Loans to Make Mortgage Overpayments

Cotta

Hi All,

I have a mortgage with £66,000 left on it at a rate of 4.69% with three years left on the current term and 18 overall.

I am allowed to make overpayments each year to the value of 10% of the remaining balance.

I was advised to take out a loan at a rate less than 4.69% to make the 10% overpayments taking into account that while I can meet my monthly payments with ease I have little savings to be able to afford such an overpayment.

In the past if money have became available I have made overpayments, however such an opportunity is not presently available.

This loan option to make a 10% overpayment doesn't make any sense to me, is it a viable option and if so how does it work?

David_White

Cotta wrote: »

I was advised

Who's giving the advice?

glentoran99

Cotta wrote: »

Hi All,

I have a mortgage with £66,000 left on it at a rate of 4.69% with three years left on the current term and 18 overall.

I am allowed to make overpayments each year to the value of 10% of the remaining balance.

I was advised to take out a loan at a rate less than 4.69% to make the 10% overpayments taking into account that while I can meet my monthly payments with ease I have little savings to be able to afford such an overpayment.

In the past if money have became available I have made overpayments, however such an opportunity is not presently available.

This loan option to make a 10% overpayment doesn't make any sense to me, is it a viable option and if so how does it work?

The loan option seems a foolish one to me, If you can afford to make the loan repayments then instead you put those loan repayments to the mortgage, So instead of accruing interest on the loan you are reducing interest on the mortgage

Cotta

David_White wrote: »

Who's giving the advice?

A finance advisor, he was alarmed at the rate on my current mortgage and the fact there is three years left on the term.

lee111s

Cotta wrote: »

A finance advisor, he was alarmed at the rate on my current mortgage and the fact there is three years left on the term.

He needs sacked.

Simply pay more off the mortgage per month via overpayments.

mrginge

Cotta wrote: »

In the past if money have became available I have made overpayments, however such an opportunity is not presently available.

How are you going to pay the loan off then?

csgohan4

Cotta wrote: »

A finance advisor, he was alarmed at the rate on my current mortgage and the fact there is three years left on the term.

Bet he wants you to arrange the loan through him for more commission

TheShape

It's a sound idea in theory (none of the figures will be exact but hopefully close enough to illustrate):

You take out a loan for £6000 for 3 years (the same time as your fix) and immediately pay it off of the mortgage. At 4.69% that will save you roughly £443 in interest over the three years. If the loan you take is at 3.5% it will cost you approx £324 in interest over the three years so you'll have saved approx £120 in interest.

In practice though:

You're probably paying approx £453 per month at the moment which should drop to approx £412 after the overpayment so you'll be paying £41 less per month to your mortgage but, and it's a HUGE BUT, you'll have to pay £175 per month to clear the loan in those three years.

My advice would be to overpay the mortgage if you can because 4.69% is quite a high rate but don't take a loan to do it as the savings aren't big enough to justify the extra monthly payments.

If you have savings earning less than 4.69% then it's worth putting some of those savings towards overpaying the mortgage but it's usually recommended that you have an emergency fund of at least 3 months, ideally 6 months of outgoings.

getmore4less

It can make sense with very cheap money.

Cheapest money is on a 0% purchase credit card.

Still need to manage the cash flow to pay off the credit card before the 0% runs out.

Get your FA to do the cash flow analysis of the loan to show how much you save.

Cotta

Thanks for the responses folks, I am happy that what I am doing at present and making overpayments when I can is the best option.


Is 4.69% really a high rate?

amnblog

Cotta wrote: »

A finance advisor, he was alarmed at the rate on my current mortgage and the fact there is three years left on the term.

Did he have long shoes and a big red nose?