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Couldn't think in the life for me where else I'd get an answer to this and my head is already hurting trying to work it out... so over to you guys.
I have a mortgage that sits on two products with different interest rates and debt levels. I'm trying to work out which one is best to overpay.
Mortgage 1 - Balance £64,710 - 3.19% rate
Mortgage 2 - Balance £182,356 - 2.84% rate
The amount I can over pay by is within the limits of either mortgage so that's not a consideration.
Which one would I be best overpaying? And how the hell do you work it out....
Thanks
Regardless of the balance, the answer is one with the higher interest rate of course mate.
The higher rate costs you more money so if you reduce the balance you'll pay back less interest.
I think it as easy as the one with the higher interest rate.
Assuming no penalties and that the payment is credited as soon as you make it
It also depends on how long you're going to be paying those interest rates and if one or the other is going to revert to SVR anytime soon.
Every pound borrowed is more expensive at 3.19 than 2.84 so pay off the 3.19 BUT rethink if any is on interest only.
Well hold tight isn't the daily interest on the 182k a fair bit more than the daily on 63k so although the rate is lower the actual interest accrued over a set period is higher? Isn't that the more important calculation? So I'd think he'd be better off overpaying the largest balance until he can get both onto a better interest rate or am I confused?
I bet you're thinking it the wrong way around by looking at how much each costs to service each month...
Think of it this way: you've got an extra £1000 to apply to either loan. Which loan costs more to borrow £1000? Answer: the one at 3.19%.
balance 1 would be 2064 a year interest roughly for arguments sake
balance 2 would be 7016 in interest.
both assuming no capital paid - which probably isnt true so long as your not on interest free for some reason.
but without knowing the capital you pay back or the overpayment you intend to make its hard to give more accurate figures how ever balance 2 is accruing a bigger interest figure each year.
Joolsburger +1, that was my thought.
Aye get the bigger debt paid down. Its a marginal difference in rate and a substantial difference in balance
How long does each mortgage have to run, and how long does each discounted rate have to run? Will you be able to remortgage either, both orcombine them?
Are they interest only or repayment?
There's lots of variables that may make bugger all difference or quite a sizeable one. More info is needed.
Use one of the overpayment calculators out there. Money saving expert has a good one. Plug the numbers into it for each mortgage and compare the results and it will tell you categorically how much you will save on each.
The other thing you'll need is the mortgage no of years left.
Assuming a 25 year mortgage paying the £1000 off the smaller mortgage saves you £1196 in interest across the life of it and the larger one saves you £1025.
Don't see the logic in paying the larger amount off - you're just reducing a balance that's accruing yearly interest - I'd pay off the one with the higher interest rate as all things being equal the amount on the mortgage isn't relevant it's the rate as they're both debt unless you have different repayment vehicles for each or different mortgage terms?
I can't believe how much debate there is about this.
The total balance is completely irrelevant. All else being equal in terms of penalties and terms, you overpay the one with the higher rate.
It's unlikely that all else is equal though. You don't usually take out two different mortgages at the same time, unless it's a product designed to confuse the punter.
this thread just shows the (low) level of numeracy amongst the public...
there really is no doubt as to which you would be better to overpay
and remember if you have loadsa money you can overpay both!!!
Well hold tight isn't the daily interest on the 182k a fair bit more than the daily on 63k so although the rate is lower the actual interest accrued over a set period is higher? Isn't that the more important calculation? So I'd think he'd be better off overpaying the largest balance until he can get both onto a better interest rate or am I confused?
The larger loan has more interest in total
But that means nothing as you are not repaying the full amount
If you pay £100 off each mortgage over the next year you save £3.19 in interest on one mortgage and £2.84
It's unlikely that all else is equal though. You don't usually take out two different mortgages at the same time, unless it's a product designed to confuse the punter.
My assumption is that when moving or extending the second mortgage was taken out to cover the extra but was set up to end in the same year
The proportion of interest to capital on a repayment mortgage changes over time though as you pay cumulative interest. SO the more you pay earlier in the term the more you save over the life of the mortgage
I'm interested in the answer to this if you work it out OP. I'm fairly confident that getting the balance down on the larger loan is the way to go. Different is the balances were similar but they aren't.
Just to add fuel the the fire*, you should also consider that many mortgages have a minimum loan value. I believe this is about £50k. What this means in practice is that if your paid down either or your two, to below £50k, you may find remortgaging them to a better rate in the future becomes more difficult. Just worth bearing in mind.
*this fire shouldn't really be burning, its a fairly straightforward calculation. This thread is proving that forums are not always the best place to discuss things.
right!
over 25 years
£200/month would save you ~£15k on the smaller mortgage or ~£20k on the larger
in interest
right!
over 25 years
£200/month would save you ~£15k on the smaller mortgage or ~£20k on the larger
in interest
That can't be right.
Mortgage 1 - Balance £64,710 - 3.19% rate
Mortgage 2 - Balance £182,356 - 2.84% rate
Every £200 debt costs £6.38/annum on Mortgage 1 and £5.58 on Mortgage 2.
