Should I pay off my mortgage discussion

mrgclm

I overpay my mortgage by £100 per month and have built up over £7500 in overpayment savings. Investment advice always says clear your debts starting with the highest interest first; so my question is: My partner has a car loan at 12.7% and comparing this to my mortgage rate of 5.74%, am I right in thinking that using the overpayments to pay off the car loan is the right thing to do?

gillian46

You are right that you should pay off the car loan before the mortgage as the interest rate is higher. You will need to look at the T&Cs for the loan to see if you can overpay by a certain amount each month (I don't think a lot of unsecured loans let you do that). If it doesn't then probably the best thing to do is put the overpayment money each month into a high interest savings account until you have enough to pay off the loan outright.

Thanks CLJ I'm sure you would have spotted it as well

mrgclm

Thank you gillian46, we shall get the car loan paid off asap :T

jamesd

mrgclm, so long as the car loan is less than the amount in the mortgage overpayment account (with the mortgage company) you can ask the mortgage company for it to clear the car loan. I'm assuming that by saying that you have 7500 in overpayment savings this means that you have a flexible mortgage with drawdown (withdrawing) facility.

Then keep on making the car repayments but into the mortgage instead of the car loan... and you'll pay back the mortgage overpayment fund by the time the loan is repaid.

mrgclm

Thanks jamesd. We are going to pay off the car loan in full, then put the monthly payments first into cash isas and then into the flexible mortgage.

jamesd

Good plan but you might consider these in a stocks and shares ISA as well if you like the idea of predictability and 12% or 8.5% gains a year:

BlackRock UK Absolute Alpha, about 12% growth in the last year.
CF Arch Cru Investment Portfolio (see details), about 8.5% growth in the last year.

No guarantees that these returns will continue but they are doing well so far if you compare the fairly consistent lines here to the FTSE all-share (excluding investment trusts) index. Don't just use the 12% one. They invest in different ways and the diversification gives you extra protection.

Dithering_Dad

jamesd wrote: »

Dithering Dad, if you expect a period of high inflation it's the ideal time to take more fixed interest debt and defer making extra payments to existing fixed interest rate debt. Inflation will reduce the real value of those debts. High inflation is a particularly good deal for property owners, who have relatively large debts with high leverage (borrowing to deposit ratio).

Expecting high inflation is also the time to take out a longer than usual fixed rate deal, but still to make sure that it's at least portable so you can move. The fixed rate taken near the end of the low interest time (which isn't now) is likely to be lower than the future variable rates.

You're probably right to expect higher interest rates once the financial system and following economic problems are clearly dealt with. Probably a few years away so too soon to move to a long fixed rate deal IMO.

Now is a good time to take out unemployment insurance, so minimum cover periods will have expired before a possible claim. Not a good time to deplete savings to pay debt, for this reason, among others.

Personally I'm seriously contemplating large borrowing combined with setting a my pension contributions in a salary sacrifice pension so that my effective salary is about 8,000, which would qualify for working tax credits. That would give very high pension (and later pension mortgage capital repayment) contributions during a year when share prices are depressed but property prices aren't yet. It's a high risk strategy because I'm locked in to the low income for a year and will deplete savings a bit.

Hi James, sorry - missed this one. I hope it's not too late to respond...

Your post highlights a long-standing issue I have with providing direct "This way is better than that way" advise on MSE. Mainly because there is not a "one size fits all" approach to finances, and unless you know all of the details on a person, you cannot possible advise them on what to do - hence my approach to speak in generalities or to say what I am doing as an individual.

Your response for instance, while good general advise wouldn't be much use to me for the following reasons:

Long-Term Fixed Rate deal: good advise to someone who is in long-term secure employment. Not of use to myself who is a contractor with bursts of high income and periods of unemployment. In this case, my view is that I am better reducing my liabilities when I have the high income because during lean periods, I will have less (hopefully none) debts which in turn makes my emergency saving go so much further. An even better appraoch would be for me to go to Interest Only on my mortgage to realy lower my outgoings during lean months and then I can do repayments during the "harvest".

Unemployment Insurance: useless for most people due to the strict criteria (IMHO) but particularly useless to someone who is not in permanent employment such as myself. Better to pay the premiums into your emergency savings fund.

