Use a Loan to overpay Mortgage?

willtt

Hello Nido

Yes you are right I did compare interest savings to the lifetime of the mortgage but I'm still not sure why this isn't the correct thing to do?

In regards to my mortgage deal it's 2.19 that's why I was confused with the figures as it appears taking the loan at 3.6 works out better over 60 months as it's shorter than my mortgage at 2.19. I'm even more confused than when I started!

globalds

in 60 months do you pay £1000 more on £11,000 of your mortgage?

That is the figure you need to know ?

If it is less than £1,000 interest then don't lend the money and just overpay by £180 for the next 60 months ..you will have paid off more than the loan would have.

60 x £180 = £10,800 though so best do your sums for £800

ACG

Have you compared the figures to what they would be if you overpaid your mortgage by £180 a month? If your comparing interest on something being paid off over a shorter period then its not a fair comparison.

Cornucopia

Okay, so a £200k mortgage over 20 years at 2.19% would cost:

£1030 per month, £247119 in total

A £190k mortgage over 19 years would cost:

£1019 per month, £232391 in total

So, paying off £10k at the start would save a year and £14728 in total cost.

If the £10k loan "costs" £11k, I'd say the logic was sound, not allowing for the difference in value between £11k now and £15k at the end of the mortgage term (they may well be worth about the same).

The loan is cheaper over the shorter term, as there is less accumulated compound interest to be paid.

nidO

willtt wrote: »

Hello Nido

Yes you are right I did compare interest savings to the lifetime of the mortgage but I'm still not sure why this isn't the correct thing to do?

Because comparing the benefit over the lifetime of the mortgage assumes that you wouldn't otherwise pay off that 10k of capital until it's effectively the last 10k you pay off.

This is not a like-for-like comparison though as you're having to pay back the 10k (plus interest) NOW in the form of repayments to the loan, being the £180 a month.

So effectively you're making that interest "saving" by paying £10k now, rather than £10k in however many years you would be paying the last £10k of your mortgage.

In reality however, if you can afford the £180/month loan repayments for the next 5 years, you can afford to overpay your mortgage by £180 for 5 years instead. Which means, leaving aside the interest differences, you've paid off that 10k of capital over the next 5 years not years and years down the line from now.
This means the only difference is the interest saving from paying down the £10k immediately and having that much less interest to pay over the next 5 years, vs paying the same 10k down monthly over 5 years.

nidO

As ACG has said, if you want an accurate comparison, work out how much interest you'll save if you overpay your mortgage by £180 a month for the next 60 months.

This will then have you "spending" the same over that time period, (£180 a month as loan repayments vs £180 a month as mortgage overpayments) and will tell you the total interest cost/benefit of the two.
If your mortgage is 2.19% (and you don't expect it to rise dramatically in the next 5 years), then you'll find overpaying the mortgage is a better option, and you shouldn't even be considering going down the loan route.

Cornucopia

According to the MSE Overpayment calculator...

£200k, 20 yr mortgage @2.19% with a £180 overpayment over the entire duration saves £8886.

nidO

Cornucopia wrote: »

£200k, 20 yr mortgage @2.19% with a £180 overpayment over the entire duration saves £8886.

To flesh that out a bit more for the OP's scenario...

Assuming your £200k, 20 year example mortgage:

Making a lump sum payment of £10,000 now will "save" £5267 of interest over the life of the mortgage, with the OP then paying that £10,000 plus around £800 interest back at £180 a month over 60 months.
Therefore, the benefit of going ahead with this loan idea, when compared to blowing the £180/month repayments on beer/takeaways/whatever takes your fancy would be around £4500.

However, a fair comparison is against spending that £180 on the mortgage as overpayments, vs spending it repaying the 10k loan.

On this basis, spending the £180 a month for 60 months as an overpayment on the mortgage would save around £4800 in interest.
Therefore, of the 3 options (£180/month on loan repayments, £180 a month on mortgage repayments, £180/month on takeaways), the direct overpayments are the best option, the loan the 2nd best, and the takeaways obviously the worst.

Hope that clears it up a bit, OP.

willtt

Hello all,

Just to add some more figures, so I owe approx £115,000 and have 23 years remaining at a rate currently fixed at 2.19%. I understand using the over payment calculator to see the interest savings over the entire mortgage but I am not sure how to use it to compare the interest savings just over the 60 months instead?

It would be useful to know the figures but from all your helpful comments it seems that overpaying monthly is going to be more beneficial.

getmore4less

Just use a simple calculator much easier and the MSE calculators are flawed forsome of the calculations anyway.

http://www.whatsthecost.com/mortgage.aspx

start with your repayment loan

£115k @ 2.19% 23 years is 531pm

set to interest only and 5 years term and payment £531.

left after 5 years £94658

add the overpayment to the payment making it £711

left after 5years £83255

saving £11403

if that is more than the loan(180*60=10800) then overpaying is better by £600.