Overpay car loan or mortgage?

[MrsReacher85]

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?

Assuming you are allowed to overpay, overpay the one with the highest interest first

Do either have any early repayment fees? What % rate is the car loan? All being equal, I'd probably pay the car loan off first just because you can get it out of the way quicker.

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.

I need to check on the car loan, but I don't think so. Interest rate is 3.3% but I'm aware the compound interest on the much higher amount mortgage confuses the issue on interest rates!

We can overpay the mortgage up to 10% a year, which this wouldn't touch.

I would probably pay the car loan (assuming no early repayment fees) because the car is depreciating in value all the time so I'd want to pay as little interest on it as possible.

The interest was added up front with the car loan, but you get a rebate if you overpay. I've no idea when the interest would be calculated on the mortgage.

Just looked at auto trader and the car seems to be worth between 12-15k so that's a very good point about the car value!

Three ways of looking at this.

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.

Thanks all! Sometimes I think I just need to write it down/talk out all the options.

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 :)

I wanted to knock time off the mortgage, but the broker advised against it for various reasons.

I imagine the idea being to give you flexibility if you find yourself a little tight for money some months. Its not bad advice.

I think that was exactly it, especially because we're a one income family at the moment.

Pay the car loan off first. Mortgage interest is added daily.

And you can flexibly pay bits off here and there normally on a mortgage.