Which to pay off first?

NuttyBird

Imma_Number wrote: »

I've cranked some numbers based on another thread of yours and this one. I couldn't reconcile 3.69%, 28K & 6 years (72months) with a payment of £410pcm. I got £434. The 35K one over 12 years (144months) was closer @301pcm.

All the following assumes that the interest rate stays the same and that the regular mortgage payments also stay the same despite any over-payments. Also when the 28K mortgage is paid off, that £410pcm goes as additional overpayment on the 36K one.

Also ditto above posts re ERCs, T&Cs and other overpaying limitations

Anyway, going with what I have there wasn't much difference between paying off the 28K mortgage first and the 36K mortgage first in terms of pure return.

Paying the 36K mortgage first ended up with both cleared barely 1month sooner than paying the 28K one first.

However I'd suggest paying the 28K one first because frees up a whole chunk of outgoings sooner and so gives more flexibility.
* Over-paying by £50 pcm reduces the term of the 28K one by ~9months.
* Over-paying by £100 pcm reduces the term of the 28K mortgage by ~14months.

You can then use the £410 freed up by paying off the 28K mortgage early to either overpay on the 36K mortgage or fund something else that may have cropped up 5 years down the line.

Hope this helps.
#

Thank you - this was my thought re paying the smaller one first and freeing up the £410 - which I could put towards the larger one.

I wish I could find a spread sheet where I could track my over payments - I think it would give me more incentive to get this paid:)

Gizmo247

Very easy to create a spreadsheet of your own. Just look at the financial functions for compound interest and have a row per month.

Making a DIY spreadsheet will improve your skills but most of all allow you to better understand you finances.

John1993_2

James_N wrote: »

Hi Brit - please, if you want to give the appearance of knowing even a little about what you say, you might update your sig to be accurate. Actually, thinking about it, how do you know ANYTHING about mortgages - you don't have one, and I think have never had one. So exactly how are you able to give others the benefit of your considerable experience and knowledge (not).

My uncle was a bank manager a few years back. He never had a mortgage (moved back to the family home after renting for a few years), yet was (unsurprisingly) very expert in them (this was back in the day when your bank manager would discuss the best options with the customer face to face).

Hopefully this illustrates the idiocy of the above comment. Not having had a mortgage in no way suggests that a poster is not knowledgeable about them.

ValHaller

NuttyBird wrote: »

Thank you - this was my thought re paying the smaller one first and freeing up the £410

When you overpay, you can choose to reduce the term or reduce the monthly payment. Always reduce the monthly payment. If you reduce the term, you may find it hard to extend it again. At the end of the day, if you overpay and reduce the monthly you will end up paying it of at about the same time

To reduce the monthly payment, you may need to save up for a little while and put a lump sum in.

Imma_Number

ValHaller wrote: »

When you overpay, you can choose to reduce the term or reduce the monthly payment. Always reduce the monthly payment. If you reduce the term, you may find it hard to extend it again. At the end of the day, if you overpay and reduce the monthly you will end up paying it of at about the same time

To reduce the monthly payment, you may need to save up for a little while and put a lump sum in.

That's where it gets complicated and depends on the mortgage provider.
I only have experience with Nationwide where I have 3 options:
1) Over-payment reduces the term
2) Over-payment reduces the monthly repayment
3) Monthly repayment & term stay the same until next rate change. So it's like (2) but the amount by which the monthly repayment would reduce automatically gets over-paid.

From what I've read, other providers have minimum over-payment requirements. Letters may need writing, phone calls made, Direct Debits set up. All in all the provider can make it a bit of a faff.

So if you only have the options of reducing the term or reducing the monthly, I agree with ValHaller. Then you "just" need to add the amount your monthly has reduced to the next months over-payment. Which may be easier said than done.

It's because of the myriad of different ways over-payments are handled that makes creating a generic spreadsheet tricky.

Imma_Number

Key spreadsheet function for mortgage calc: PMT

Repayment amount = -PMT(Rate/12, Months_Remaining, Mortgage_Balance)
Interest component = Rate/12*Mortgage_Balance
Capital component = Repayment amount - Interest component

eg:
Mortgage Balance: 28000
Rate: 3.69%
Months Remaining: 72

Repayment amount = -PMT(3.69%/12, 72, 28000) = £434.12
Interest component = 3.69%/12*28000 = £86.10
Capital component = 434.12 - 86.10 = £348.02

Subtract the Capital component from the mortgage balance, reduce the months remaining and recalculate to get the next months figures.