Which mortgage to pay off?

pollyanna24

I know it's the mortgage with the highest interest rate that you should concentrate on first, but is that same in my circumstances:-

Mortgage 1 - £28,617 at 6.75% (was trying to get this one down as close to possible to £0 when the rates kept climbing, but it's a mortgage that I took out years ago and I can borrow back any overpayments if I ever need).
Interest is £5.29 per day.

Mortgage 2 - £67,545 at 3.14% (fixed till 2027)
Interest is £5.78.

So although mortgage 1 has a higher rate, due to the different sums owed, mortgage 2 is actually costing me more in interest per month (albeit admittedly by not that much, but if I keep overpaying mortgage 1, the daily interest rate will go down and the difference will seem more.

Brie

What happens when you pay M1 off?  Does it disappear?  Or would you still have the borrow back possible?  if it won't disappear any time soon and you could borrow back if necessary then I would pay it off and then start tackling M2.  

We've got a flex mortgage - essentially you don't need to pay anything at all as long as you don't exceed your borrowing facility.  But we've paid it down to zero and beyond so it's normally running with a small credit.  In credit I think we get and APR of .1% or something equally silly.  But in debit it's now at 7.5%.  So I try to keep it just on the right side of zero and keep any excess cash we have in a higher rate savings account.

Archerychick

You may be looking this wrongly. M1 is costing you more per £1 you owe. Always pay the highest interest debt first is the rule, unless there is a need for you have the buy back access - although at 6.75% there are probably other better ways of borrowing funds.

Also, let’s say you’ve cleared M1. At todays interest rates you’d be better to put any overpayments for M2 into a savings account and earn off the interest, leaving you with a lump sum to pay in one go when the deal ends.

pollyanna24

Thank you for your comments.  

I believe there is no way to borrow back the money once the mortgage is gone.  I think I had it in my head that when I got to the stage of this in a year or so, I was just going to stop overpaying it when it was down to £100 or so.  Not sure if that is the best way to do it, but I think there is probably some charge for paying off a mortgage early (it is not due to be repaid until 2046).

pollyanna24

Brie said:

What happens when you pay M1 off?  Does it disappear?  Or would you still have the borrow back possible?  if it won't disappear any time soon and you could borrow back if necessary then I would pay it off and then start tackling M2.  

We've got a flex mortgage - essentially you don't need to pay anything at all as long as you don't exceed your borrowing facility.  But we've paid it down to zero and beyond so it's normally running with a small credit.  In credit I think we get and APR of .1% or something equally silly.  But in debit it's now at 7.5%.  So I try to keep it just on the right side of zero and keep any excess cash we have in a higher rate savings account.

This sounds interesting.  Can honestly say I have never heard of it, but might look into it.  Sounds like what I would call an offset mortgage? 

Archerychick

pollyanna24 said:

Thank you for your comments.  

I believe there is no way to borrow back the money once the mortgage is gone.  I think I had it in my head that when I got to the stage of this in a year or so, I was just going to stop overpaying it when it was down to £100 or so.  Not sure if that is the best way to do it, but I think there is probably some charge for paying off a mortgage early (it is not due to be repaid until 2046).

Yes you’ll have an early redemption fee. I have the same challenge. Don’t forget to factor in your regular payments so you don’t end up paying it all off by mistake. 

My lender told me that they can recalculate the monthly payments until the end of the fix to ensure that doesn’t happen. Check to see if they can also do that 

pollyanna24

Archerychick said:

pollyanna24 said:

Thank you for your comments.  

I believe there is no way to borrow back the money once the mortgage is gone.  I think I had it in my head that when I got to the stage of this in a year or so, I was just going to stop overpaying it when it was down to £100 or so.  Not sure if that is the best way to do it, but I think there is probably some charge for paying off a mortgage early (it is not due to be repaid until 2046).

Yes you’ll have an early redemption fee. I have the same challenge. Don’t forget to factor in your regular payments so you don’t end up paying it all off by mistake. 

My lender told me that they can recalculate the monthly payments until the end of the fix to ensure that doesn’t happen. Check to see if they can also do that 

Thanks for that.  My payment reduces every month as I overpay by more than £500.  Just means I put more of an overpayment the following month.  

Just received my yearly statement and there is a Mortgage Exit Administration Fee of £65 to pay if I pay off the mortgage with more than 10 years left to pay.  So I will pay down till the monthly payment is minimal and then keep my £115k overpayment just in case I ever need it.  

South_coast

If mortgage freedom is your dream, I wouldn't let a £65 fee sway your decision!

powerspowers

I’d target M1, you owe less on it so every overpayment reduces the daily interest faster than on M2. M1 interest is more than saving accounts at the moment whereas M2 isn’t.
 

I think keeping M1 at a v low level so you can access the overpayment pot sounds like a good idea if you want a buffer whilst you build up savings or circumstances have changed that mean you’d struggle to access credit in future. There’ll come a point where it no longer makes sense to and borrowing from that pot would just be going backwards- in my mind that’d be the same logic as remortgaging your home once it’s paid off- with a poor interest rate!  

pollyanna24

powerspowers said:

I’d target M1, you owe less on it so every overpayment reduces the daily interest faster than on M2. M1 interest is more than saving accounts at the moment whereas M2 isn’t.
 

I think keeping M1 at a v low level so you can access the overpayment pot sounds like a good idea if you want a buffer whilst you build up savings or circumstances have changed that mean you’d struggle to access credit in future. There’ll come a point where it no longer makes sense to and borrowing from that pot would just be going backwards- in my mind that’d be the same logic as remortgaging your home once it’s paid off- with a poor interest rate!  

True.  I came up with the idea of maybe borrowing money back at a bad time when the mortgage seemed so high and I was worried about losing the house after becoming a single parent.  

I think I will probably keep it very low and pay down M2 and then maybe pay them both off at the same time.  That sure will be a great feeling!