Pay off debts or pay down mortgage to help repay equity loan?

paulburns1984

Hi everyone, was hoping for some advice on my situation...

I have about 16k in savings to do something with and trying consider best options. 

Bought house for £289k in Nov 2017, brrowed £210k on five year fixed at 2.3%, mortgage payment £754. Current balance £200k
Used help to buy equity loan of £54k - interest free until year five when monthly interest will accrue at roughly £90 a month.

Other debts - £6500 on 0% CC, £65 monthly minimum; 7k student loan, £180 monthly deduction from wages.

Combined household income 64k. After bills, mortgage everything currently saving about £1100 a month.

So with the £16k in savings do we...

1) Pay off CC, pay off student loan so they are out of the way, increases savings by extra 250ish a month and peace of mind they are gone
2) Transfer CC balance to a new 0% card when  introductory rate expires in November, continue to pay minimums on CC and allow student loan to pay down gradually as has been doing. Use 16k to pay down mortgage and continue overpay mortgage down further by extra 1k a month so that when the fixed rate ends in three years and we remortgage we can get better rate and potentially lend more/release equity to pay off half or full sum of equity loan
3) keep paying minimum on CC, allow student loan to keep going down gradually, just leave the 16k where it is, continue saving 1k a month. Potentially have around £36k in two years time to pay off some of equity loan.

Additionally, I pay into my NHS pension about £380 a month, which i could opt out of for a couple of years to add an £9k to the pot for say two years before opting back in, if anyone thinks that is necessary in this situation?

I'd love to get your views on what's the best option. Thank you for taking the time to read all of that and respond.

liggerz87

@sourcrates he or she im sure will give you sound advice 

BabyStepper

Hiya

In your position I would follow the DR babysteps and do the following:

1. Pay off you credit card immediately. I know it's at 0%, but just get rid of it and out of the mindset of using cc debt. Save up for everything you want/need. 

2. Pay off you student loan. I usually would not advise this, but the amount is so small (why is it so small?) it looks likely you will pay it off within your working life anyway so might as well save some cash in interest. 

3. That will leave you £2.5k in savings. Start increasing that to 3-6 months household expenses to cover any difficult times. You work in the NHS so your job is probably very safe and 3 months EF would do it. Security of your partner's job will determine how big you want your EF to be and you'll have £1,350 per month so this could happen quite quickly.  

4. Make sure your pension payment is 15% of your salary and do not stop paying it. You'll be grateful later. Make sure your partner has 15% of the household income going into a pension too. 

5. That leaves you with the mortgage and help to buy loan, and roughly 2 years until the loan starts accruing interest. I don't know much about help to buy, and I don't know how much you pay towards that currently, but £90 interest per month on £54k loan is about 2%, so not bad enough to make this a huge priority. Once you have the other things sorted, got rid of non-mortgage debt, saved an EF, made sure pensions are where they should be, you can overpay your mortgage at whatever rate feels comfortable for you. DR would say aim to pay it off in a total of 15 years, so you could start by working out what that would look like. 

6. Do what you want with the rest of your cash. 

7. Feel good you're in such a strong position. 

p.s. I understand your reasoning in wanting to kep the cc debt and overpay the mortgage, given interest rates and such, but a lot of this is about increasing your financial security and resilience in hard times. Borrowing from a credit card to pay your mortgage, which is essentially what you'd be doing, is never a good strategy.  

Those are my thoughts, not original, borrowed from DR, but it works for me.   

ryanm8655

When does the 0% deal end on the credit card?

You’ve got 26 months to build your savings back up so I’d be inclined to clear the student loan for a start to save yourself the interest, then keep the cash by, in anticipation of your 0% deal ending, sticking it in premium bonds or something to try and get the best return you can. In the meantime building that pot further so that you can remortgage and pay the equity loan and save the HtB loan interest.

In these uncertain times I’d hang on to some of the cash for now. I’d only clear the CC and/or overpay the mortgage if you think the money will be burning a hole in your pocket (doesn’t sound like that is the case).

Don’t stop paying your pension. Also I assume your pension is defined benefit so I don’t think you need to increase your contributions...

paulburns1984

BabyStepper said:

In your position I would follow the DR babysteps and do the following:

2. Pay off you student loan. I usually would not advise this, but the amount is so small (why is it so small?)  

Yes I'm a DR convert, his messages have really helped me change my relationship with money. But wasn't sure if there was a slightly better way to do things. The student loan is so small, as I started uni in 2005, so got in before everything went nuts with student loans. Came out with about 18k and have been paying it down gradually over the years

paulburns1984

ryanm8655 said:

When does the 0% deal end on the credit card?

