3 parts to my mortgage, which bit do I overpay?

cal1_2

Hi Everyone
I'm hoping all you lovely people will be able to give me some advice.
I bought my house in 1999, I got a 25yr mortgage. My mortgage in 1999 was 62K which was made up 31K interest only and 31K repayment. Got divorced 2007 and had to borrow an extra 18K to pay ex husband out.
My mortgage offer in April 07 stated :-

Total £ 74,400

sub-account 1 £26,300 5.49% 17yr,3 mth left repayment
sub-account 2 £31,100 5.49% 17yr,3 mth left interest only
sub-account 3 £18,000 5.99% 17yr,2 mth left repayment

(Sub-account 1 & 2 were 10 yrs fixed rate, to finish June 2009)
(Sub-account 3 is a 2yr fixed rate, to finish May 2009)

I am a single mum, but have just managed to get an extra job and am hoping to make overpayments of approximately £300 per month. I have checked with the mortgage company and can overpay by £499 on sub-account 1 & 2 combined and a further £499 on sub-account 3.

I have an endowment plan to pay off sub-account 2, which is underperforming:rolleyes:, so I have been paying overpaying an extra £100 per month only since earlier this year, which should more than cover the shortfall (is the best thing to do? )

Am I better off paying the £300 of sub-account 1 or sub-account 3? I realise s-a 3 has a higher interest rate than s-a 1 so I initially thought it would be better paying it off s-a 3. BUT! s-a 1 has been running for longer, ie 8 years, and I read somewhere on here that we pay more interest than capital at the start of a mortgage. As s-a 3 has only been running since May 2007, could anyone give me advice which one is the best to pay it off please?
Sorry for long-winded post:o but am hoping someone will be able to advise me:D
Thank you all for reading this, kind regards.

cal1_2

anybody ?
38 views & no advice

Suppose I just have to go with my gut instinct then:undecided

Ed_86

Firstly I'll say i don't really know....

The reason i posted was to say hang on and i am sure someone who has some experience will read this and give you a reply that has some knowledge behind it!

In all honesty tho i really don't think it will make the most difference really as the difference between the sub accounts is so little but would seem to make sense to pay highest interest rate one off first?

just my two pence but ia m sure someone will be along to tell you either way!

david78

You should pay your overpayments into the sub-account with the highest interest rate (sub-account 3).

How long each has been running/has to run and how much of the payment is interest vs. capital is completely irrelevent.

It also doesn't matter that some are interest-only and some repayment

jamesd

cal1 wrote: »

we pay more interest than capital at the start of a mortgage

It's not the time since starting the mortgage that causes this. It's the amount of outstanding unpaid mortgage. The fixed payment is split into interest and capital parts if it's a repayment mortgage. At the start, most of that is interest because the capital owed is high. Over time the capital owed decreases so you're paying interest on less money. Same fixed payment, so a higher proportion is now capital. This means that it doesn't matter which mortgage part you pay off first, since it's not a question of time since it started, just the difference between interest on the amount owed and the repayment amount.

Your decision depends just on the interest rates. Pay off the one with the highest interest rate first. That's account 3.

However, you can get higher tax free interest from cash ISA accounts so it doesn't actually make sense to overpay on any of them until you've used your full cash ISA allowance.

It's worth saying more about your endowment in case it's worth swapping that for investing in funds via your stocks and shares allowance. It's likely that it is worthwhile if you'll accept medium volatility. It's entirely reasonable to expect a reasonably invested S&S ISA to deliver 50% more cash than needed to pay off the mortgage. If your endowment projection doesn't include terminal bonus you'd see it underperforming every year until the end. Whether it does depends on the company.

cal1_2

Ah! Cheers guys!:beer:
Even though I am careful with my money, I don't really understand S&S ISA's
I thought it was best paying off sub-account 3 cos the interest rate is higher. Am hoping to make as many overpayments (within the rules) as I can before the fixed rate ends in 2009, so the amount I have to borrow at the time I come to look for a new deal is as small as it can be. Does anyone know how I can work this out? All the calculators show how much interest & years saved if I overpay, but how can I work out how much the figure will be by the time I come to remortgage in 2009?
Thanks again to all who replied:T

Gobosly

Agree with previous posts and your gut instinct. There isn't that much difference in interest rate between the mortgages, but you may as well make the overpayments on the highest interest rate mortgage to have most effect.

