Loan to make mortgage overpayment?

Mitus

Hi all,
First post on this forum but have been using the site for the best part of a year Has been a real eye-opener and really wish I'd have paid more attention to my finances years ago! But hey-ho, hindsight is a wonderful thing!

Going to round figures here slightly for ease of reading but my current situation is:
Mortgage £107,000 @1.25% (0.75% above base-rate deal) due to finish May 2036
Monthly payment £490 and I have been overpaying £760 (so a total of £1250) since January this year to reduce term and take advantage of the low interest rate

I've now just seen the loans available from Derbyshire @5.4% for £7,500 - £14,999. I did some playing with the sliders on their website and found out to borrow £8850 for 12 months would cost ~£760 a month. So, could I in theory do this to take a reasonable chunk out of the mortgage in one hit instead of 12 smaller ones? So I'd then pay the minimum £490 each month on the mortgage and the £760 would then pay back the loan.
The figures seem to suggest it would be beneficial, but at the back of my mind there's the nagging thought that borrowing at 5.4% can't possibly be better than 1.25% !!

I'm aware of the risks involved, eg if interest rates shoot up I'd have to pay more than £490 for the mortgage AND still pay the loan so lose flexibility. I'm just curious to know if I've got the figures right..

Thanks in advance,
Andy

CLAPTON

yes it would be a bad idea to borrow at 5.4% just to repay a debt at 1.25%

in fact you would be better to save in a decent savings a/c rather than overpay as you can get more than 1.25%

TrickyDicky101

If one loan costs 1.25% and the other costs 5.4% it isn't rocket science to work out which one is best.

beecher2

It would not make sense to borrow at 5.4% to pay off a 1.25% mortgage.

In fact you should stop overpaying your mortgage, and put the money in the highest paying savings account you can find. You're not taking advantage of the low interest rates when you can get better savings rate elsewhere.

Thrugelmir

Rather than overpay the mortgage use your ISA allowance at the very least every year.

Mitus

Yes, I can see the difference in rates is glaringly obvious, hence why I'm confused with the figures I've got. I guess the difference is that 1.25% is on £107,000 and 5.4% is on £8,850? So should I not be making the comparison that way? At the end of a 12 month period, I'd have overpaid by the same amount, only doing it in one lump makes for better long-term savings on interest?

Thrugelmir

Mitus wrote: »

I've now just seen the loans available from Derbyshire @5.4% for £7,500 - £14,999. I did some playing with the sliders on their website and found out to borrow £8850 for 12 months would cost ~£760 a month. So, could I in theory do this to take a reasonable chunk out of the mortgage in one hit instead of 12 smaller ones? So I'd then pay the minimum £490 each month on the mortgage and the £760 would then pay back the loan.
The figures seem to suggest it would be beneficial, but at the back of my mind there's the nagging thought that borrowing at 5.4% can't possibly be better than 1.25% !!

The loan will cost a £150 in interest.

You'll save around £115 in interest.


So a net cost to you of £35.............

Mitus

Forgot to mention I'm already ISA'd up for the year and also have 3 regular savers on the go One at 8%, one at 6% and one at 5%

dimbo61

If you have £760 a month spare (loan costs ) then why not just overpay by that amount !

Thrugelmir

Mitus wrote: »

Forgot to mention I'm already ISA'd up for the year and also have 3 regular savers on the go One at 8%, one at 6% and one at 5%

Remember the savers are actually half the quoted rate.

Do you have a pension?

[Deleted User]

If you can get a higher interest rate on savings than you are paying on your debts you are better off financially to save more than to pay off more of your debt.

There are plenty of savings accounts offering between 2.5% and 3% on savings.

If the interest rate on your mortgage is variable, then keep an eye on it and if it becomes equal to or increases above the interest rate that you are earning on your savings, then over-pay your saving towards your mortgage (at that point).