Which Debts To Pay Spare Money To?

mleonard79

Hi Everyone,

I hope this is the right board for this question but basically I've been trying to sort out my mum's debts for a few years now. I've finally got it to a point where from here on in she will have some spare cash to put towards paying off debts and I'm trying to work out what to do with it. From this month she will have £350 spare per month and from August when she turns 60 that will increase to £500 p/m.

Her only debts now are a mortgage and 3 credit card balances. I have been balance transferrring from 0% to 0% every year for her and her main C/C debt of just over £6K is currently on an A&L 0% deal til Sept. She has another £4K split between Amex and M&S at 4.9% for the life of the balance. The mortgage has 5 years to run and is fixed at 5.29% for the duration as I re-mortgaged for her 2 years ago on a 7 year fix thankfully.

So I have 3 choices as to what to do with the spare money:

1. Pay down the credit cards (either the £6K card or the LOB cards.)

2. Overpay the mortgage - it is a fully flexible mortgage which you can overpay as much as you want, whenever you want.

3. Pay first £3.6K of spare money into an ISA and then overpay mortgage with the rest.

I know the rule is pay off whatever has the highest interest first so I ruled out paying it into the C/Cs and initially thought overpaying the mortgage was best. I'm a little worried, due to the credit crunch, though that there won't be many 0% BT deals available this year. The mortgage, however, is very flexible and anything you overpay to it can be taken back out again. When I took out the mortgage I took £3K more than was necessary and immediately overpaid it back so it's there as a buffer in case I needed it to go towards her C/Cs. This means that by Sept there should be just over £5K available if the worst came to the worst and I couldn't find a good deal for the C/C debt. I don't see any point in throwing it at the C/C right now though as I may well find a deal. I also think it's best if she just continues paying down the life of balance cards as they are at a safe rate at least.

It dawned on me, however, that ISA rates at the moment are over 1% higher than the mortgage rate so perhaps it would be of more benefit to pay £3.6K into an ISA for her and then overpay the mortgage once that had been filled as she would gain more in interest than she would be paying out. The only concern with this is that interest rates have just gone down and seem bound to go down again over the next few months so it may end up not worth it

I was just wondering what others on here thought the best course of action is. Thanks for any advice.

Regards

Michelle

andan

Well it sounds like you certainly know what your talking about! If it was me and considering your mum's situation seems quite stable at the moment, i would probably put it in an isa. Like you said, you'll earn more interest for it, so more money to throw at the debt, plus you've got it, should you not be able to get another 0% card.