In answer to your question regarding the calculation of the amount at the end of the mortgage in 2009, have a look at the link below. It is free downloadable excel spreadsheet template to calculate mortage (or loan) repayments.

http://www.vertex42.com/ExcelTemplates/simple-amortization.html

You need to enter the mortage amount, the interest rate (careful here as you need to enter 0.599 for 5.99%)and the number repayment periods (number of months until you want the mortgage to finish). It's not exactly what you asked for but I normally play about with those numbers until I get what I'm after. Hope it helps!

jamesd

cal1, S&S ISA's aren't so bad once you start using them. Pretty intimidating when you know nothing about them, though. Worth a read of Ok then - How do I choose a S&S ISA if you're curious.

david78

cal1 wrote: »

I am hoping to make as many overpayments (within the rules) as I can before the fixed rate ends in 2009, so the amount I have to borrow at the time I come to look for a new deal is as small as it can be. Does anyone know how I can work this out? All the calculators show how much interest & years saved if I overpay, but how can I work out how much the figure will be by the time I come to remortgage in 2009?

Sorry cal1, I meant to tell you the solution to this yesterday but I forgot.

This is what I do (best to code it up in a spreadsheet).

Let

B = amount borrowed (or current balance on mortgage)
rm = monthly interest rate as fraction (so for 5.5% annual rate, put 0.055/12 or 0.004583)
m = number of months of term left (so for 25 years put 300 etc.)

The monthly payment the lender wants is calculated using:

MP = B*rm/((1+rm)^m-1) + B*rm = B*(1+rm)^m/((1+rm)^m-1)

Let n = number of months passed (so for 3 years put 36 etc).
Let Bn = balance after n months

If the monthly payments are maintained and the interest rate is the same over the n months, the same monthly payment can be calculated at the end of n months (this is how the monthly payments are established -- they are designed to be constant). So modifying the balance and term remaining on the above formula gives.

MP = Bn*(1+rm)^(m-n)/((1+rm)^(m-n)-1)

and so, equating the two equations gives:

B*(1+rm)^m/((1+rm)^m-1) = Bn*(1+rm)^(m-n)/((1+rm)^(m-n)-1)

which can be solved for Bn, i.e.

Bn = B * [(1+rm)^m)/((1+rm)^m-1)] * [((1+rm)^(m-n)-1)/(1+rm)^(m-n)]

or if I can get insert picture to work:



If you are making overpayments OP so your total monthly payment is MP+OP, you must replace m in the above formula by the modified term -- i.e. the shorter term it would actually take to pay off your mortgage if you could carry on at the existing rate until the balance was reduced to zero.

You can calculate the modified term by (trust me here):



(very bright sparks and mathematicians out there will recognize this as the solution for n of the first equation with Bn = 0).

where you can use log10 or ln (natural logs) to work out the logarithms.

This will tell you what your balance will be when you re-mortgage to a different rate.

Genius or what!

Incidentally, you can also use this to check the decreasing amounts of insurance on term assurance policies. Usually agrees to a few pence.

Bye.

cal1_2

Thanks david78............I think!!!!!!!:eek: :eek: :eek: :eek:

"Genuis or what!"..........your obviously the ruddy genius:T


................I thought someone may have an 'easy to use, already set up, idiot proof calculator':rotfl:

(thanks anyway:D )

Kaz2904

Easy to use, idiot proof coming up.
www.whatsthecost.co.uk enter the amounts you owe and what you pay. Do both repayment accounts seperately.
Then scroll down and click on details and it will tell you what you will owe in the month you need to remortgage. Hope this is easier for you to get to grips with!