Mortgage or loan

peter_pan_4

Thanks to help from mum I am now down 2 mortgage of £18,000. Question is, should Icontinue with mortgage or use a personal loan 2 pay this off as early as possible?

IveSeenTheLight

peter_pan wrote: »

Thanks to help from mum I am now down 2 mortgage of £18,000. Question is, should Icontinue with mortgage or use a personal loan 2 pay this off as early as possible?

There are two main things you have to consider: -

1) Is there any early redemption penalty for paying your mortgage off early
2) What is the difference between your mortgage interest rate and your potential loan interest rate

You also need to weigh up whether the mortgage account allows overpayments as opposed to your potential loan.

Try working out how much you can overpay into your mortgage account and when this would mean you have paid it off by.
How much interest would you pay into the mortgage as opposed to how much you would pay on a personal loan?

On my mortgage, my early redemption penalty is 2% of whatever I pay over the agreed overpayment limit. For 18,000 pounds this works out to be 360 pounds.
If I had the money, it would certainly be worth considering.

As it sounds like you do not have the funds at hand (you are looking to get a loan) although you could be mortgage free, you would still have a debt of circa 18,000 pounds.

I would personally max out the overpayments on the mortgage and consider paying above the agreed overpayment amount and pay the early redemption fees.
In my mortgage, the early redemption penalty works out at approx 4 months interest on the overpayed amount.
If your mortgage is to last more than the 4 months, then ultimately you are saving money even though you pay early redemption costs.

e.g. 18,000 pounds mortgage with 4 years left to pay is approx 425 pounds per month at 6.01%
Cost to pay off 18,000 pounds at 2% ERP is 360 pounds
Interest payments in the first four months is 350.50 pounds
Total Interest payable over the 4 years = 2281.07 pounds
Interest saved paying off debt early = 2281.07 - 360 = 1921.07

Regardless of the amount you pay off on ERP or the term, with an ERP at 2% it works out to be approx 4 months interest

Iain_W

at the end of June next year I come off a 4.89% 5 year fixed mortgage which currently stands at about 15K.

Obviously with interest rates rising on the back of the current credit crunch, future rates will be much higher than my 4.89%

To fix again will require me to spend maybe £500 or possibly up to £1500, at a rate which may be approx 6 - 6.5% - so my question is why shouldnt I take a personal loan to pay it off, at a rate of say 6.6%, but that will be fixed to the end of the loan FOR FREE ?

That way I get what i want ie a fixed rate for no upfront arrangement fee - :rotfl:

cazmanian_minx

If you're down to £15k, you may also be restricted in your choice of lender - many have a minimum loan amount of £25k. My discounted tracker expires in February and I'm going to be on SVR after that. As I'm now self-employed but don't have 3 years of account yet, I think I'm stuck with that unless I can juggle it onto life-of-balance credit cards somehow. Would that be an option for you?

Caz