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Original poster

To overpay mortgage/loan, and which one?

13 replies

MarsBar1993 · 03/01/2024 10:09

DH & I have recently just moved house, we had a fixed rate mortgage for 5 years at 1.84% on c. £145,000 (oh how I wished I'd fixed for 10!) which ends November 24, we borrowed an additional £150,000 at a rate of 5.09% fixed for 2 years, which will end around December 24.

We have also just (after moving) took out a bank loan for £12,000.00 on a rate of 9.9% for 5 years.

If we have any surplus money at the end of the month (ie around £100/£200) which is the better debt to overpay? The loan with the highest interest rate, or the mortgage with the lowest interest rate?

OP posts:
MikeRafone · 03/01/2024 10:12

What will you interest rate on your mortgage be in December 2024?

are there any clauses on paying extra on your mortgage or loan?

Original poster
MarsBar1993 · 03/01/2024 10:18

@MikeRafone it would jump to the variable which at the moment is around 7% I believe? So I am very much hoping for mortgage rates to come down this year : )

Good question re clauses on paying extra. Both parts of the mortgage allow me to over pay up to 10% of the mortgaged amount in a 12 month period, so I won't get close to that.

Loan overpayments fine I believe.

OP posts:
Penguinpairs · 03/01/2024 10:49

Pay off the loan as the interest rate is highest on that one even after you remortgage

Spirallingdownwards · 03/01/2024 10:51

If the loan is a personal loan you may not be able to overpay. Do check this carefully. If you can't then the mortgage with the highest rate.

Original poster
MarsBar1993 · 03/01/2024 11:15

The loan is with Natwest, I think I can overpay the loan with no penalty but I will double check.

OP posts:
BiddyPop · 03/01/2024 11:21

The one with the highest interest rate makes sense on the face of it, but that may not be the biggest cost or the most impact.

If the mortgage can be overpaid while fixed rate, do some sums to see how much extra it will cost when rates rise.

Find some tables on calculating interest costs into the future and pop into an excel spreadsheet to play with the figures of all loans and see what would have the greatest impact - overpaying mortgage now to reduce higher interest costs when fixed ends or the smaller loan with high rate.

It might be an idea to pay some off both. Or to focus on the smaller loan first and hit the mortgage hard when the loan is paid off with both the current loan repayment and the excess.

SeattleSpacePlane · 03/01/2024 13:42

The one with the highest interest rate makes sense on the face of it, but that may not be the biggest cost or the most impact

This. If overpaying the mortgage means you drop to a lower LTV bracket by the time you come to remortgage, it might actually work out better in the long run.

laclochette · 03/01/2024 17:42

As others have said, if overpaying your mortgage could drop you into a different, better loan to value category when it comes to remortgaging, that may save you more in the long run.

(I'm assuming when your current fix ends you'd hope to move onto a new fix rather than move onto the SVR?)

So worth running the figures on that.

If this isn't the case, eg because you can't afford to pay off enough to drop into a meaningfully different LTV category, AND if the personal loan allows for early repayment, then I'd attack that smaller loan first, as the interest rate on it is pretty high.

Or there may be a combination of both. You can't know until you play around with the figures, and the figures depend on your LTV which you've not provided here.

Original poster
MarsBar1993 · 03/01/2024 17:49

@laclochette we bought for £400k does that help work out LTV?

OP posts:
laclochette · 05/01/2024 21:42

It's just the ratio of the value of your property at the time of remortgage vs the equity you have in it. If you borrowed £145k, some of which you'll have now paid back, against a house worth about £400k, then your LTV ratio is brilliant! Even at £145k it was 36%, and will be less now you've paid back some of the loan (unless your house has for some reason massively declined in value), so you're probably accessing among the best rates available to you anyway. Worth chatting to a good broker to see what you can access even better rates if you go even lower in terms of LTV, for sure... Once you have that info you can make the final call.

Original poster
MarsBar1993 · 05/01/2024 21:46

@laclochette we had to borrow an extra £145k for the new house

OP posts:
Twiglets1 · 14/01/2024 06:17

Pay off the £12,000 loan first as that will be a higher interest rate than a mortgage.

By the way, you shouldn’t allow your mortgage to revert to the SVR. Your mortgage company will write to you about 6 months before your deal comes to an end offering you a choice of some new fixed rate deals. It will be higher than you are used to paying but not as high as the standard variable rate so make sure you switch to a new fixed rate.

People generally fix the best rate they can 6 months early then switch to a better rate if interest rates fall during the 6 months which they are likely to do in 2024.

Shouldbeworkingnotreadingtalk · 14/01/2024 06:35

  1. Mortgage (£150,000 at 5.09%):
    • Annual Interest: £150,000 × 5.09% = £7,635 per year.
    • Monthly Interest: £7,635 / 12 ≈ £636.25 per month.

  2. Bank Loan (£12,000 at 9.9%):
    • Annual Interest: £12,000 × 9.9% = £1,188 per year.
    • Monthly Interest: £1,188 / 12 ≈ £99 per month.

Now, let’s consider you have an extra £100-£200 per month to pay towards these debts.

If you pay towards the Bank Loan (higher interest rate):

•	By overpaying, you’ll reduce the principal faster.
•	This decreases the overall interest you’ll pay because the loan will be paid off sooner.
•	Since the interest rate is higher, every pound you pay extra has a greater impact in reducing the total interest paid.

If you pay towards the Mortgage (lower interest rate):

•	While the monthly interest is higher due to the larger loan amount, the rate at which interest accumulates is slower because of the lower interest rate.
•	Overpaying reduces the principal, but not as effectively as it would with the higher interest rate of the bank loan.

Focusing on the bank loan first makes sense financially. It’s the classic debt repayment strategy of tackling the highest interest rate first, which in this case is your bank loan. Once that’s cleared, you can then redirect your extra payments to the mortgage, ultimately saving you more in interest over time.

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