Northern Rock together - Pay the mortgage/secured/unsecured??

texaspete777

Ok, I understand. I didn't see any other post. : )

JimmyTheWig

texaspete777 wrote: »

I have approx the following debt :

£130000 mortgage @ 4.78%
£8000 secured @ 3.94%
£30000 unsecured @ 4.78%

The general rule of thumb is to pay off the highest interest rate first.
The other general rule of thumb is that you should prioritise secured debts (this includes the mortgage, for avoidance of doubt) over unsecured debt.

So initial commons sense says to make the overpayment against the mortgage.


But does this...

the unsecured loan - If I was ever to separate this from the mortgage, with the intention of moving to another lender, the rate, either with NRAM or another lender, will go up to about 12%

have any bearing on that?

No, it doesn't!
When you come to remortgage you can either remortgage for the whole amount you owe, or you can remortgage for the amount of secured debt you owe and keep the unsecured debt on a high rate with NRAM. Due to the hike in rate on the unsecured loan, you would be better off remortgaging for the full amount. But if you couldn't (e.g. loan to value or income limitations) then it might still be better to remortgage just the secured debt and pay the high rate on the unsecured debt.

Imagine in the next year you can pay off £10k.
Option 1 is you pay the £10k off the mortgage.
Option 2 is you pay the £10k off the unsecured loan.

Scenario A - You can remortgage for £158k. With option 1 you can use this to clear all the NRAM debt. With option 2 you can use this to clear all the NRAM debt.
Scenario B - You can remortgage for £138k. With option 1 you can use this to clear the secured debt and pay £10k off the unsecured loan (leaving £20k unsecured at the high rate). With option 2 you can use this to clear the secured debt (leaving £20k unsecured at the high rate).
Scenario C - You can remortgage for £128k. With option 1 you can use this to clear the secured debt (leaving £30k unsecured at the high rate). With option 2 you can't clear the secured debt, so can't remortgage.

With scenarios A and B it doesn't matter whether you pay it off the mortgage or the unsecured loan. With scenario C it does matter.
[Note that with scenarios B and C you may _choose_ not to remortgage because the drop in mortgage rate isn't worth the hike in unsecured loan rate, but that is a choice that you would have and could make based on the numbers.]


Also, in the worst case scenario, if you can't pay your mortgage or secured loan then they can repossess your house. That's not the case if you can't pay an unsecured loan. So again, it makes sense to pay off the secured money if it is at the same rate as the unsecured money.

lfc321

I'm no expert, but it seems to me that if your house is indeed worth £120,000 and the debt secured on it is £138,000 then it's going to be a long while before you need to think about moving to a different lender. You need to get out of negative equity first, probably down to 90% LTV before other lenders will look at you. So you need to pay down at least £30,000 of that secured debt. Double that if you want to add the unsecured to a future mortgage. So I would start with the secured debt - presumably with the mortgage since that's at the higher rate.