Which mortgage to overpay?

kg1448

Hello. I have two mortgages, totalling £240k on a house worth approx £850k. Which mortgage should I overpay?

Mortgage 1. £105k, remaining term 12 years, interest rate 1.4% (monthly payment approx £800/month)
Mortgage 2. £135k, remaining term 24 years, interest rate 2.2% (monthly payment approx £600/month)

I have been overpaying mortgage 2 on the basis the rate is higher and I am paying more interest on that mortgage, to try and reduce the term to about the same as mortgage 1. However it has occurred to me perhaps a better strategy is to try and clear mortgage 1 completely as soon as possible - to become semi 'mortgage free'. Eg if I overpaid that mortgage by £1k/month the whole mortgage could be gone within 5 years. Obviously after that I would have more disposable income to clear the other mortgage.

What do you think? Grateful for any wisdom people can share!

[Deleted User]

Overpay the highest rate.

Anything else will cost you more in interest.

Unicorn_cottage

Overpay the highest rate.

Zero_Sum

The overall cost of both will be less if you pay off the highest rate first.
Another option instead of overpaying, put money into regular savers or you could open a £1000 5 year fixed rate bond each month at 2.7% then over pay the interest & on maturity. I know most prefer to keep things simple so its an over complicated method not many would bother with.

AnotherJoe

You were right first time in paying off the highest rate and wrong with reconsidering that.
Slap yourself for entertaining such a silly idea and continue as you were.

getmore4less

in 5 years

1. £105k, 12y 1.4% £793pm £63,354
2. £135k, 24y 2.2% £604pm £112,411

Overpay £1k pm

1. £105k, 12y 1.4% £1793pm £1,241
2. £135k, 24y 2.2% £1604pm £49,048

amount left overpaying

1. £113,652
2. £112,402

£1,250 difference

Ss said just saving can give a better return as could pension.

kg1448

Thanks, I thought that would be the verdict! I was also thinking that clearing the smaller mortgage sooner could potentially give greater flexibility in different scenarios. Eg if renting out the property instead of living in it, the rental income would be a lot more with only one of the mortgages remaining. The longer term plan is to either rent out the current house and buy somewhere else to live in, OR to sell up and buy somewhere cheaper with no mortgage... The rental value of property is approx £2400/month.
Thanks for all your helpful replies!

[Deleted User]

kg1448 wrote: »

Eg if renting out the property instead of living in it, the rental income would be a lot more with only one of the mortgages remaining.

Why is that?

kg1448

If renting out with both mortgages remaining, the rental income after paying both mortgages (£1400 total/month) would be £1000/month. With only the £600/month mortgage remaining the income would be £1800/month.

AnotherJoe

kg1448 wrote: »

If renting out with both mortgages remaining, the rental income after paying both mortgages (£1400 total/month) would be £1000/month. With only the £600/month mortgage remaining the income would be £1800/month.

Wow. :wall:

I suggest you try calculating what it would be with both mortgages, but the higher rate one reduced by the amount of the lower rate mortgage you'd otherwise have paid off.
And then slap yourself again.


Here's a clue.

What costs less overall in total?

£105k at 1.4%
£30k at 2.2%


Or,

£135k at 2.2%.

getmore4less

There will be a future cash flow benefit of clearing the shorter term but that will cost more interest in the long run because of the longer term on more money

Depends what you want to do with the free potential free cash flow.
If you want to use it to overpay then stick with the higher rate if you want it to spend then

I would be more concerned about the rental gross yield of 3.3%.


edit :

add the numbers for 5 years time.

£63,354 1.4% 7y £792
£49,048 2.2% 19y £264

or ignoring the 1 extra payment on the short term.

£112,411 2.2 19y £604

difference in cashflow of £452