loan versus mortgage when paying for a car

billozz

hi all wonder i can pick some brains please.
i currently have a loan for my car which i pay £275 pm i currently have a settlement figure of £11877.55 which includes early settlement figure. the rate of the loan taken out a few years ago is 5.9%.
i am about to take out a mortgage of £50000 for a property i am buying which is over 8 years at 2.52% fixed for 5 years then variable after that until completion, payments for this loan would be £575.00 pm. i have been advised that adding £12000 to the mortgage would increase the payments to £713.79 pm. this would mean tht i would now be paying £139 pm for the car but obviously over a longer period, assuming i continued to pay the the money i would be saving on the car loan every month as an overpayment on the motgage ( i have checked and i can do that) how much more of an overpayment would i have to make each month for me to actually save money?
i do not have the knowledge to work out if i can save money or not doing it this way or if it would just be better to go for a better loan rate i have had a look and i can get 2.9% from other lenders.
i hope this is not too complicated and look froward to any replies .
thank you
Bill

DrEskimo

What are the exact details of the car loan?

When was it taken out, for how much, and what was the term?

Is it just a straight personal loan/HP, or is it PCP?

billozz

DrEskimo wrote: »

What are the exact details of the car loan?

When was it taken out, for how much, and what was the term?

Is it just a straight personal loan/HP, or is it PCP?

hi thanks for the reply
the loan was taken out in 2016
for £17498
over 7 years
its a personal loan from natwest bank

DrEskimo

So you will undoubtedly save money, even with the early repayment charge, as you are slashing the interest rate in half.

However, what is more important is the question about whether you want to change unsecured debt into secured debt on your home?
I think most would strongly advice against it.

I would look at seeing if you can consolidate it to a lower rate loan (the rate offered is not necessarily the rate you will get), but if not, just look at trying to overpay as much as possible by cutting your budget back where possible.

Of course the other option is valuing the car, then deciding to sell it to settle much of the outstanding loan (all of it) and buying a cheaper car?

billozz

thanks again
you say undoubtedly ill save but where i got confused was, its a lower interest rate but over double the term so i couldnt work out if tha would be a saving or not

System

If you don't overpay you'll pay £1,248 interest on the additional £12,000 on the mortgage over the 8 years.

£62000 mortgage over 8 years assuming no change in interest rate will give £68526 overall repayment at normal rate.

£62000 mortgage including the overpayment of £275 every month until the mortgage is repaid, again assuming no change in interest rate brings the term down from 8 years to 5 years 7 months and you repay a total of £66510.

£12000 is 24% of the £50,000 purchase price so we'll round it up to 25% to make the maths easier because I've been up all night. On the overpayment option the amount of interest out of the £4510 total mortgage interest paid which is due to the car would be £902.

Some quick back of fag packet maths on the remaining 4 years of the original car loan you'd pay somewhere around £1300/£1400 in interest so yeah you'll save money. Even if life gets in the way and you don't overpay the mortgage you'll roughly break even over the 8 years.

As you can see from the above, you'd only have to overpay the mortgage by the £275pcm you pay on the car loan for an additional 1 year and 7 months longer than the car loan has remaining to clear off the higher mortgage.

MEM62

How long do you expect the car to last you? Put the finance on your mortgage and you could be paying for the car years after it has expired. Not prudent by any definition of the word.

DrEskimo

billozz wrote: »

thanks again
you say undoubtedly ill save but where i got confused was, its a lower interest rate but over double the term so i couldnt work out if tha would be a saving or not

It's a bit complicated as you have the mortgage rate changing after 5 years, but if I simplify it and just assume you will remortgage at the end of the 5yr fixed for another 3yr deal at the same 2.52%, then you can work out that the saving is about £900.

Scenario 1
Keep paying the £12k car loan at 5.9% at £275per month = ~£1,200 in interest.
Pay the £50k mortgage at 2.52% at £575per month, then at month 48 when the car loan is finished, redirect the £275 car payment to mortgage overpayments = ~£4,800 in interest.
Total = ~£6,000 in interest

Scenario 2
Settle the car loan and get a £62k mortgage at 2.52% at £713 per month, and add the £137 you are now saving as mortgage overpayments = ~£5,150 in interest, and as above you will finish the mortgage 1yr7months earlier.

So it is about £900 cheaper (if my maths is right...someone correct me if it's off!), and you also settle the mortgage earlier, but as stated, do you really wanted to take the risk of adding more debt secured on your house...? If you sell the car (either by choice, or have to due to circumstances) what will you do to buy another one?

I would definitely advise to keep them separate, and certainly look to keep the debt unsecured and either re-finance at a lower rate, or just go hell over leather and clear it as fast as possible...

System

MEM62 wrote: »

How long do you expect the car to last you? Put the finance on your mortgage and you could be paying for the car years after it has expired. Not prudent by any definition of the word.

My car is nearly a decade old, on 143k, not showing signs of dying any time soon. Neither is my 14 year old MX5. I've owned plenty of cars older than that in the past which have all managed 15,000+ miles a year just fine. Judging by the number of 10-15+ year old cars around here and the tons of 10-15 year old cars on Facebook with stellar mileage for sale I'm guessing it'll last the length of the financial arrangement the OP is wanting to do.