Mortgage overpayment - what’s best!?

cubby4040

Hi everyone,

I have a mortgage with 17 years remaining. It’s in 2 parts as I took extra to do home improvements last year. Part 1 is approx £164k on a 4.99% fixed rate for 3 years and part 2 is £10k on 1.84% fixed rate for 5 years. 

I would like to overpay by about £100 per month so which part should I pay this towards? Would I be best to pay towards the part 1 with higher interest or the smaller part and try and get it paid off? Or should I put £50 in each part? Not sure what to do!! 

Thanks 

Lorna 

saajan_12

Depends on whether you might need the cashflow in the coming months, and what limits / tax thresholds you're near. However in general direct the money in the order below:
1) If you have unused limit in an ISA earning > 5% then pay in there
2) If you have access to an interest bearing account > 5% and wouldn't pay tax on the £1200 / year, then pay in there
3) If you have access to an interest bearing account > 6% (5% * 1.2) and would pay basic rate tax on the £1200 / year, then pay in there
4) If the 164k 4.99% mortgage doesn't have overpayment charges then overpay off that
5) If the 10k 1.84% mortgage doesn't have overpayment charges then overpay off that

cubby4040

Thanks, I hope to retire early in 10 years so wanted to try and get some of the mortgage paid off. Neither of my mortgages have a penalty for overpayments of up to 10% per month so it was whether it would be beneficial to get the smaller part paid off before the end of the fixed rate or get the larger part paid off because it’s on a higher rate? 

jimjames

cubby4040 said:

I would like to overpay by about £100 per month so which part should I pay this towards? Would I be best to pay towards the part 1 with higher interest or the smaller part and try and get it paid off? Or should I put £50 in each part? Not sure what to do!! 

Financially it makes no sense to pay anything extra off the 1.84% part, focus all payments on the higher interest element to get maximum benefit from your money. Otherwise you'll be paying interest that you didn't need to which will slow down your repayments!