What to Overpay first?

pmartin86

OK, ill try and keep it brief, some of you might recall about a year back i bought my first house, i have a £72,000 mortgage with a £10,000 personal loan that started today (Borrowed 10k off parents to do structural work to house, now got a personal loan to pay them back)

I want to overpay about £100 a month to start with, but not sure where to put it to save the most cash

Mortgage outstanding: £71,000 at 4.85% - 24 years to run
Loan Outstanding: £10,000 at 6.2% - 5 years to run

I am able to pay up to 20% per month on top of my normal mortgage payment, so approximately £80. I can make unlimited overpayment on the loan that reduce the term.

Logic says pay the loan as its higher APR but something is nagging that the mortgage will save more money as its over a much longer term, for some reason, my brain is refusing to confirm either.

Any help appreciated.
Paul

Ashingtonian

The mortgage.

Million_Percent

Mortgage.

If you overpay £80 every month for the remainder of the mortgage (assuming everything else stays the same) you will save over £14K in interest and pay off your mortgage over 6 years early.

If you overpay £80 a month on the loan, it will only save you around £550 in interest and reduce your term by 19 months.

Edit: I used this mortgage calulator to work these figures out: http://www.drcalculator.com/mortgage/uk/

Tixy

Are you in a fixed rate deal currently on the mortgage? if so when it ends will you be able to overpay by more than 20% a month? Or will you be likely to switch to a mortgage where you can such as an offset mortgage? If so then you would likely save more by overpaying the loan as much and as quick as you can, then in 3 years or so diverting the whole of the loan repayment to the mortgage debt.

But if you were to assume that you would stick with this mortgage for the rest of the term and never be able to overpay by more than £80 a month then overpay the mortgage as much as you can each month.

Mallotum_X

Higher rate first until its gone then overpay the mortgage.

pmartin86

Thank you all.

The mortgage is fixed for 5 years (4 left) during which time I'm limited to the +20% overpayment. I was hoping to make a dent in it before the fix ends, and save up a chunk if possible to pay as soon as I can pay a lump sum, simply due to the seeming inevitability that interest rates are going to go up a chunk in the next 4 years.

The next question would be more complex i suppose, do I overpay the £20 spare into the loan, or save it towards the lump sum and let the loan play out naturaly so to speak? The hope is that within 12-18 months, the £200 Im currently putting towards house renovations will then be directed to either of these avenues, so the "lump sum" should be larger than what £20 a month will get.

Paul

Million_Percent

Presumably the interest rate of the loan is fixed for the life of the loan whereas who knows what mortgage interest rates will be in 5 years time? One thing is certain they are unlikely to be as low as they are now.

Don't forget, if you remortgage at the end of your fixed period, you will get better interest rates with a lower LTV which could be achieved by overpaying on the mortgage.

The lowest risk solution for the long term is to pay the £80 extra off the mortgage and £20 extra off the loan each month.