Overpay mortgage or loan?

chelseablue

Trying to work out what's best to do.

We have a mortgage with Nationwide that only started this month
Its a 5 year fixed rate of 1.79% with an outstanding balance of £220,000 (30 years to go :eek:)

We also have a personal loan, interest rate is 4.5% with an outstanding balance of £5,800 (4 years to go)

From next year we will be in a position to send an extra £500 a month to the mortgage.

Or would we better sending it to the loan?

I understand the usual answer is the one with the highest interest rate but on the loan we're pay about £500 in interest over the 4 years

But the interest on the mortgage is around £280 a month

WestonDave

In general you pay the highest interest one first but....


If overpaying your mortgage would get you a better loan to value ratio when you remortgage at the end of your current deal then that might be better.


Or you might find that the one or other of them has early redemption or overpayment penalties which mean that you get no benefit from overpayments. A lot of mortgages on fixed rates have a limit to how much you can over pay during the deal - say 10% so if that is the case you need to watch that. On the other hand the loan might be fixed interest spread over the life of the loan with no benefit from over payment.


Its possible you could be best off putting the money in savings at the best rate you can find if neither loan benefits from overpayment (I'd be surprised if there wasn't some benefit but maybe there is a limit to how much you can do in which case put the rest in savings.)

JimmyTheWig

chelseablue wrote: »

I understand the usual answer is the one with the highest interest rate but on the loan we're pay about £500 in interest over the 4 years

But the interest on the mortgage is around £280 a month

The interest amount on the loan is less than the interest amount on the mortgage because you owe so much more on the mortgage.
If a fairy godmother was asking which you would like her to clear for you, then go with the mortgage as that would save the most interest. But that's not what's happening - over the next year you could clear the loan (and so stop paying _all_ the interest the loan is attracting) or you could pay a relatively small amount off the mortgage (and so stop paying a relatively small proportion of the mortgage interest).

That's why the general rule is to pay off the loan that has the highest interest rate. Though I totally agree with WestonDave's provisos on this.

getmore4less

No brainer subject to ERC, the loan


It will be gone in 10 months once you overpay then throw the money into saving at a better rate than the mortgage or the mortgage for the next 3.5 years.

Up front interest on loans was abolished years ago.

getmore4less

The real comparison is the interest on each £500 1.79% or 4.5% per month

79p or £1.88 per month.