Pay extra on mortgage or extra to debt?

Naturalbornspendthrift

Hi everyone,

The title probably looks like a no brainier but wanted to seek your advice!

I've managed to land myself my dream job- not only more £££ but better hours too! I keep thinking they will discover I am actually incompetent and sack me but that's a whole other anxiety related issue!

My new job nets us an extra £800 a month after tax and deductions. We've done a lot of debt busting over the past year and have a £1000 emergency fund. Aside from the mortgage, my husband has a bank loan, current balance £8000, payment £211 a month and 4 more years to go. There are no early repayment fees and extra payments can be made at any time. Mortgage is £139,000 with 25 years left, monthly payment of £680. We also overpay by £31 each month (takes as back to monthly payment of £711 which was what the mortgage was when we first took it out, this will save about £3k in interest and allow us to pay it off just over a year early)

My question is this- do we carry on letting the loan run on until it ends and overpay the mortgage by £800 a month or so we pay £800 extra to the loan and just get rid of it.

We want to decide soon as at the end of the month I will get my first proper wage from my new job and rather than let it go on frivolity we want to mak the best of it, live as if I was still on my old wage and do some serious debt busting! Thanks xx

AntoMac

Congratulations on your new job

If it were me (nice problem to have by the way) I would tackle the most expensive debt first - probably the loan I would guess. You would kill it off in no time and then you could redirect the extra money (or some of it) to the mortgage if you wished.

Million_Percent

Kill the loan first then throw the excess at the mortgage.

Kitten868

What are the interest rates? If it's a nice 3% job I'd go for the mortgage

redpete

It should just come down to which is charging you the highest rate of interest.

Jon_B_2

I don't think it is as simple as paying the higher APR.

I have a loan which is nearing the end at 4.9% which was for £8,500 and the interest was only around £600ish in total.

Everyday my mortgage with an outstanding balance of about £203k is producing interest of £500/month at only 2.84%

The interest is charged daily - there is a massive benefit to paying the debt down on the mortgage early. 2.84% of £203k is a lot more than 4.9% of £8.5k!!!

getmore4less

Jon_B wrote: »

I don't think it is as simple as paying the higher APR.

I have a loan which is nearing the end at 4.9% which was for £8,500 and the interest was only around £600ish in total.

Everyday my mortgage with an outstanding balance of about £203k is producing interest of £500/month at only 2.84%

The interest is charged daily - there is a massive benefit to paying the debt down on the mortgage early. 2.84% of £203k is a lot more than 4.9% of £8.5k!!!

That's not how it works,

higher rate first

You save more clearing a debt of £8.5K @ 4.9% than you do @ 2.84%

Debtslayer

Well done for getting new job and the debt busting
Which has the highest APR? Pay highest off first. But if it were me I'd be splitting the money between highest APR debt and building up more savings; say £300 on debt and £500 to savings; at least until you get a decent amount of savings, say 5k. IMO £1000 emergency fund is too little

redpete

Jon_B wrote: »

I don't think it is as simple as paying the higher APR.

I'm afraid it is.

Both mortgage and loan will charge interest daily. If you have £100 to put towards debt repayment you will save more per month (or day, or year) if you put it towards the debt with the highest rate of interest, the outstanding balance on either is irrelevant.

thegrind

Its the Interest rate charged on the principal amount outstanding.

2.4% APR on 120,000 is a lot more interest than 10% on 12,000.

Surely this is easy stuff?

I'd personally pay off all unsecured debt first. Then focus on the Mortgage.

redpete

thegrind wrote: »

Its the Interest rate charged on the principal amount outstanding.

2.4% APR on 120,000 is a lot more interest than 10% on 12,000.

Surely this is easy stuff?

I'd personally pay off all unsecured debt first. Then focus on the Mortgage.

But the situation is a fixed amount per month available to overpay one or the other, it is not a decision between paying £120 000 or £12 000.

£800 off a loan costing 10% saves a lot more interest than £800 off a loan costing 2.4%.