Am I better off overpaying both mortgages or all on the smaller one?

BigJohn3

Due to a move to a larger house whilst in a fixed term mortgage we now have 2 mortgages and are trying to work out how to overpay to the best effect. I am hoping there will be some good advise from you experts

Both the mortgages have 18 years to run and are both on Nationwides SVR of 2.5% with no limit or charges on overpayments so we can do what we want. Using general figures not down to the pence, the larger mortgage is £111,421 with monthly payments of £636.53 and the smaller one £76,189 with monthly payments of £435.01.

Using the overpayment calculator on this site we worked out if we upped the payments to £900 and £500 it would save £13k interest and pay them both off 5 years earlier which is good.

Having made that change I have since had a further think about it and if we actually use all the overpayment money on the smaller account then it would save £9,323 in interest and pay it off 8 years and 9 months earlier.

Now whilst this isn't as much of a saving overall, my thinking is that it will free up cash sooner to start overpaying the other one as well. After 5 years it shows that we will owe £37,323 rather than £58,336 so more of the capital has been shifted rather than just paying off a bit more interest.

Does this logic make sense or am I missing something? I realise that being a variable rate and currently at such a low rate it is bound to increase at some point but we can only work with what we have.

Apologies for it being so long but any thoughts or comments welcome.

BigJohn3

I've just seen there is another forum that looks like it is about mortgages in general. I think this is the best place for it but should it be moved?

rockabelle

Here's a perfectly good place to post it!
I haven't redone your calculations, but I'd suggest getting rid of the smaller one first, so that if you have to remortgage at any time, you have only one mortgage to worry about (though I suppose you could combine them if you remortgaged, so it wouldn't make a difference). Having two might affect your credit score? Plus, personally I'd find it more satisfying getting totally rid of one!

BigJohn3

rockabelle wrote: »

Here's a perfectly good place to post it!
I haven't redone your calculations, but I'd suggest getting rid of the smaller one first, so that if you have to remortgage at any time, you have only one mortgage to worry about (though I suppose you could combine them if you remortgaged, so it wouldn't make a difference). Having two might affect your credit score? Plus, personally I'd find it more satisfying getting totally rid of one!

Thanks for the comments. I am not bothered by having 2 mortgages because at the end of the day it is the overall debt that matters. It did mean we had to go with the same supplier when we moved but as both are now out of their fixed period we would just consolidate into one. One of the reasons we haven't done it is that we can overpay £500 per month off each without any penalty. We don't have and are unlikely to have over £1k burning a hole in our pocket any time soon but this gives us the flexibility to do just as I am suggesting.

Not sure about the credit rating. Hadn't really thought about it but when we have done the credit check trials we have always scored well so I don't think it is a massive factor if we needed to borrow more on a loan etc.

I don't think we would totally get rid of the smaller one in 10 years as I think after about 5 years we will have made a big dent in the capital so could switch our attention to the other one and try to do the same with that. With the way I've currently done it, I think I am still wasting a lot of the money on paying interest before eating away at the actual mortgage value.

I am just wanting to check I have not overlooked something and that my sums and assumptions are correct.

turtlemoose

http://locostfireblade.co.uk/spreadsheet/Index.html


download that and run both scenarios through it

bookgirl_2

If paying off the smaller one will limit the potential for future overpayments, I'd pay some off each.

Otherwise, if it costs the same either way it is good psychologically to focus on paying one off in full!

BigJohn3

Thanks for the link to the spreadsheet Turtlemoose. It is a thing of beauty but unfortunately doesn't allow me to compare apples with apples because one scenario is with the whole sum owed being reduced (which is shows nicely) whilst the other scenario is only overpaying one section of the mortgage whilst the other stays on a fixed monthly amount.

I can't see a way of making it do that so obviously it is recommending the mortgage for £70k rather than £180k which in that format I can't argue with the logic

Not sure how or if it is possible to fudge it to show what I want.

jodles16

Im still a bit new to all this so I might be confused! From what I understand even though both are at the same APR you will be paying more interest overall on the bigger one, so to me it would make more sense to make bigger payments on that one and smaller ones on the smaller one...or just on the bigger one until they are the same! I would imagine thats the best way to save more interest?

Jodles

PS just nosied on the mortgage calculator, over 18 years the bigger one will cost you about £135k including interest and the smaller one will cost you 95k including interest.

Lokolo

jodles16 wrote: »

Im still a bit new to all this so I might be confused! From what I understand even though both are at the same APR you will be paying more interest overall on the bigger one, so to me it would make more sense to make bigger payments on that one and smaller ones on the smaller one...or just on the bigger one until they are the same! I would imagine thats the best way to save more interest?

Jodles

No that is wrong.

If I have £100 to spare. My mortgage is 3%. My savings rate is 5% after tax.

Putting the £100 into my mortgage would reduce the interest by £3 a year.
Putting the £100 into savings, would return me £5.

I can either have -£103 in mortgage, or +£105 in savings. So therefore savings would be the way to go.

jamesd

From a purely financial point of view it makes no difference which you you pay into since doing it to either makes you worse off than you could be, given the low 2.5% interest rate. At that rate it's not worth doing any overpaying because you can make more money by saving or investing the money instead.

There are:

1. Regular saver accounts paying 6% taxable.
2. Current accounts paying 5, 4 and 3% with various limits and conditions.
3. Peer to peer lending at 10%+ or lower from a range of providers, with some risk to capital and term lockins.
4. Conventional investing, with the long term UK stock market return being about 5% plus inflation.

The big thing you were missing was looking at only half of the picture: the interest you could save, instead of comparing that to the interest or investment returns you could make and picking the one that gains you most.

jamesd

jodles16 wrote: »

From what I understand even though both are at the same APR you will be paying more interest overall on the bigger one, so to me it would make more sense to make bigger payments on that one and smaller ones on the smaller one...or just on the bigger one until they are the same! I would imagine thats the best way to save more interest?

What do you think the interest difference is between:

1. One mortgage of £50,000 and one of £20,000 both at 2.5% interest rate
2. One mortgage of £60,000 and one of £10,000 both at 2.5% interest rate?
3. One mortgage of £35,000 and another at £35,000 both at 2.5% interest rate?

There's no interest difference at all. In all three cases the interest to pay is 2.5% of £70,000 each year.