Keep savings, pay off mortgage or buy a new car in cash?

vikingswimmer

Hi, 

We're in the very fortunate position of having a good chunk of savings (about £60k) and are about to buy a new car (about £40k). However, we also have about £300k remaining on a mortgage (20 years left) and will need to remortgage before Feb 24.

I'm looking for advice on whether we should pay cash for the car (because we can) or get a loan for the car and pour the £60k into the mortgage instead.

Any advice or opinions welcome.

Thanks!

The_Unready

I think that if it was me my first question would be "do I need to spend £40k on a car, as it's about 66% of my total savings"?

vikingswimmer

Thanks @The_Unready - yes, for a variety of reasons this is the car that we are getting (after a lot of shopping around!). We're not really worried about the price of the car, just the best thing to do about the money.

martinbainbridge1975

may be worth checking if there is a limit for overpaying the mortgage, unless you are waiting till when the remortgage is done in 2024. mortgage rates and car finance rates are far from favourable at the moment, if this was me my first thought would be to look at the difference it would make on the mortgage payments given the term remaining is 20 years

CliveOfIndia

If it's a given that you're going to spend £40k on the car (seems a lot to me, but each to their own - you can save a lot by buying a nearly-new used car), then it's worth looking into dealership finance packages.  Personally I'd never buy brand-new, but I know a lot of people take out the dealership finance, snap up the dealer's contribution then pay it off almost immediately.

Aside from that, you need to be sitting down and doing some sums.  What rate could you realistically get a car loan for?  What rate will you realistically be able to re-mortgage at?  Of course you won't be able to get an accurate figure, but playing around with dummy quotes on comparison sites can at least give you a ball-park figure.

You need to consider how much each option would cost/save you over the full term.  A mortgage will almost certainly have a lower APR than an unsecured loan - but after you've been paying it for 20 years, you'll actually have paid a lot more in interest than an equivalent unsecured loan over, say, 3 years.

Broadly speaking, overpaying a mortgage will usually save you quite a lot in the long term - though you do need to factor in any overpayment charges that may be imposed.

Another important consideration - if you did take out a loan for the car, this would be factored in to a mortgage lender's affordability calculations, so it may impact the rate that they offer you.

It's always a balancing act, and there's rarely a clear-cut right or wrong answer.  Perhaps you might consider what interest rates are likely to do in the near future.  Hopefully they won't keep going up forever (!), but if they do continue to rise then overpaying the mortgage will at least give you something of a buffer, reducing the amount you owe and reducing the impact of any future interest rate increases.  Whereas a car is just a depreciating asset.

Ryan_Holden

Unless I'm mistaken then you can't know what's best.

You don't know what loan rate you would get given (can't trust the headline rates). And you don't know what your mortgage rate will be in 2024. All I bet you do know is your current mortgage rate.

So in order to figure out what's best you'd need to know

• your current mortgage rate (which you do) 
• a pre-approved loan rate (you could try the soft checks on Experian)
• a pre-approved mortgage rate (you can lock in 6 months before your due date, be wise to do this

Then you could do the sums.

Pre-approved is important. You can't look at at a loan company advertising 5.7% and presume you'd get it. 

As also mentioned, if you did a loan it would affect your affordability for the mortgage so worth bearing in mind.

You may very well get a personal loan rate lower than the mortgage. Who knows.

pjcox2005

If your remortgaging in Feb 24 then it suggests currently you're probably on a low(ish) mortgage rate, and as you can get savings accounts above 4.5% then savings will trump it. Gives greater flexibility, saves more and you can always make a £40k payment when remortgaging.

In terms of loan v savings, then the main point is interest rates. Is the loan rate lower than 4.5% - if dealer finance gets it lower as interest free or a contribution then I'd personally take that and keep the flexibility of savings. If the loan is over 5.5% then I'd pay cash as you'd be losing £400 or more per year in interest difference.

ader42

A £40k car loan over 5 years will likely cost you £11k in interest at 10% so you pay £51k overall. 
Keeping the £40k in savings getting you 5.5% will generate you £11k in interest.
So doing both these means you pay £40k for the car and forego the interest on the savings in lieu of paying interest on the purchase.  

Spending the £40k loses you whatever opportunity you would otherwise have chosen, mortgage reduction, savings at 5.5% or investing in the stockmarket generating ?% 

Of course putting the £40k into the mortgage will save you £26k in interest but over the 20 years.
Keeping that £40k in savings for 20 years at 5.5% will generate £44k in interest for you. 

ManyWays

Do you just need a new fix from your current lender? Or do you need to switch lenders, eg if you borrowed from an intermediary-only specialist lender who will not give you a new fix?

This is relevant because if you only need a new fix, then if you have a mainstream lender who has signed up to the Mortgage Charter they will not do an affordability check. But if you need a new mortgage, then there will be an affordability check made and having a large loan or car finance will reduce the max amount a lender may be prepared to lend to you. Possibly by £50-100k. That may or may not be a problem for you - talk to a broker.

Ryan_Holden

2 posts on the same day and silence for 11 days. The cynic is me says this post was more of a flex than a request for information.

[Deleted User]

There is a trend for certain types of posters to go silent when they do not receive the overwhelming approval they desire for their stated plans. Some posters are incapable of responding to, or even considering well intentioned suggestions that may benefit them.