Salary Sacrifice: I'm also considering this, but in order to do it I have to get my outgoings down - you are only allowed 6k of savings before they impact the CTC and WTC payments, which if I paid myself a low salary (such as the 8k you mentioned) I would soon drain my savings and emergency savings and would have to finance myself with debt. Once my mortgage is gone, I intend paying myself and Mrs Dither a small salary that will cover our NI contributions (to secure state pensions) and day to day expenses (bills and food) and either leave the rest in my Limited company or pay it all into our pension plans. If you're also planning on this, you should join us on the MFi3 to get your outgoings down too . You could turn your 'high risk strategy' into a low risk, high gain one.

jamesd

Dithering Dad, yes, everyone needs to read everything here while considering their own situation and whether it applies to them or not. Or whether it simply doesn't match their preferences.

Personally I'm not keen on long term fixed rate deals at all. But if someone does want one, that's the point in the economic cycle when the deal will normally be best.

For your situation I doubt that I'd go for large payments to a mortgage during good times unless it is offset or has flexible drawdown. That's because the mortgage lender might not let you have back the money you need to live on and pay the regular monthly payments during the lean time. For me, savings and investments are what I'd want (and I'm currently working hard on making sure I can live on savings and investments until I can retire, as my personal "I'm financially secure" target). But your choice is the one lots of people would prefer, not a bad one either.

For your case unemployment insurance may well not be right. Policies differ and I know one person who wondered if he might be made unemployed and signed up a year before he was. Ended up doing very well out of it. Since we're possibly heading into uncertain times economically, now's a good time to have it for many people (while for me the company is looking to expand rapidly so my own unemployment risk is quite low). Can cancel it during good times and sign up again whenever bad times are expected. But I don't currently have it because of my circumstances.

I ended up not going down as far as WTC levels. Too much of my work income couldn't be sacrificed because it didn't count towards the minimum wage and an employer can't allow sacrifice to go below minimum wage. Things like shift payments, car allowance, bonuses and such are just too high a part of my income but can't be part of the minimum wage calculation or salary sacrifice. Ended up setting the sacrifice to a bit over 80% of base salary.

Please provide some reference for a 6k of savings factor in WTC and CTC eligibility. All I see is We will not normally take capital (that is, deposits in current and savings accounts at banks and building societies, most lump sum payments and the value of property, shares and other investments) into account when we work out your entitlement to tax credits and some notes about notional income and savings that don't count at all.

I've been saving and investing more than 60% of take-home pay so I'm probably already an associate member of the MFi3 club even though I don't actually have a mortgage yet. Committed to paying it off and starting before it does... My strategy wasn't so high risk for me, courtesy of that past aggressive saving and a non-extravagant lifestyle: I have savings and investments that I could live on without change of lifestyle for something around four years at the moment.

Dithering_Dad

Thanks James, I'll have a look at the CTC/WTC in regard to savings - It might be that I could do a Pension Pot challenge immediately after the MFi3 challenge finishes.

I think a lot of people could do well to follow your non-extravagant lifestyle if the newspapers are anything to go by - a worrying time for many to come. I'm also limiting my expenditure - when I started contracting, I made sure that our outgoings and "fun spending" stayed at the level they were at when I was a permie employee. Apart from a few grumbles from Mrs Dither about how we're earning all this money and living like paupers (we're not!), it's working out really well.

I do have an offset account and I use this to store all of my income tax money that comes due January & July each year. I also made sure that any regular overpayments I made will allow me to have payment holidays should the need arise. Always worth pointing this out to anyone who is considering overpayments - you may want that money back if times get hard, so make sure you can get at it easily!!

p.s. Just read my previous post - it reads a bit combative, which wasn't my intention - I have limited time to make posts and so rattle them off quickly, so some of the social niceties get lost!

Jonbvn

DD,

I assume that you are talking about a 6k savings limit, since for an average savings a/c paying 5% you will get GBP300pa. All interest above this will reduce CTC/WTC. However, you will be pleased to know that all income/interest from ISA's, PEP's TESSA's and NS&I tax-free products does NOT need to be declared when applying for CTC/WTC.

HTH.