Multiple mortgages - best method of attack?

mike_d99

Hi all, after years of on and off lurking I've decided to sign up! I'm not sure if this is the correct place for this thread. It's not a diary as such, but it doesn't seem to fit in the main Mortgages forum either.

A bit about me - I'm a 48 year old man, single income and have an amazing seven year old daughter who lives with me half the time. I've been reading through people's diaries during the long wait for the sale to complete and I've found them to be inspirational.

After seven long years of renting I've recently bought my dream house! But to do so, I've had to stretch myself in a big way. To reach the purchase price of £180,000 I had to take out two mortgages, a repayment one for £92,500 and an interest only mortgage on a flat I own for another £86,250. This was the only way of doing it. If I'd used savings then I couldn't have afforded anything over £100,000. I could have sold the flat of course, but I get £458 rental income per month before tax which is incredibly useful and the flat is in an area where it will only keep increasing in value so it makes sense to retain it for as long as possible. My plan was always to keep the flat until I retire, then sell it for my pension, but now I have an £86K hole in that plan!

I don't earn a huge amount, about £1,500 every four weeks and my mortgage payments are £597 per month which is higher than I'd like. My rental income is absolutely essential to keeping my head above water. If I didn't have that I couldn't afford the mortgage.

The repayment mortgage is 22 years - on a 1.99% fixed rate for three years. If I let this go onto the SVR I'd pay about £140,000 in total. The interest only mortgage is 25 years - this is going to cost me almost £200,000 over the full term, and I still have to repay the £86,250 at the end of it!

If I let the above scenarios play out, I'm paying over £400,000 which is a horrific thought! Obviously I'll remortgage in three years but as you can imagine I'm keen to get some debt knocked off as soon as possible. I'm concerned that any significant interest rate rises could send the payments into the realm of unaffordability and I definitely don't want to be paying two mortgages while I'm in my seventies!

I can overpay 10% each year on both mortgages without charges - although I'll never be able to pay that much in reality. So, with all that in mind, what's the best plan of attack? I want to get the monthly payments down so logically it would make sense to overpay on the main mortgage (I know people say you should reduce the term but my main concern for now is paying less). But in interest terms, I'm paying miles more on the interest only mortgage (over £100k in interest as opposed to £50K on the repayment one). On the other hand, the interest only mortgage only costs me £169 per month as opposed to £427 for the repayment one so it has less impact on my month to month finances.

I’ll hopefully have about £4,000 - £4,500 emergency fund, which is good although it’s only half of the six months people say you should have. I’m trying to build a ‘float’ from month to month money saved which I can use to fill any gaps in my income where needed and put towards the big bills which in turn means not having to save for these each month. Being paid 13 times a year means it’s hard to budget as the bills aren’t the same each pay packet, so you tend to have good months and bad ones. Hopefully I can keep the ‘float’ in profit so I don’t need touch my emergency fund.

So, my priorities are:
i) Keep ‘float’ in credit and hopefully build up a decent sum to insulate me against any month to month problems.
ii) Build emergency fund up to six months (about £9,000)
iii) Overpay main repayment mortgage
iv) Overpay interest-only mortgage
v) Try and sort my pension out. I have a pitiful £43,000 saved which is pitiful for a man of my age.

I intend to sell the flat when the mortgage is up. It's already worth more than £86,250 so no worries on that score but if I can repay some of that debt before then that would be much better, especially as I'm relying on the proceeds of selling it for my pension! If I could pay it off then I could leave the flat to my daughter.

I’m keen to overpay but first I need to make sure I have a sound financial footing to fall back on, especially with a child to support. On the other hand, I want to make an impact in my debts, especially as interest rates might rise in the future.

What would the experts on here recommend as the best way of going about this? All advice gratefully received!