Is this a stupid idea??

Senseicads

Apologies if this is on the wrong board, mods please feel free to move if you think it better somewhere else. Ok bear with me as this is a bit of setup just to explain my scenario….i am just wanting to make sure that what I am suggesting isn’t totally daft and I haven’t messed up too badly in the calculation.

I am looking to give me and the missus some options when I get to 55, we are currently 40.
We currently have a mortgage of £260k at 2.14% with a 26 year term
We also have a set of loans and borrowing all at 0% after making house improvements, total of about £20k. This costs us about £450 per month and will finally be paid off roughly after 6 years, some of the debts are shorter than this, but the main debt at 160p/m is the kitchen and it is 6 years. This was planned debt and is manageable by our current income but doesn’t allow us to save much money, as there is generally not a lot left over. We do have a small emergency fund of about £3k also which I add to regularly out of the left overs. Generally 50-100 a month as and when.

Ideally I would like to get into the position when we are 55(ish) to have paid off our mortgage, and potentially give us some options around early retirements, or downsizing or going part time. The big thing for me here is to be paying off the mortgage. Without having to pay this each month we could potentially work part time, or we could just retire early and live on our combined pensions. By Paying off the mortgage I feel that this will give us the best way of opening up our options at this age….i am happy to be corrected on this. Currently in terms of pensions the missus gets a local govt pension and I max out my contribs at 5% and the company puts in 15%. So without a mortgage we have a chance of being able to retire then but like I said we will more than likely carry on working for a bit longer…I just want to give us the choice and some options, and put us in the best place possible. .

So to the question. This seems on the face of it to be entirely counter intuitive however I have done some maths and I think it stacks up…

The plan is, when the mortgage is up for renegotiation at the end of the year to put the £20k in debts on the mortgage at the 2.14% this will free up the £450 a month to over pay the mortgage. This initially felt absolutely the wrong thing to do. However using the calculators on here and a spreadsheet I come out with these rough figures…

Paying £450 a month overpayment reduces our term down to just under 17 years(close to our 15 year target).
It also saves us £39,000(ish) in interest payments on the mortgage by paying off early.

If we left the mortgage until after the debts are paid(after 5/6 years then) and the £450 is started to be paid off then, then the mortgage calculator says it will only reduce the term to 22 years. Additionally I’ve worked out the cost if we made no overpayment at all as £8000 extra interest by putting this extra £20k on the mortgage. I know it won’t be quite as accurate as this as debts get paid off we could over pay the debts or the mrotgage to meddle with this but it was getting really complicated to model this.

So the debts we currently have don’t cost me anything, however by adding them to the mortgage and overpaying this I can save £39k overall on the overall debt. I don’t have the cash yet to overpay £450 a month off the mortgage, but who knows what will happen as we go forward with pay rises and the like. 15 years is a long time after all.

Is this a stupid idea? I am exchanging unsecured 0% debt for secured debt costing me interest, on the basis that I will be able to save more money in the long run over the lifetime of my mortgage by overpaying? I am also, inevitably, lined up to get some small inheritances as my parents pass on, which should reduce my mortgage term further.

I did look at other ideas, such as LISA’s and what not, but I don’t have the spare capital currently to put into these instruments currently as we have the £20k to still pay off. There is also the chance that we could concentrate on paying off the debt we have first, but even if I could reduce that and have it paid off in half the time then it would still increase the years I have to pay off the mortgage by at least 3 years, giving us less options in our 50s. At the moment I am thinking it’s a good idea, but because it seems SOOO counter intuitive I wanted to get some advice from people who might have also been in a similar position?

Thanks in advance everyone.

[Deleted User]

Right now you have £260k @ 2.14% and £20k @ 0%

You seem to be asking if it is cheaper, and therefore a good idea to instead have £280k @ 2.14%

No, it isn't cheaper.

[Deleted User]

To clarify:

Your £450 overpayments would not be having any effect on the interest that you would be paying on that original part of the mortgage until the overall balance had dropped below £260k.

Your overpayments will be reducing the £280k total loan down towards £260k. This is exactly what they are already doing, and at the moment you are not paying interest on the £20k while this is happening.

[Deleted User]

It's a terrible idea.

foxy-stoat

Bonkers - just keep paying the unsecured debts down and then overpay the mortgage by the same amount you pay the debts once each one is cleared.

I will achieve the same thing and you wont need to turn unsecured debts into secured debts.

katsu

Will the debts stay on 0% until they are paid off on their current deals? If so, you must have an error in the maths somewhere to think changing them to interest bearing is cheaper

katsu

I suggest that as you clear each debt you add the extra money to your mortgage as an overpayment. Try using the OP calculators on the main site tabs above to see how much difference that will make.

Senseicads

So you're saying its a bad idea then? :-) for me i was focusing more on the time it would be for me to clear the mortgage in total...so doing it this way i'd be clear in just under 17 years...other wise it is over 21 years. Thinking we would have more flexibility in our 50s. But I am getting the impression that this will cost me more than I think overall?

[Deleted User]

It's not quicker and it is more expensive.

katsu has it right, when each 0% loan is paid off then you can pay whatever money was going towards that into the mortgage instead, but don't offer to pay interest on something you don't have to.

AnotherJoe

Senseicads wrote: »

So you're saying its a bad idea then? :-) for me i was focusing more on the time it would be for me to clear the mortgage in total...so doing it this way i'd be clear in just under 17 years...other wise it is over 21 years. Thinking we would have more flexibility in our 50s. But I am getting the impression that this will cost me more than I think overall?

As said, either your spreadsheet is wrong, or you didn't allow for the possibility of overpaying the mortgage as your loans were paid off.



Its simply not possible that by paying extra interest on £20k that its quicker or cheaper

[Deleted User]

Senseicads wrote: »

So you're saying its a bad idea then?

Only because it will take you longer and be more expensive to clear it.

In all other ways, it's a great idea.