I'm just sorting out our new mortgage fix, we're fixing at 1.96% for 5 years. This drops our payments by just under £200. My initial thought was to just pay the amount we've been paying each month and get it paid off quicker. However, I'm now wondering if we should pay our car loan faster.
The car loan currently has £12k outstanding and costs £357 a month. If we overpaid by the reduced mortgage amount we could clear it in 20 months, instead of the 36 currently outstanding. We would then send the extra c.£500 a month to the mortgage.
I keep going round in circles about what's the best way to handle it. Am I right that it doesn't make too much difference or is there a clearly better way to do it?
Which loan are you paying higher interest on? Generally, this is the one to pay off first, although early repayment penalties and when interest is calculated may also need to be taken into account. Suggest you take a look at Martin Lewis Money saving Expert.
1) As everyone else has said, pay the higher rate off first, but thats always complicated by early repayment fees, length of loan (i.e. £200 owing over 25 years costs far more than £200 owing over three) or even future risk of rising interest rates once fixed rate finishes.
2) If you pay off the car early the temptation is to upgrade. Then you're worse off!
3) If hard times come calling, catching the bus seems a far better option than living in a tent.
Ultimately for me, with the current climate and uncertainty on interest rates I might look at paying down the mortgage. The car is a fixed cost that won't change throughout the life of the debt. After 5 years you don't have that certainty with the mortgage.
Thanks flyinflipflop, I think that's the way I'm swinging too! My worry is my husband being tempted to upgrade once the car is paid, and the mortgage never being overpaid. I generally sort the finances so I could overrule but it might be nice to prevent the argument!
In 5 years, we'll have finished refurbing the house so it should be worth more, it'd be nice to have the LTV nice and low then. Especially since we don't know what will happen with the interest rates.
For me, the answer is definitely overpay on the mortgage. As you are currently remortgaging, think about reducing the term of the mortgage to keep the payments roughly the same are they were before. Knocking off even a year off your mortgage with save you a large amount over the long run, due to the joys of compound interest!
I wanted to knock time off the mortgage, but the broker advised against it for various reasons. His advice was to pay as if it was a shorter term, and it will have the same effect. Obviously I didn't ask him about the car loan!
If your mortgage is anything like mine they recalculate your interest in "real time" if you overpay, so for every month you overpay your subsequent monthly repayments get even cheaper too! That's a double whammy of savings if you ask me. I can't imagine your car loan lenders do that