Pay off student loan or mortgage? 3 May 2021 at 10:01AM in Mortgage-free wannabe 6 replies 188 views

pmk741

Hi all 

Would be grateful of any advise on my situation: 

I’ve 10k remaining on my student loan plan 1  and am paying 200 a month in repayments. It will be cleared in approx 4 years unless my income drops.

As a household we have around 25k in the bank and I have no idea whether to hold it as an emergency fund, pay off my loan or reduce the mortgage.

We are a couple in our early thirties with a household income of 70k.  We have 120k in mortgage debt which is 55% LTV on 1.85% interest. I am conscious this income may reduce to 50 if we have a family and think the student loan repayment would come in handy so have lingering thought it may be worth just repaying  it ? 

We paused overpaying our mortgage a year ago to start saving some cash due to the uncertainty. 

Here are my options as I see it :

Recommence mortgage over payment ? 

Make a lump sum payment to my mortgage to reduce the term and make up for the overpayments missed over the last 12 months ?

over pay student loan monthly?

clear student loan to release monthly income ? 

My gut feeling is recommence overpayments and hold remaining money in savings???

FtbDreaming

I’d be tempted to clear the student loan then throw the £200 a month saved on to the mortgage. I know the loan isn’t massive and ML says it’s pointless to pay off early but I’d love all my wages to be mine rather than paying for student loan forever and a day. I double begrudge paying my postgraduate loan as the MSc was a waste of money and the interest is sky high! 

pmk741

Thanks FtbDreamming

Interest is 1.1% for plan 1 which is pretty good.

Agree very annoying - I've thought about putting the money in an account and drawing down the student loan repayment each month, I came to the conclusion it was a bit OTT.

killerpeaty

Do you have an emergency fund external to this 25k? If not, then I would definitely split out that money and then decide what to do with the rest.

Personally, I wouldn't bother with the student loan as it's only 4 years and you're not used to having that money anyway. I would either overpay the mortgage or invest the money in global index trackers (sorry that's not an option but thought I would chuck it in there). My thinking here is that with the mortgage you can potentially reduce your outgoings which will make life easier (and protect you from unexpected life events) or give you some bonus income potential again protecting you from unexpected life events. If for example you become sick (please don't) and could not work then the student loan wouldn't be paid regardless whereas other monthly outgoings would.

But you should do whatever you and your family feel is best. Internet strangers don't know your risk preferences.

pmk741

Thanks KIllerpeaty 

No separate emergency fund. We will also need to buy a car within the next few years so I had in mind that I will likely put a significant sum down as a deposit for a car, maybe 10k.

I think the conclusion might be leave the loan as is, restart the mortgage overpayments, keep 10k for a car and then hold the rest in
premium bonds for an emergency fund.

I’m not sure what global investment trackers are but I have a pension which I’ve maxed out salary sacrifice contributions on. 

Mickey666

If you anticipate stable employment then I guess the numbers would say pay off the student loan rather than the mortgage because that's the higher interest loan.

However, life is often unpredictable (which is why you have an emergency fund, right?) and if something happened that affected your income then the mortgage would suddenly become the priority because a soemwhere to live would be more important than repaying a student loan.  Indeed, if your income dropped then you wouldn't even NEED to repay the student loan . . . possibly ever.

So my instinct would be to pay down the mortgage above most ofther things.

powerspowers

I’d do mortgage over student loan. I owe £7k on my SL and make a tiddly overpayment each month (dates back to when the interest outstripped the monthly payment and upset me) 

But I can see your driver for wanting it gone! How about putting 5k into investment or premium bonds and then using it to clear student loan in 2 years?