Pay off mortgage or credit cards first?

jennywren1_2

Originally posted this on the overpayment calculator thread but thought it might be better to make it a thread of its own.

I'm new on this board and looking for some advice.

We're currently 6 months into a 5-year fix at 6.49% (125% LTV hence the high rate - that and bad timing!).

We also have approx £20k on various credit cards - all on life of balance transfer rates. Of this a small amount is at 6.9%, the rest is at between 4.95% and 5.9%.

We're overpaying by £150 a month on the highest rated card, and planning to make changes so we can at least double that from next month.

My query is what do we do after the highest rated card has been cleared? As the mortgage is then the next most expensive debt we have it seems obvious that overpaying on that will save us the most money. BUT that means we'll be left with credit card debt indefinitely - or at least until after we've got rid of the mortgage, which is almost the same thing (best estimate at the mo is that we could be mortgage-free in 16 years).

So should I be paying off the credit cards first despite them being at a lower interest rate?

Thanks

Any thoughts?

dimbo61

have a long hard look at your finances and start to save the MSE way
you have done very well to get a loan of 125% and when this deal runs out in five years i hope you have plenty of equity in your house and no credit card
debts !!!
look at all your bills and shop round for all the best deals on this website
you must reduce what you spend each month and clear your debts first
as you say get rid of the most expensive cards first , pay your mortgage each month and then clear all your other CC cards,
if you have no debts other than the mortgage then you can overpay on that
GOOD LUCK

jamesd

You'll save more by overpaying on the mortgage than the cheaper card deals, so yes, that's where most of your money should be going.

If you don't like that idea, paying off the 5.9% credit card deal will lead to you paying 5.90 more interest per year for each 1,000 you pay off that card instead of the mortgage. I've ignored compounding, assuming that you'll change mortgage in five years so it won't become significant.

For the 4.95% credit card deal the extra cost of paying off that instead of the mortgage is 15.40 per year per thousand Pounds paid off it.

If the thought of keeping the credit card balances until you can remortgage discourages you, you could set the cards to receive a fixed monthly payment that is 10 more than the minimum for the 5.90% card and 1 more for the 4.95% card. Over time that will gradually increase the amount of capital being paid off the cards. You should really be looking to keep the 4.95% debt for as long as possible, though, since it's so cheap.

Kaz2904

The problem with paying off the highest interest rate debts first is that you will still have debt when you come to remortgage. At the moment you are in negative equity. You need to be in a better position in 5 years time and have little or no debt.
You will find from hanging around on here and the DFW board that you are able to make huge cutbacks that you never thought possible. You will then figure out the most efficient way of repaying all of your debts including your mortgage!
Good luck, it sounds like you have a long term project and the benefit of having a 5 year fix gives you the time to turn things around to your advantage.

jennywren1_2

How did I know I'd get conflicting advice :rotfl:

Kaz2904 wrote: »

The problem with paying off the highest interest rate debts first is that you will still have debt when you come to remortgage. At the moment you are in negative equity. You need to be in a better position in 5 years time and have little or no debt.
Good luck, it sounds like you have a long term project and the benefit of having a 5 year fix gives you the time to turn things around to your advantage.

Do you mean it will be easier to remortgage with no debt? Or would having more equity make it easier? (I guess the ideal situation is both of course )

Incidentally I don't think we are in negative equity at the moment, probably got about £25-35k equity in the house at the mo but of course that could change very quickly.

Having just looked again at my figures it wasn't actually 125%, that was the "deal" we had but actual mortgage was 109% LTV.

mischiefmaker

I think personally I would prefer to get rid of the credit cards first at least if you know the mortgage is paid each month (even the minimum) then your house is secure, have you post your SOA on the DFW board yet for some tips?

mrs_mug_2

I've just come on to ask a similar question though we HAVE got 125% ltv and £2000 on credit cards. We also have poor credit (a recent thing) which is due to us having 1 returned dd (illness prevented efficient money shuffling to an account we only used for that one dd) and 1 missed credit card payment (thought it was paid but the balance was still £1.34). Or at least, that is all we can put it down to.

So, we've got between £200 and £500 a month to throw at the debt. We were going to clear the credit card first but may now consider over paying it all on the mortgage and see how we go from there. Unless any one else has any other comments?

