Which loan to pay off?

Dazzer123

Hi folks,

I've got a question to which i think i already know the answer, but i'm eliciting some second and third opinions just to be sure.

Here's the situation:

I have a mortage on my home and a separate mortgage on my business building.

The home mortgage has a 3.3% interest rate and still has 26 years to run, after which all is paid off.

And the business building mortgage has a 3.6% interest rate, and still has 10 years to run, after which all is paid off.

I've just come into an inheritance of €20,000.

So my question is, which mortgage should i use the money to pay off? Both mortgages will allow me to pay off this amount without incurring a fine.

So, my calculation is that for the business loan, over 10 years I'll pay €3,845 interest on that 20k at the 3.6% rate.

But on the home loan, over 26 years I'll pay €9,818 interest on that 20k at the 3.3% rate.

So paying 20k off my home loan is a no brainer, right? Obviously this isn't taking into account any ramifications it would have in terms of tax, but i can't imagine that the tax implications would be great enough to offset the difference to make another choice more sensible.

Any words of wisdom would be greatly appreciated! :beer:

PeacefulWaters

Why are all these amounts in euros?

How does the "business building mortgage" get treated for tax write offs etc?

All things being equal, you pay off the most expensive debt first. You then divert the monthly payments that you were paying to this debt to overpay the cheaper mortgage.

TrickyDicky101

Are you a sole trader and does your business make profits? Do you have an accountant (that does your accounts) that you can speak to?

System

Dazzer123 wrote: »

So paying 20k off my home loan is a no brainer, right?

No. If you can find a way to invest the money and get a higher return which it is possible to do in the UK then it would be better off there.

Obviously this isn't taking into account any ramifications it would have in terms of tax, but i can't imagine that the tax implications would be great enough to offset the difference to make another choice more sensible.

Actually in the UK they would as the interest on the business loan is likely deductible expense so if you were paying £100 a month in interest then paying off the loan would add another £20 corporation tax or £20/£40 income tax a month.

Sarastro

Who took out the loan for the business building? You personally or did the business? If the later, then the inheritance can't pay off the building loan without being invested into the company in some way.

badmemory

Making the roof over your head more secure would make sense. Is the business self employed or ltd co? If you own the business building personally but have a ltd co to run the business then the answers may be different. I would go for the residential mortgage though.

Alternatively, you could put your inheritance into a pension!

Fireflyaway

I'd go with the home without a doubt, regardless of the interest rates or remaining term. Theoretically your business could fail or you could become unwell etc. I hope not but there is always the possibility. You will always,need a roof over your head though.