extra equity you walk away with [compared to over paying the unsecured loan] is matched by what is left of the unsecured loan.

So any new lender will look at your equity and turn up their nose at your loan.

Athers11

Good guess Thruglemir, NRAM it is!

Our thought process was that as the loan is effectively separate from the secured mortgage that would be covered by a new loan from A N Other lender if necessary, so it wouldn't be something a new mortgage provider would need to take on board.

Thrugelmir

If you detach the loans. Then the unsecured rises considerably in cost. I believe by around 8%. So no benefit.

Best to tackle the unsecured debt first in terms of overpayment.

Any new lender would factor any unsecured credit you have into their calculation when appraising your application. Both in terms of monthly commitment and amount owed. So would have an impact.

Reducing the unsecured element at least gives you a tangible target to focus on. As you'll see the rewards of your hard work.

Is the mortgage on an interest only or repayment basis?

StuC75

Having equity in the property is really no different to having money in the bank (if anything money in the bank is safer).. E.g. If the valuation goes down then the equity is lost..

When Moving the money in the bank could still be taken into consideration when working out the LTV on a new mortgage taken out. This money would be added to any equity realised from the sale to form the deposit for the next house -- theres only a difference in where the money is, and ultimately its liquidity \ Accessibility..

Whilst overpaying would reduce the interest charged in the longer term - if the shorter term plan is to move then I would assume you would go for a different mortgage product\terms..

A new mortgage provider would consider the loan payments in terms of affect on Affordability ..

Athers11

@Thrugelmir - mortgage is replayment, so we're chipping away at both of them at the moment. The only time we're going to clear the loan is if we move away to another provider when we move, certainly not going to happen while we're still on this deal!

@StuC75 - true about the market, but having had our place valued 18 months ago (after buying it about a month before Northern Rock went boom!) the estate agent reckons it's largely held its value despite the market dropping, so it's a relatively safe property.

Both interesting thoughts on the logic behind paying loan instead though, all good advice!

Thrugelmir

Athers11 wrote: »

Both interesting thoughts on the logic behind paying loan instead though, all good advice!

You are unlikely to obtain a savings rate that betters what you are paying NRAM. Anything paid off the debt will make a difference in the longer term.

So cut the waste expenditure is the best advice. If moving house is a short term goal.