Pay extra on mortgage or extra to debt?

DrivingMissDaisy

I would err on the side of caution of bit. Since you mention this is your first pay, you haven't probably cleared probation just yet - I would be inclined to save the extra amount. Or at least save 50% of the extra amount and put the other extra against the bank loan (if that has the highest APR). I would use the extra funding to increase your rainy day amount to 3 months expenses before overpaying the bank loan or mortgage

clint_S

On a 25 year £120,000 2.8%APR Mortgage the finance charge is £46994.82, or £1879.80 per year, or £156.65 per month.
For a 5 year £12,000 10% loan the finance charge is £3,297.87, or £131.92 per year, or £11 per month


Paying down your mortgage decreases the loan time to 20 years you only have a finance charge of £122.85 per month or a saving of £33.8. if it saves two year you save £13.67 per month off the finance charge.


For the loan. if it removes one year you save £2.30 in Finance charge. If you can save two years the you save £4.53 of the finance charge.


Long term paying the mortgage is better. Although I would clear the loan allowing more to be dumped on the mortgage.

triple_choc_chip

Hiya, well done on the new job!

I too would build more of a cushion, a minimum of 3 months, up to 6 months net pay of the highest earner. The £1k EF is great for replacing white goods or mending the boiler but having a nest egg in case of illness, redundancy, or starting a family is even better.

I would then pay the loan off but I think I would save it in an account before asking for a settlement figure. When you have the money you can judge how secure you feel and whether you want to add it to the nest egg or get rid of the debt.

HappyMJ

If the interest rates are similar then it's debatable as to which one is better to pay first. We're told on here that securing debt is bad as you can lose your house if you don't pay the mortgage so making extra payments on the mortgage will help prevent you from losing your home in case you lose your job and can't make payments. As you would be ahead in repayments in gives you breathing space before you have to do something else.

We're also told on here that securing a short term unsecured debt that may be charging 5% interest on to a long term mortgage charging 3% might look cheaper if you look at the headline rate but in the long term is actually more expensive.

What would I do?

I'd pay any debt charging more than 5% interest first. If you repay a credit card and need money back in an emergency you can use the credit card again. It's much more difficult to get mortgage overpayments back in the future.

I'd then save around £6,000 in high interest savings accounts so that if I were to lose my main source of income my expenses will be sorted for the short term until benefits are in payment.

I would then make overpayments on the mortgage before paying off car loans.

KirstyO

Beware if you decide to overpay your mortgage by large chunks, you may be subject to overpayment fees - you need to check the most recent version of your terms and conditions. Also if there are fees they are normally applied when you hit a certain %age of the outstanding debt, so the smaller the remaining total, the less you can overpay by!


(eg my mortgage, I can only overpay max 10% each year, as it is only 95k mortgage I can't pay more than 9.5k in overpayments this year, by the time it gets to 10k, I could only overpay 1k without being penalised)

Million_Percent

Seems to be a bit of confusion over the maths here.

So, we have 2 debts:

Mortgage: £139,000, 25 years left, £680 per month
Loan: £8,000, 4 years, £211 per month

For the sake of simplicity, let's discard the £31 the OP is already overpaying on the mortgage and calculate the total payments for the two scenarios.

1. Overpay the loan then switch the overpayment to the mortgage:
The loan will be paid off in 9 months at a total cost of £8380
With the £800 overpayment switched to the mortgage from month 10, the mortgage will be paid off in 9 years 8 months at a total cost of £163,365
Total Cost: £171,745

2. Overpay the mortgage and pay the loan according to schedule:
The loan will be paid off in 4 years at a total cost of £10,128
The mortgage will be paid off in 9 years and 1 month at a total cost of £160,904
Total Cost: £171,032

Reality is there is not much in it. Of course these figures are rough as I'm sure the figures and terms the OP provided are rounded not exact. The calculation also assumes the mortgage rate is fixed for the full term and has no overpayment penalties.

Personally I would pay down the loan first just to get rid of it. Reduce your minimum monthly payments to give you most freedom and flexibility for the future.

gingerdad

For me i'd build up a bigger fund 3-6 months salary - use one of the 6% regular savers with HSBC, First Direct or M&S. then look at paying down the mortgage.

Muhren

Million_Percent wrote: »

1. Overpay the loan then switch the overpayment to the mortgage:
The loan will be paid off in 9 months at a total cost of £8380
With the £800 overpayment switched to the mortgage from month 10, the mortgage will be paid off in 9 years 8 months at a total cost of £163,365
Total Cost: £171,745

It's good to see the two in comparison. One question though does this take into account being able to pay an extra £211 month off the mortgage once the loan has been paid off?

northerner999

I agree fully with those advocating building up your emergency fund. If you needed a new boiler tomorrow you likely wouldn't have enough - a few months' of big payments and you would have a solid EF.

It also gives you more options should your dream job not turn out so well - five years ago I started my dream job, bought new (used) car laptop and everything I needed to make the most of it. Two weeks in and I quit because my boss was a bullying idiot who I could not stand (then came the unemployment and the debt), I also know people that have been under redundancy consultation weeks after joining a company - I'm not saying this to put a downer on you but just to highlight how we often know little of what lies ahead. Maximising your EF gives you the most flexibility whatever happens, and if you got to July with £3,000 in there - and you could reach that figure while still overpaying the loan if you need that psychologically - then you will really have a strong hand.

Naturalbornspendthrift

Thanks for all your replies!

I have to say I don't actually know what the APR is on the loan! My husband took it out and other than contributing to the payments I don't have much to do with it! I suspect it's about 7.5% APR but will get him to dig out the paperwork and check.

It was interesting to see the numbers compared- thanks million percent for that!

I still haven't decided what to do- I am erring to option 3 of increasing the rainy day fund as some posters mentioned just incase it doesn't work out with the new job!