Mortgage in two-parts, which should I overpay?

I_Need_Help800

Hello!

We recently moved house to a more expensive property and had to take out some additional borrowing (referred to as 'part two' of our mortgage) to cover the costs.

Our 'part one' is coming towards the end of a fixed 5-year rate (ending in April 2025) at 2.17% and the new 'part two' is fixed for 2-years (ending in July 2026) at 5.65%. Part one of the mortgage is about £50,000 less than part two.

We are looking to set up an overpayment to reduce the length of the term but wondered whether we would be better over paying 'part one' for the next 6 months, to reduce the value of that by as much as we can before we inevitably switch to a higher rate at the end of the term, or whether we would be better off overpaying on the higher interest rate 'part two' to reduce that by as much as we can straight away.

Both parts allow up to 10% of the initial loan as overpayments without any additional fees. 

Thanks

amnblog

Why would you pay off lending on the Part you are paying much lower interest on?

I_Need_Help800

That's a great question and I don't know which is best.

If I reduce the part with the lower interest rate now, when I re-mortgage (to an inevitably higher interest rate) in the very near future, I'm taking on a higher interest rate on a smaller loan.

kingstreet

The new rate on the smaller loan is likely to be less than 5.65%!

I_Need_Help800

Yes, I expect so too. Unfortunately for us, we completed on Friday 26th and the rates with our mortgage provider dropped from 5.65%  to 5.51% on Thursday 1st August, so we just missed out on that rate reduction.

Jemma01

* You need to tell us how much money is left on each.
* You also need to tell us in April 2025 how much you think the interest is going to be
* You need to tell us in April 2025 how much money would still be outstanding on the account without overpayments.

It maybe worth paying off the one with the higher amount because when April comes, the mortgage re-payment could double. Hard to tell you without all the numbers and a calculator at hand.

bamgbost

Just to piggy back on this. I have a similar dilemma.
2 part mortgage...
1) 265k @ 4.1% (5 yr fix, 4 yrs remaining)  and 2) 31k @ 2.7% (3year fix, 1 year remaining)

Naturally most may say option 1 to overpay on, due to higher interest rate. But Im more inclined to try reduce option 2.
To ensure its low as poss for remortgage next year, and its prob the 1 i have higher chance of clearing first due to lower total amount.

What do you's think?

BarelySentientAI

bamgbost said:

Just to piggy back on this. I have a similar dilemma.
2 part mortgage...
1) 265k @ 4.1% (5 yr fix, 4 yrs remaining)  and 2) 31k @ 2.7% (3year fix, 1 year remaining)

Naturally most may say option 1 to overpay on, due to higher interest rate. But Im more inclined to try reduce option 2.
To ensure its low as poss for remortgage next year, and its prob the 1 i have higher chance of clearing first due to lower total amount.

What do you's think?

Financially, option 1.  Sentimentally, many would choose option 2.

Hoenir

The less interest you pay, the quicker the capital will be repaid.