Loan for Mortgage Overpayment

Pipz

Greetings,

Just wanted to run a course of action past you all.

I can overpay 10% of my outstanding balance at the beginning of a calendar year, I haven't been able to do that this year as I have been clearing an existing loan which is now paid in full.

My only option to make this overpayment is to take out a loan.

Overpayment 2014 - £6.2K

Proposed Loan amount - £7.5K over 60 months
(for cheaper rate, balance of £1.3K to be repaid to loan immediately).

I'm trying to assess whether the interest paid on the loan would be considerably less than the interest saved on making this overpayment. I'm not quite sure how to approach the maths so advice is welcome!

I'm aware that higher APR debts are best paid first and that invariably the loan APR will be higher than my mortgage but I don't want to lose the 2014 overpayment as I think in the long run £6.2K off the mortgage will save more interest off the mortgage than incurred via the loan.

The mortgage stands at c£62K at 3.49% 21 years remaining. Your thoughts are appreciated

Wyndham

Well, this is very rough maths with lots of caveats, but....


Assuming your mortgage wouldn't go down by itself (which I know will likely be incorrect) then if you paid £62000 at 3.49%, you'd pay £2163 in interest for one year. If you reduced the mortgage by £6200, you'd be left with £55800, which at 3.49% would cost you £1947 in interest for the year. So the difference is £215, which isn't much.

BUT, when you multiply that by the 21 years you have remaining, you get £4515.


So, the question you need to ask is whether you would pay more than that in interest on the loan? You don't give a rate, and again, this is very rough, but a loan of £6200 at 10% over 5 years would be around £3000 in interest, lower rates less, higher rates more. Again, not scientific at all, and you need a proper quote on this rather than my back of the envelop maths!


Does that help?

Pipz

Thanks it does.

I left a loan rate off as one can never tell, this time last year I was accepted for £10K @ 6.79 so that is a rough indication perhaps as the loan in question is now paid off.

I paid apprx £360 in interest through not letting it run to term. When I compare this against the potential saving over 21 years then it makes sense.

I'm not keen on missing out on a year of overpayments!

stator

I think it would silly to do this. Put your spare money into a savings account and earn interest. If you have a crisis or unexpected cost you will be able to dip into the savings. If you've overpaid your mortgage with a loan you will be stuck with mortgage and loan repayments on top!

Foxy-Stoat_3

Why not just over pay the mortgage each month by roughly the loan repayment amount.

Taking out a loan with higher interest rate to pay back another loan with a lower interest rate seems bonkers, even if the length of the term is different.

JimmyTheWig

Other than by taking a further loan, how much do you plan on overpaying next year?
And the year after that?
When does your fixed rate (or whatever it is that is tieing you in preventing you from paying more than 10% overpayment) end?

Foxy-Stoat_3

Maybe the OP is planning on paying back 10% every year with another loan so,
2014 - Mortgage £62,000 - get a loan for £6,200 for 5 years
2015 - Mortgage £55,800 less payments - get another loan for £5,500 for 5 years
2016 - Mortgage £50,000 less payments - get yet another loan for £5,000 for 5 years
etc etc ect
So you turn your mortgage into lots of unsecured loans - not sure I can see any pros for doing this.

Green_Glass

Could you not just use your loan repayments to pay an overpayment on the mortgage each month ? Surely the difference in interest between doing it that way and taking a loan out is minimal to pay in one go is minimal.

(sorry - just realised someone else made the same suggestion)

JimmyTheWig

Foxy-Stoat wrote: »

Maybe the OP is planning on paying back 10% every year with another loan so,
2014 - Mortgage £62,000 - get a loan for £6,200 for 5 years
2015 - Mortgage £55,800 less payments - get another loan for £5,500 for 5 years
2016 - Mortgage £50,000 less payments - get yet another loan for £5,000 for 5 years
etc etc ect
So you turn your mortgage into lots of unsecured loans - not sure I can see any pros for doing this.

If he then defaults he won't lose his house.

I believe the OP's point is that paying a higher interest rate over a short timescale is often cheaper than paying a lower interest rate over a long timescale.
This is true, but there is (probably - I haven't worked out every scenario) no reason why he can't pay the lower interest rate over the short timescale if he has the money to pay the amount off in that short timescale.

TriathNanEilean

Just to back up what recent posters have said..

The quick calculation Wyndham did was fine as far as it went but I think it missed out one important thing. If you forget about the loan, you can instead use the monies you were going to use to pay the loan back, for savings. At intervals that your mortgage provider allows, take these savings and pay off extra towards your mortgage (perhaps retaining an emergency fund - good idea that).

The end result of this is that after 60 months the total amount outstanding on your mortgage will be just as much reduced as if you had taken out the loan (just roughly but close enough for our calculation here). So the £215 per year saved interest figure that came up shouldn't be multiplied by 21 years but just by the 60 months of the loan.

So you would save about £1,000 with your scheme, but it costs £3,000, so is a bad idea. Which kind of makes intuitive sense when you think about it: 10% interest is about 3 times your mortgage 3.49% interest rate, so it costs 3 times as much doing it that way.

Pipz

The plan to overpay next year would be to have enough in savings to cover it. I plan to take an evening job in addition to the main occupation to help overpay the loan (if I take it) and then save the equivalent overpayment amount by Dec 15.

The fixed rate ends March 18.

I find it difficult to articulate, and I realise taking on an additional obligation is not ideal but I'm trying to assess what the financial impact of not making this £6.2K overpayment is over the mortgage term.

Once I know that figure, which I think was estimated by the first reply, I can then compare that with the amount I might pay in interest on the loan to see if it is viable.

Obviously this assessment relies on the stability of my current financial condition. But if we look at it from a perspective of interest saved on mortgage vs interest incurred on the loan do the figures make sense?

My previous loan (£10k) was on a 5 year term and was paid off within 10 months hence the loan cost apprx £360 in interest, a loan of £7.5k would presumably cost less in interest (depending on interest rate and could potentially save thousands over the mortgage term.

I'm not committed to a particular course of action at present, I just want to work out the cost of this particular option.

Please excuse the convoluted thread!