Which debt to overpay?

IcePigeon

Hi everyone,

I purchased my home about 3 months ago as a first time buyer with a 95% LTV in London. It needed a new kitchen and bathroom so took out a personal loan after completion to pay for the work. I’ve been carefully budgeting and saving for the past five years so now being in debt is a weird feeling but despite the large financial commitment I don’t feel overcommitted!

I have a house emergency fund for £3k, a relatively redundancy safe job, and salary protection policy for long term sick leave. I’m in a position to make a regular £200/month debt overpayment to either my mortgage or the loan. My head says to focus on the loan as it has the highest interest rate; but I’m not sure if due to the length of the mortgage I’d be better off sending the funds there.

My outstanding mortgage is for 200k at 3.79% over 30 years.
My outstanding loan is for just under £10k at 5.9% over 5 years.

Any thoughts on the best use of the money?

Thanks

IP

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Karonher

Overpay the loan and then when that is finished overpay the mortgage.

ceb1995

IcePigeon wrote: »

Hi everyone,

I purchased my home about 3 months ago as a first time buyer with a 95% LTV in London. It needed a new kitchen and bathroom so took out a personal loan after completion to pay for the work. I’ve been carefully budgeting and saving for the past five years so now being in debt is a weird feeling but despite the large financial commitment I don’t feel overcommitted!

I have a house emergency fund for £3k, a relatively redundancy safe job, and salary protection policy for long term sick leave. I’m in a position to make a regular £200/month debt overpayment to either my mortgage or the loan. My head says to focus on the loan as it has the highest interest rate; but I’m not sure if due to the length of the mortgage I’d be better off sending the funds there.

My outstanding mortgage is for 200k at 3.79% over 30 years.
My outstanding loan is for just under £10k at 5.9% over 5 years.

Any thoughts on the best use of the money?

Thanks

IP

Overpay the loan first, we're the same next to no debt for years then bought a house that needed work doing on it and now in 15k debt.

JayRitchie

How long is your mortgage fixed for? What is your LTV?

Basically you will probably be better off overpaying the loan and trying to get rid of it due to the interest. Then see how you are getting on and whether you can make annual overpayments on the mortgage.

IcePigeon

95% LTV and fixed for 5 years.

I thought the old adage of highest interest rate first would be right but just wanted to sound it out. With a £200 overpayment the loan will be paid off in under three years and then can have a £400 overpayment on the mortgage!

Thanks for the insight.

Socajam

Before overpaying on the mortgage:
Do you have a life happens fund and an emergency fund.
If you do not, it does not make sense to over the mortgage when the time arises.
If you have neither one of these and something where to happen, where would the money come from to help you out - another loan?

Unicorn_cottage

Yes pay off loan first then have an eye on reducing your mortgage to the next ltv bracket so that when you come to remortgage you can snag a cheaper deal

EssexHebridean

I'd approach this a bit differently.

For a start I'd look to stash that monthly surplus away into the highest interest paying account you can find - if your bank offers a regular saver then use that. At the end of a year you'll have £1200 in there, plus the interest. At that stage I'd pay £1000 off the loan, £200 to your emergency fund, and the interest off the mortgage. That way you're making a small impact on the mortgage - and even a tiny OP early on makes a HUGE difference going forwards. The extra £200 to the EF takes into account the drop in value that the passing of time and inflation will have on what's in there, and you're still making an impact on the loan too. Then start the whole process again. The advantage this gives you is that for the duration of the regular saver you have an additional stash of money in your EF, effectively, which rarely does any harm.

Another thing to think about going forwards is what to do with money you "didn't know you had" - so perhaps a saving in your monthly energy bills due to changing supplier, or driving down the cost of TV/internet etc by haggling, even a payrise - we started to pay this off against our mortgage too and again, over time it made a big difference without us ever noticing it had gone (as after all, it was "money we didn't know we had" because it had previously been accounted for in our budget!)