We've got 4 years left on our Northern rock fixed rate. It is all a bit depressing for us, isn't it? (bad credit, negative equity etc etc)

jennywren1_2

mrs_mug wrote: »

I've just come on to ask a similar question though we HAVE got 125% ltv and £2000 on credit cards. We also have poor credit (a recent thing) which is due to us having 1 returned dd (illness prevented efficient money shuffling to an account we only used for that one dd) and 1 missed credit card payment (thought it was paid but the balance was still £1.34). Or at least, that is all we can put it down to.

So, we've got between £200 and £500 a month to throw at the debt. We were going to clear the credit card first but may now consider over paying it all on the mortgage and see how we go from there. Unless any one else has any other comments?

We've got 4 years left on our Northern rock fixed rate. It is all a bit depressing for us, isn't it? (bad credit, negative equity etc etc)

In your position I'd be clearing the credit cards - even if you only have £200 a month you could be rid of those within a year, then you have 3 years to overpay on the mortgage

I agree the negative equity is depressing, although as long as you can afford to make the payments and aren't planning on moving does it really matter? (at least until you come to remortgage - like you we're with Northern Rock, I suspect we might both have a few difficulties there :rolleyes: ).

Kaz2904

If your LTV is greater than 100% then you are in negative equity.
Of course you are gradually paying down the mortgage unless you are on an interest only mortgage.
If you go to www.whatsthecost.co.uk then you can enter your figures to see what to pay in what order. It will also show you haow much you will owe when you come to remortgage. Don't forget that when you have a council tax or water free month you can use the money for overpayments.
Don't forget to use quidco for your online spending and think about joining the grocery challenge on the old style board.
The longer you spend on this site the harder you will find it to part with any money! It may be worth putting your extra money into an ISA if you are able to earn a higher interest rate with an ISA than you pay on any of your debts.

Another handy tip is to look at why you have this amount of credit card debt in the first place? Have you been consistently overspending or was it a serious of unfortunate events. If it was overspending, what have you put into place to stop this happening in the future?
Have you set yourselves a budget that enables you to still have treats? You will find it much easier long term to repay your debts if you set a realistic budget.
As I said before, Good Luck!
I've been slipping over the last year but had been crunched down well on finances for 3 years solid. I know that our debts have been created with necessary work to the house and things that we could perhaps have waited for but couldn't live with any longer. If we'd waited until our mortgage and debts were gone then we would be living with grot in our house until 2013. Any money we have spent has if not added money to our house (who knows in this climate) made it infinately more saleable should we need/want to sell.

jennywren1_2

Kaz2904 wrote: »

If your LTV is greater than 100% then you are in negative equity.

Surely that depends on the current value of the house? An almost identical one 3 doors down the road (if anything ours is in a better state of repair) sold 3 weeks ago for £35k more than we paid. We were only £19k in -ve equity at the start of the mortgage, and have already reduced that by almost £7k, so even a conservative estimate of the value being £25k higher than when we bought it means we do have some equity (even if I did get my figures wrong in my last post ) Of course that's today - who knows what will happen to the value in the (near?) future, somehow I doubt it will go up any more

Thanks

jamesd

kaz2904, two things that you might give more weight to:

1. The mortgage is a secured debt, the credit cards aren't. Paying down secured debts before unsecured, if the interest rates are comparable, is the best move because it decreases the chance of losing your home.
2. A mortgage is debt. You pay off whichever lowers your total debt fastest and that'll be the mortgage in jennywren1's case. When it comes to remortgage time the mortgage can just be taken out for a bit more to repay the credit cards if they are at a higher rate than the mortgage (remember that the mortgage was reduced in preference to the cards initially in this scenario, reducing the total amount of debt).

jennywren1, 4.5 years from now the current credit crunch is likely to be sorted out. And 4.5 years of pay increases even just in line with inflation will make it easier to pay more off debt. Even at just 3% inflation and pay increases you'd end up with 12.5% more income to add to repaying debt. Or alternatively, the debts fall in value by the corresponding amount, 20k of credit card debt being reduced to just 16k in today's money courtesy of inflation.