You’ve got 26 months to build your savings back up so I’d be inclined to clear the student loan for a start to save yourself the interest, then keep the cash by, in anticipation of your 0% deal ending, sticking it in premium bonds or something to try and get the best return you can. In the meantime building that pot further so that you can remortgage and pay the equity loan and save the HtB loan interest.

In these uncertain times I’d hang on to some of the cash for now. I’d only clear the CC and/or overpay the mortgage if you think the money will be burning a hole in your pocket (doesn’t sound like that is the case).

It's November 2020, so just trying to think through best actions at that point.

Thank for all the advice everyone. It's turned my head towards getting rid of the debts. Just one niggle remains that I would like to check with you guys... Would paying off both debts negatively affect my credit rating - and would this have an impact when we come to look at remortgaging in two years time? PArtner and I have both got a CC to just pay one petrol pump visit each month and pay off in full each month to try and play the silly credit rating game for when remortgaging comes - wouldn't dropping our debt balance (i.e., the CC balance) look bad?

ryanm8655

No it wouldn’t. If anything having cleared debt would help with remortgaging...

With the 0% ending in November, personally I’d clear that. It’s going to cost you about 3% to clear it to another card so may as well just get rid.

paulburns1984

Good to know, think i'll get them both cleared then! I hear it feels quite good to have debt (apart from mortgage) gone so looking forward to that! 

ryanm8655

paulburns1984 said:

Good to know, think i'll get them both cleared then! I hear it feels quite good to have debt (apart from mortgage) gone so looking forward to that! 

Yeah, I look forward to having that feeling for the first time since before uni

Retireinten

Just wanted to reiterate the importance of you remaining a member of the NHS pension. You have plenty of spare income to not only meet your current obligations but save £1,100 a month - so you are in a strong position and have no need to stop paying into your pension. It is an incredibly generous and valuable DB scheme and you will deeply regret postponing payments even for a short while, when you get to an age where your attention focuses more on retirement and you realise what you have lost. And there is always a risk you won't rejoin as you adjust to a higher take home pay and fall into the trap of prioritising today's needs over tomorrow's need for a retirement income.

My top financial regret is that it took me over two years to join the LGPS when I started working for local government. That has lost me £1,500 a year in guaranteed pension income and a £4,500 lump sum, from 60 - and I would have paid peanuts into the scheme for this, as I was a trainee at the time. Remember also that £350 contribution is probably gross to and you will receive a lower amount after tax in your pay if you did cancel. 

In terms of what to pay off first, if your student loan has the highest interest rate then I would get rid definitely.  I wouldn't be in any rush to clear you 0% cc if you stand a good chance of transferring this, but I'd probably set the payments to clear the balance within the next 0% window. I am mortgage free (I expect quite a bit older than you at 45) and pay a decent amount into pensions each month but I still have a balance on ccs to take advantage of the the interest free deals, usually for big purchases - 0% cards can definitely  be used to your advantage!

I am absolutely not a Help to Buy expert.  What is the interest rate of this and your mortgage? When remortgaging, will you want to shift the help to buy loan to this or does that have to be kept separate? I think interest rates will decide my next step here alongside your options for remortgaging and dealing with the help to buy loan.  Personally I would do what's necessary to secure a low rate across both your mortgage and loan by the 5 year period, but I don't know enough about the help to but scheme to suggest ways to achieve this. Then take stock at this point financially based on what your plans are for your future (house move, children, etc) 

paulburns1984

Yes thanks retireinten, it's always a good reminder.
It's something I will have to watch out for within myself, having seen all my grandparents and now my mother die within two years of retiring - it's easy to start thinking that it can be wasted money.

And the urge listening to Dave Ramsey is to consider not using a pension scheme - where the pot will not come into my family on my death, but rather invest that money myself to then have the pot stay in the family on death.

But I know the NHS pension scheme is good. Accruing at 1/54th of annual income each year. My current contribution is 9.8% (this not far off jumping to 12% based on planned increases in wage over next few years, but the employer contribution is around 13%.

I would like to pay off mortgage early and then invest to be able to retire earlier than the scheduled NHS retirement age, but I'm sure I can work that out much further down the road.