Save or Overpay Mortgage/Car Loan

Firsttimebuyer2021

Not too sure if this is the best place for this post however I was wondering what the best option would be for us. 

We have around £350-£400 a month spare after paying all bills/allowances and trying to work out the best option for the money. 

Current mortgage outstanding is £155,000 with a fixed rate until Oct 26 2.8% and minimum monthly payment of £546 with 39 years left to pay. 

Car Loan outstanding is £7,400 with a rate of 6.9% and a minimum monthly payment of £255 with 2 years and 6 months left.

Now my plan was to overpay the car loan and then redirect the money and the car loan money to overpay the mortgage before the fixed rate is up or do I just save the money in a regular saving account? Just finding it hard to work out what would be the best option to go for.

Bigwheels1111

Pay off highest interest First it’s that simple.
Save if rate is better than mortgage rate.
Don’t get me wrong overpaying and clearing your mortgage early is a great feeling.

lohr500

Agree with @Bigwheels1111

If your £350-£400 a month is surplus after paying the £255 a month car loan, then I would push that surplus into clearing the car loan sooner.

£655 a month would clear the £7,400 in just over 11 months.

Then look at the available savings rates in 12 months time to decide if it is better to overpay on your mortgage or put the £350/£400 a month into some form of savings. Depending on your tax status and/or any other existing savings at the time, an ISA may be the better option to minimise any tax liability.  But you can decide on that when the time comes. 

Right now, clearing the loan costing you 6.9% should be the 1st priority.

grumbler

MSE:

Should I overpay my mortgage?

Pay off debts or save?

MalMonroe

Hi, I would pay off the car loan. Then maybe overpay the mortgage if I could do that without penalty. I also like to have savings so would also want to save regularly, even if only a small amount. 

Just my own opinion/thoughts of course.

grumbler

MalMonroe said:

Then maybe overpay the mortgage if I could do that without penalty. ....
Just my own opinion/thoughts of course.

Waste of money. With so many 4.5%+ regular savers available you can earn at least 4.5-2.8=1.7% on all overpayments. When they mature put the money to a fixed rate savings account (currently about the same 4.5% for two years).

I remember times when my savings were bigger than the remaining mortgage balance and paid me higher interest than mortgage cost me.  So, for 2-3 final years I was making profit from my mortgage.

SandyShores

Another vote for paying off the car loan first.  I followed Dave Ramsay's baby steps which are something like build a small emergency fund, pay off your debts, build a bigger emergency fund, save for retirement/kids, pay off the mortgage, then save.  When you are deciding whether to save or pay off your mortgage there's a useful MSE overpayment calculator which includes a section to compare to saving.  I've chosen to make mortgage overpayments - I know we would make more interest in a savings account currently - its just my preference.  But I know there are some great posters who are saving to become mortgage neutral 

EssexHebridean

First question is definitely whether you have an emergency fund? As you are home owners with a car or cars, the minimum level to start with is £1000 - then build to 3 months worth of expenses over time, ideally. 

A lot of people get an EF built to a couple of months worth, then continue saving and pay off £1k lump sums periodically from any debt while also continuing to build the EF - for for example for every £1500 saved - direct £1000 to debt, leaving the £500 in the EF.

Check whether you are able toOP the loan in cribs and drabs or whether you’d do better to work towards saving a lump sum than clearing. The loan once you have enough.

OP’s on the mortgage might well be limited to 10% of the outstanding capital per year, but it would certainly be sensible to OP what you can. You could consider simply rounding up the monthly payment starting immediately - so just round up to the nearest £100, £50 or even just £10 - the sooner you start overpaying the more impact it has over time. 

Think also about setting aside money ready for a replacement car when the time comes to avoid needing to take a loan for that in the future.

Good luck with it - I started off on here overpaying a car loan, then moved on to clearing the mortgage (in 13 years rather than 25), now after 6 years fully debt free I’m looking at taking on another mortgage again - this one will be OP’d from day 1! 

enthusiasticsaver

I would direct any spare money to the car loan initially then once that was gone tackle overpayments to the mortgage.  Make sure you have some emergency savings too. 

jamesperrett

I'd agree that the car loan should probably be paid off first. After that, in addition to all the other suggestions, I would look at your pension. Adding just a little bit now could make a big difference when you come to retire.

Zopa_Trooper

Firsttimebuyer2021 said:

Not too sure if this is the best place for this post however I was wondering what the best option would be for us. 

We have around £350-£400 a month spare after paying all bills/allowances and trying to work out the best option for the money. 

Current mortgage outstanding is £155,000 with a fixed rate until Oct 26 2.8% and minimum monthly payment of £546 with 39 years left to pay. 

Car Loan outstanding is £7,400 with a rate of 6.9% and a minimum monthly payment of £255 with 2 years and 6 months left.

Now my plan was to overpay the car loan and then redirect the money and the car loan money to overpay the mortgage before the fixed rate is up or do I just save the money in a regular saving account? Just finding it hard to work out what would be the best option to go for.

According to the main site you can borrow £7,500 at 4% so maybe that would be your first port of call?