Clear Loan or Increase Mortgage Payments

harrpau7

Hello all,

Bit of a quandary me (and my g/f) are in and are after some advice.

We have had our first mortgage for nearly two years (25 year term) and will be re-mortgaging very soon. So far we have overpaid by over twelve grand in these two years and can continue to do so even after the re-mortgage (overpayments come from bonuses/overtime etc). Our current monthly mortgage payments are £738 and we can afford to keep it at that when we re-mortgage (it will be a 2 year fixed at 2.14% for £119,000 - monthly breakdown below) however we also have a loan which we still have around 4 years left on owing £5,600 (5 year loan for £7,000, 3.9% APR) which we pay £128 a month on.

We therefore want to know if we should keep the monthly payments around the same for the mortgage (which would be a 16 or 17 year mortgage) or go to a longer term with lower monthly payments and then use the difference to clear the loan (which we could do in 2 years), so when we come to re-mortgage again we would not have a loan (but higher amount for re-mortgage). If we went to a 23 year mortgage we would be paying about £550 a month, freeing up nearly £200 a month to pay the loan off with (and once again, we could make mortgage overpayments from bonuses/overtime, we like to do it that way as these are not guaranteed from month to month).

Thanks in advance.

oligopoly

Loan first due to higher APR

harrpau7

oligopoly wrote: »

Loan first due to higher APR

Thats what I am thinking, how about re-mortgaging for £5,550 extra and then using that to pay the loan off?

Our current monthly outlay for both mortgage and loan is £866 (give or take a few pennies), £738 for mortgage and £128 for loan. I have worked out on the nationwide, santander and HSBC sites that we can get a mortage for £124,500, 2 year fixed, this time at 2.24% instead of 2.14% due to slightly higher LTV for 15 years paying £815 a month, meaning we would be £50 a month better off, with shorter mortgage term than the 16/17 year one we initially wanted and then way shorter than 23 years in my first post and have no loan to pay off.

Does this sound like a good idea?

Thanks again

AnotherJoe

I havent done the sums but I doubt it is a good idea because instead of paying £5,600 over four years at 4.9% you'd be paying it off at a bit less than half that but for 15 years,eg 4x as long

Thats got to be more money paid in total. Perhaps twice as much at a guess?
You could find an online calculator which will tell you the total amount of interest you pay.Add to that the extra .1% on the main loan you are paying.

One way you could perhaps make it work is go for the bigger mortgage but overpay it for the first four years to account for the loan (so you'd need to make sure overpayments were allowed) .

Or even if you went with your initial plan but instead of being fifty quid a month better off, overpaid by that fifty or a bit more.

harrpau7

AnotherJoe wrote: »

I havent done the sums but I doubt it is a good idea because instead of paying £5,600 over four years at 4.9% you'd be paying it off at a bit less than half that but for 15 years,eg 4x as long

Thats got to be more money paid in total. Perhaps twice as much at a guess?
You could find an online calculator which will tell you the total amount of interest you pay.Add to that the extra .1% on the main loan you are paying.

One way you could perhaps make it work is go for the bigger mortgage but overpay it for the first four years to account for the loan (so you'd need to make sure overpayments were allowed) .

Or even if you went with your initial plan but instead of being fifty quid a month better off, overpaid by that fifty or a bit more.

Yeah thats what I was thinking, we would still probably overpay by at least £5,000 a year on the mortgage and that £50 extra would also go to overpayments, plus the mortgage term is a couple of years shorter, so I am not sure what is best to do now.

Thanks anyway, we have a little time before a decision needs to be made so it's all food for thought.

harrpau7

Further to add, I have done some more sums and this is what I have worked out:

15 year mortgage which consolidates loan is £818.27 a month, which means in total we would pay back (assuming we kept the same mortgage for the term) a total of £147289.

16 year mortage and keeping loan is £860.88 a month for 4 years and then when loan is gone £732.50 a month, a total of £146240 for mortage and loan. After 4 years when loan has gone we would be £85.77 a month better off (£1,029.44 a year) as explained below. However on 15 year mortgage we would have 4 years of being £42.61 a month better off, which for 1 year is £511.32 and for 4 years is £2,045.28.

23 year mortgage and overpaying on loan is £674.69 until loan is cleared and then £564.31 a month, maximum total (dependant when loan is cleared) of £156,381 for mortage and loan (NOT HAPPENING NOW).

At first glance the 16 year deal looks best, however with the 15 year deal we would have a whole extra year of not paying the £732.50 a month for the 16 year deal, which is 'saving' £8790. If you subtract the £146240 (16 years) from the £147289 (15 years) thats £1049 better off on the 16 year deal. Then subtracting that £1049 from £8790 puts us (if worked all this out correctly) at £7741 better off overall. On the 16 year one though once the loan had gone we would be £85.77 a month better off with monthly payments from the 15 year one which is £1,029.44 a year (all these sums are assuming the mortage stays the same for the entire term, can't really predict the future for mortgage rates).

After all that, my head hurts and I feel I am missing something, am hoping someone can look at all this and make head and tail of it and advise what is best to do.

Cheers

AnotherJoe

Well, it shouldn't (IMO) be all about paying off the mortgage, you want to have some fun along the way so I'd go for the 16 year deal which gives you 12 years of having extra money you can use for whatever along the way, rather than wait 15 years.

And if you can afford it or feel like affording it you can overpay the 16 and get the same effect as the 15, but you arent locked in to that schedule.

I'd also like to thank you for your post as it induced me to get off my lazy !!! and transfer my car loan onto my offset mortgage (just did it a couple hours ago) so you've just saved me about £750!!

It was just one of those things I meant to do but hadnt got round to because of the hassle. Dumb. Should have done it 6 months ago but it kept slipping my mind.

harrpau7

AnotherJoe wrote: »

Well, it shouldn't (IMO) be all about paying off the mortgage, you want to have some fun along the way so I'd go for the 16 year deal which gives you 12 years of having extra money you can use for whatever along the way, rather than wait 15 years.

And if you can afford it or feel like affording it you can overpay the 16 and get the same effect as the 15, but you arent locked in to that schedule.

I agree with what your saying, but we have enough money to enjoy life as well as paying mortgage. We overpay on the mortgage where possible but still lead comfortable lifes. Plus in two years again we would remortgage and see where we are again, so its something for us to discuss, each option seems to have for's and against's so will see what happens over next few weeks.

AnotherJoe wrote: »

I'd also like to thank you for your post as it induced me to get off my lazy !!! and transfer my car loan onto my offset mortgage (just did it a couple hours ago) so you've just saved me about £750!!

It was just one of those things I meant to do but hadnt got round to because of the hassle. Dumb. Should have done it 6 months ago but it kept slipping my mind.

Glad to help, I will PM you my sort code and account number for goodwill payment .