Overpay on higher interest big pot or lower interest small pot?

NoctuNoctu Forumite
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Would appreciate a quick bit of advice.

We have 2 Nationwide mortgage products on the same property (one was ported from old property when we moved). Both fixed for a few years.

We owe:

£120,000 @ 2.39%
£40,000 @ 2.19%

Product terms the same. Which one should I direct overpayments to?

My first inclination was to the larger pot with a higher interest rate. But would it be more beneficial to clear the £40k first so that interest simply stops accruing on that pot once it's gone?

Can't figure this one out. Advice gratefully received. Thanks :money:

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  • NoctuNoctu Forumite
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    Anyone? Please :-)
  • edited 16 February 2019 at 12:24PM
    LomcevakLomcevak Forumite
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    edited 16 February 2019 at 12:24PM
    In general, if free cash flow isn't an issue, pay off the highest interest rate first.

    There can sometimes be reasons to not do it that way, e.g. if you're trying to get under a LTV boundary to remortgage of if you're struggling for cash and would benefit from clearing off a smaller, lower-rate amount to free up cash flow (the latter case is more common with general consumer "dealing with debt", where there are often many loans, overdrafts, credit cards, etc., and running out of cash to pay them is often the lightbulb moment. Less common for mortgages).

    However, can also be a good psychological boost to clear something off, even if not absolutely the most efficient way. As the difference is small in your case, it could be that the £40k feels like an easier target to attack :)
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  • NoctuNoctu Forumite
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    Thank you :-)
  • AnotherJoeAnotherJoe Forumite
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    Noctu wrote: »
    Would appreciate a quick bit of advice.

    We have 2 Nationwide mortgage products on the same property (one was ported from old property when we moved). Both fixed for a few years.

    We owe:

    £120,000 @ 2.39%
    £40,000 @ 2.19%

    Product terms the same. Which one should I direct overpayments to?

    My first inclination was to the larger pot with a higher interest rate. But would it be more beneficial to clear the £40k first so that interest simply stops accruing on that pot once it's gone?

    Can't figure this one out. Advice gratefully received. Thanks :money:

    NO ! Each £100 (say) you pay off saves more interest on the higher rate loan than the smaller rate loan. Its as simple as that. Interest accrues on every pound. If you pay off the smaller loan you have more of teh higher rate one accruing more interest.

    Starting with
    £120,000 @ 2.39%
    £40,000 @ 2.19%
    you move either to

    £80,000 @ 2.39%
    £40,000 @ 2.19%

    or

    £120,000 @ 2.39% (eg ALL of it at the higher rate) it should be obvious that you'd pay less interest each year on the former.
    But if it isnt ....

    £80,000 @ 2.39% = 1912
    £40,000 @ 2.19% = 876
    total 2788

    or

    £120,000 @ 2.39%

    total £2,868


    Sure, its only £100 or so, but if it takes you (say) ten years to pay off the £40k, thats £1,000 you've lost which probably you needed to earn £1500 to pay it.
  • pinknsparklypinknsparkly Forumite
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    Always overpay the one with the highest interest - as AnotherJoes sums demonstrate, you'll end up paying more interest if you overpay the lower interest £40,000 pot rather than the higher interest £120,000 one. If you come to remortgage with another lender, then all they will be interested in is the total amount you need to borrow, not the fact that your mortgage is split into two pots.
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  • NoctuNoctu Forumite
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    Thank you both! That was my first inclination but wondered if I was missing something :-)
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