do i go for 'good debts' now?

ruth2

Hi all; thanks for reading!

I've come to an impasse and am looking for some points of view now - not actual advice (don't worry, I won't hold anyone accountable! haha); but I'd like to know what would you do in my situation, please?

Previously I had extremely poor spending habits and got myself into debt to the tune of £6k (on several credit cards). I've been a (very!) long-term lurker here, and using a lot of tips and advice after three years I've managed to (just last month) clear my credit card debt through cutting back, saving, selling, etc! The works! I cut up my credit cards in glee and feel absolutely amazing, honestly it feels like a huge weight has been lifted.

For the first time in a very long time if I stick to my budgets I usually have something like £200 left at the end of the month (that even includes putting aside a little for a rainy day!). I've not been in this position since forever, so I'm not sure what to do now. My thoughts were turning towards my two 'good debts' - mortgage and car loan.

My options as I see them are:

1. I could pay it off of my mortgage. Because of childcare costs I've had to drop to an interest only rate (base rate Santander) and am aware that I am at the mercy of the bank and BoE rate, and that I'm not actually paying off my home! On top of that; I bought my home for £140k a while back, and it was recently valued at £120k (I was thinking of either downsizing or getting off the property ladder). This drop in my home's value doesn't take me into negative equity - I still have ~15% - but I worry that if I pay this £200 off the mortgage I may be throwing good money away? If I don't formalise it, I have that flexibility if I need it, but would aim to put £200pm towards it.
   
2. I could pay it off the car loan that I have; I have maybe 4yrs left on the loan, ~£6k owed, and worked out that I could potentially pay it off by the end of next year if I really got stuck into it. That would mean an additional £140pm spare after that; which would be amazing. But then again; it's a 'good' debt because I need a car, and I can manage the monthly repayments as is - so maybe this is pointless? I think if I paid it off early I'd 'only' save something like £150 in interest? Then again, saving £150 is pretty good...
   
3. I could enjoy the £200pm - actually go out and do things with my daughter and try not to feel so guilty for once. I can pay all my bills, I save for the future, I have no 'bad' debts ... maybe I should have a little fun?
4. I could hedge my bets - spread the money around between the three above and chip away a little bit at the 'good' debts over time, and enjoy myself here and there?
5. Or I suppose I could switch the mortgage to a long-term fixed rate repayment which would likely take up the £200pm mark (or maybe more?) and just stay on the hamster wheel for now? I might be better off without the flexibility - if it went out of my account every month I'd not have the option 'not to' pay it? If you know what I mean? Also; I suppose another question would be; is the interest only mortgage actually a good debt? Or is it a bad debt? Or is it only the same as renting? I have no idea!!

My question to you would be; in my position; what would you do? I am so used to saving that I don't know what's best!

Thank you! x

HappyMJ

It depends on what the interest rates are.

If your credit rating is good then saving the money towards refinancing costs on a very good competitive deal will probably be the best route to take.

My next option would be to save the excess until you have 6 months worth of expenses saved up or about £6,000. That amount won't affect any benefits if you were to lose your job but you will still be able to make your mortgage payments until you either find another job or the payment protection insurance kicks in and makes the payments for you.

AFK_Matrix

Hi there ruth2 and congrats on paying off your Credit Cards

As for your question, this is what I would do so this is just my opinion.

I would take a break for say 1-2 months of being frugal and spend that £200 on your daughter etc. This will give you a nice break and reward for getting rid of all that CC debt.

Then I would start by as HappyMJ has said getting together an emergency fund of 3months pay or around £6000. This gives you reasurance that if things like fixing a major repair on the car or you loose your job you have savings to help you out of that situation.

Next I would say put the money towards your car loan as I don't want to put a downer on things but you are not debt free, you still have a debt of £6k on the car loan. So get paying that off, hopefully you can make overpayments so you can get rid of it quicker.

Then lastly I would start overpaying your mortgage or put it back to a repayment mortgage as with savings accounts giving such low interest rates its better probably to pay off your mortgage.

Just my ideas but I hope they help.

quantic

My advice would be to save up a little pot of money, in my case, £6k, then use the remaining money to overpay a tiny bit but spend most of it enjoying yourself. At least in the short term, you have to get some enjoyment from life otherwise you will end up going back to your old habits.

Enjoy your new financial freedom!

ruth2

It's true, i'm not debt free, but having read articles about good debt bad debt; i feel fairly happy with what debt I do currently hold.

Oh and thank you for the congrats

I do have a small slush fund for all expenses and a couple of what-ifs (e.g. car breaking down or something going wrong on the MOT, and general house maintenance bits n bobs). I'd say that my job is secure, but as I hadn't ever considered the possibility of losing my job and/or what that would mean, maybe I've just been a little niave. Putting some aside will be worthwhile going forward, I'm not sure if £6k is a realistic target for me; but three months of expenses is nearing that figure, which is kind of scary to think about!

The mortgage is a risk on the standard variable rate because it's whatever the Santander one is? Say 4.5% or something? If that rose I'd be in trouble. But then again, I haven't seen a good 85% mortgage rate for about 5years! So who knows.

The APR of the car loan is more than the mortgage, and would make a more noticeable impact than paying off the excess £200 to the mortgage in the short-term. Long-term though; I worry that maybe I'm not thinking of the larger picture or maybe I'm missing something?

I like the idea of taking a couple of months off, and if nothing else I was probably searching for validation that I'd be ok to do that - especially good considering it's such lovely weather.

In a couple of months time; so far it looks like I'm leaning more towards leaving the mortgage as is (and accepting the risk that may change), and putting most towards the car, and a little towards a just in case fund, and not being so frugal all the time.

Thanks to all who have replied so far, I really appreciate it :-)

abby1234519

1. Treat you and your daughter.
2. Contingency fund ( car/boiler/unemployment)
3. I personally would pay car loan off.
4. Work towards being mortgage free but also having a nice life

littleskintdragon

Another thought could you split it:

£100 towards energency
£50 towards car
£50 on treats for dd?

That way you'll b happy in the knowledge that the car will be paid off sooner, your rainy day fund will gradually get bigger, and dd will have a big smile!

Not sure if you can pay small extras monthly towards car, but if not save it until u can make a bigger payment.

OverRated

Enjoy two or three months of the excess money without feeling guilty as you have earned it.

I would pay off the car if it was me. Balance how quickly you pay it off with the odd treat perhaps but the key for me is it gives you greater flexibility money wise once it is paid off. You could always start saving up the money rather than pay a little extra each month and then pay it off as a lump sum - the interest saving would be small (i assume) and then if something happens you could re-direct the money if needed.

kbleigh

Are there any fees for early repayment of the car loan? I know these types of companies don't like people paying off early and losing out on interest, so charge people for overpaying. Same with the mortgage. I know on my mortgage we can overpay up to £200 a month but after that we are charged!

It may be worth looking into this before you make your decision.