Mortgage Home Owner Loans

elwappo

Hi all,
I'm looking for some advice on whether it's worth paying off two mortgage home owner loans I've got. One has £4k left on it, the other £8k (both on a rate of 2.29%).

The thing is, I'm currently overpaying £50p/m on the lower amount and £90p/m on the higher amount, which means they'll be paid off in 3 years instead of the 14 years left on my mortgage term.

But what I'm debating is whether to use half of my savings and just pay them completely off and be done with them. I'm hardly earning any significant interest on my savings and thinking, get rid of the debt and build up the savings again while rates are low.

Plus, I do have a nice amount of disposable income every month (and paying them off would give me an additional £240 p/m in my pocket with the over payments).

It's just the thought of halving my savings amount, even though I hardly touch them. Any advice? Would you just sit tight for 3 years or pay it off? I'm torn between both.

Thank you.

Thrugelmir

Clearing debt certainly gives one a sense of satisfaction. Personally I would clear the debts entirely. Then use the money saved to invest for the future. Pension, Stocks and Shares ISA etc.

elwappo

I'm just worried about halving my entire savings. I've never really had to dip heavily into them though. Plus I've already got a pension.

I'm feeling what the Government doesn't like to hear. Fear of the economy / personal financial security. But it is the the best time to actually clear down debt as you probably know.

dtsazza

No-one can really answer this for you, as it really comes down to your own feelings and sense of "safety" on the matter!

Financially I doubt it would make much difference either way. The 2.29% interest you're paying is equivalent to 2.86% saving interest after 20% tax (or 3.8% if you're paying 40% tax). Your savings are hopefully getting something around this amount, especially as if you want to make a fair comparison you can lock them away for 3 years.

From a purely financial perspective, the best situation is to keep your savings if they earn more than 2.29% net, otherwise pay off the loans.

From an emotional perspective, I think I would actually leave things as they are. Your loans are very cheap; they're costing you about zero (in that I assume your savings are gaining about the same amount of interest). If you pay them off then as you say, half your savings are gone - you have lost liquidity. You could possibly take out another loan if you needed that money back, but it's not guaranteed. So I would rather have twice as much money "on hand" by leaving the savings where they are.

Really, it comes down to whether the discomfort you feel from "having debt" is greater or lesser than the discomfort you feel from "losing half your savings".

Yorkie1

The frequent advice is to have 3-6 months' worth of outgoings in emergency savings, before you consider overpaying on your mortgage.

If you know you've got other big expenditure in the next year e.g. car, then I'd consider setting more aside for that purpose before you overpay.

elwappo

The over payments don't really impact on me on a monthly basis thankfully Yorkie1. And my savings would cover any emergency outgoings for that period too thankfully. I just don't want the loans lingering for the lifetime of the mortgage as they were very effective short term credit with the interest rate. And I think it would help on a credit score seeing them paid off early.

Thanks dtsazza too. What you've described there makes a lot of sense and didn't think of looking at it like that. I think I'll review the loans in 10-12 months time. It'll give me a buffer to increase my savings while the loans value decreases quite substantially with the over payments.

I just wanted to get some opinions, and as you describe, it's an emotional decision based on debt, versus my savings pot. It's interesting to hear what other people would do without having any personal influence.