Best use for unexpected tax rebate

trailingspouse

Could someone check my thinking here?



We currently have three debts, which we are covering with no difficulty at all - but if we can reduce the amount of interest we're paying, that has to be a good thing.


Car loan for OH's car - this is the highest interest rate - £296 per month. No penalties for paying off early.

Car loan for my car - £252 per month. No penalties for paying off early.

Mortgage - this is the lowest interest rate - £2,000 per month (slightly overpaying, less than 5 years left to run)



We've just received an unexpected tax refund - about £2,000 each.
My first thought was to pay £2,000 off of each of the cars, but on reflection I think it would make more sense to pay £4,000 off of OH's car, as that has the highest interest rate. We could then use the money we're saving each month to overpay on my car loan (which has the next highest interest rate).

I don't think there's much to be gained by using any of it to overpay the mortgage - even if we used the whole £4,000 it would only reduce the term by about 2 months.
If it isn't used for this it will be in a Santander account earning 1.5% until we fritter it away...

[Deleted User]

You'll save the most by paying it off the highest rate debt.

However, unless if clears them in full, it won't change the monthly amount unless your lender allows for this. 0once the term ends early, you can put this money towards the next debt.

trailingspouse

Thanks.
I know my car loan will allow the monthly repayment to be reduced, so I'd assumed OH's would too. Will check.

[Deleted User]

Even if it allows it, don't. Keep paying the maximum towards the most expensive debt.

System

Don't lower the monthly repayments because you then end up undoing some of the savings you make by paying off a lump sum. Use it to reduce the term.

trailingspouse

Tarambour - yes, I've heard that's the best way, but my maths isn't up to working out the difference it would make. If you have figures, I'd be interested in seeing them.
My thinking is that by paying £4,000 in to the highest-interest debt, reducing the monthly outgoing and then using that reduction to overpay the next-highest-interest debt, we're sort of using the £4,000 twice.



If on the other hand we throw £4,000 at the highest-interest debt and reduce the term instead, we don't see the benefit until the loan is paid off (albeit it will be paid off sooner), by which time there won't be much time left on the next-highest-interest debt (I've had my car longer than OH has had his) so we'll have been paying the full interest on mine for longer.



I suppose what I need is an ROI on each scenario. If I 'invest' £4,000 in paying off the loans, which method gives me the best saving? I'll hunt out the exact figures when I've got a minute.

badmemory

Are you absolutely convinced that this tax rebate is correct? HMRC have been known to make mistakes & I would hate you to spend the money & find it needs paying back. I'm sure it is correct but always as well to check!

[Deleted User]

You need to maintain payments in the highest interest debt. If you reduce your payments to overpay a cheaper debt, you're choosing to pay more interest.

If that's your goal, you could achieve the same effect by maintaining payments on the high interest loan and just flushing a couple of fivers down the toilet each month.

Dobbibill

I'm with zx81

• pay off OH car if it's the highest interest bearing debt.
• maintain the regular £296 payment until the end of the term (which will be a new date, given the overpayments)
• when OHs car end, use £296 every month to overpay your car.
• when your car finishes adjust your budget putting some of the previous accounted money aside for a future new car (you may be able to buy cash next time) overpay the mortgage using the rest.

The figures and remaining term will get you a more tailored response.

trailingspouse

badmemory wrote: »

Are you absolutely convinced that this tax rebate is correct? HMRC have been known to make mistakes & I would hate you to spend the money & find it needs paying back. I'm sure it is correct but always as well to check!

Well, as convinced as anyone can be. The money is in the bank. And our accountant is happy.
But it's one of the reasons I want to use it 'sensibly' (rather than blowing the lot on a holiday or some such) - if we get stung for extra tax next year then our reduced outgoings will help to cushion the blow, and at least we'll have benefited in the meantime.

badmemory

If both you and the accountant are happy that's great. If no overdraft, then OHs car seems good. It sounds like you must already have an emergency fund or I'd suggest some to that.