When you over pay your (normal) monthly payments reamin the same, right? That's because your interest in calculated over the life of the mortgage, its an annual rate equivalent that accrues compound interest, not a simple 'this year it's X*y%'.
Yes but one has a balance three times the other so the actual interest accrued daily is far higher on the larger loan.
That's because your interest in calculated over the life of the mortgage, its an annual rate equivalent that accrues compound interest, not a simple 'this year it's X*y%'.
The interest is calculated on the outstanding balance at that time, so any over payment will reduce it.
Your monthly payment is calculated over the life of the mortgage, such that if the interest rate stays the same you'll pay the same amount every month for the life of the mortgage.
go and stick the numbers in a mortgage overpayments calculator.
You're bascially not paying the compound interest over the life of the loan which has a larger effect on the larger debt.
Reduce the term to 10 years the difference is £200, still in favour of the larger mortgage
Some dodgy maths going on
How can the size of the loan be a variable???
An APR of 5% means that to borrow £100 for a year costs £5. Or to borrow £100,000 cost £5,000. That's how percentages work
As the over payment is the same then the only variable is the interest rate
You're bascially not paying the compound interest over the life of the loan which has a larger effect on the larger debt.
Why is the affect bigger on a bigger loan?????
Use my calculator:
https://docs.google.com/spreadsheets/d/1cLH5NU8s4ghbiB7wlc_a1obAcjXdY59TZuW5jhStqjc/edit?usp=sharing
Because it is?
If you make the over payment on the smaller (higher interest) loan, it will pay off quicker (by several years) compared with the larger loan, so you can then switch the over payment to the larger lower interest loan.
You'll still save more money over paying on the higher interest loan first.
An APR of 5% means that to borrow £100 for a year costs £5. Or to borrow £100,000 cost £5,000. That's how percentages work
In Maths and finance yes. On STW, apparently not.
Because it is?
I spend a good part of most days talking about maths. This argument is new on me. Infact I'm taking it as endorsement of me being correct
🙂 Just bored now and haven't actually bothered to do the maths - Obviously.
I've done the maths, pay off the high interest loan first with the overpayment and then switch it to the larger (lower interest) mortgage.
If you make the over payment on the smaller (higher interest) loan, it will pay off quicker (by several years) compared with the larger loan, so you can then switch the over payment to the larger lower interest loan.
That's true.
An APR of 5% means that to borrow £100 for a year costs £5. Or to borrow £100,000 cost £5,000. That's how percentages work
That's true for a single repayment,, annually compounded one year loan, not a mortgage.
For those who think it's better to overpay on the lower rate.....
Do any of you think you'd make a profit by borrowing on the higher rate (eg by increasing the mortgage) and using the cash to pay down the lower rate loan?
If so, I'll lend you ten grand at 10% pa on condition that you lend it straight back to me at 2%.
How about you lend me 10k at 10% and then I lend you 50k and 2.1%?
Or how about you go on a mortgage overpayments calculator and fricking work it out?
Seriously how can you not get that the daily interest on his big loan is lots more than the lower loan?
Paying the big loan quicker saves him more money over time.
Seriously how can you not get that the daily interest on his big loan is lots more than the lower loan?
Consider the case when the interest rate for the larger loan is 0%.
In fairness footflaps has nailed it with regards the best option for the OP even if he still hasn't mastered the concepts of compound interest, repayment:interest ratios of fixed payment loans etc.
Get rid of the smaller loan and then work on the bigger one, assuming they're both of the same duration.
Yes Jools and consider the case where the smaller loans rate is tenthousandkerjillionzillion% too
Its a bigger total, certainly, but he is paying off a fixed amount. When paying a fixed amount pay the one with the highest interest, the total is irrelevant.Seriously how can you not get that the daily interest on his big loan is lots more than the lower loan?
Say you overpay by £500, if you pay if off the small loan then you that's £500 less that you owe at 3.19%, if you pay it of the big loan then that's £500 less you owe at 2.84%.
No it isn't.
Your reducing the term of the mortgage and hence reducing the compound interest so the total amount is relevant.
OK whatever. I really am bored now. He's not paying off a fixed amount either, an overpayment changes the monthlies, it's a mortgage not a fixed term loan.
a one off would change the monthlies, regular overpayments reduce the term
Are you now arguing with this guy?:Your reducing the term of the mortgage and hence reducing the compound interest so the total amount is relevant.
Get rid of the smaller loan and then work on the bigger one
No, in this specific instance footflaps was right, it makes sense to significantly shortern the term of the smaller mortgage and then repay more on the larger mortgage
you'd save 15K on the smaller one and presumably more than 5k on the remainder of the other loan - although I can't find a calculator that'll let me postpone the overpayments for 13 years to accurately find out.
(If you go on a 12 year mortgage on the then outstanding 72k you only save 3.5k but that assumes a monthly payment capitalto interest ration that would be starting the mortgage term from then rather than the capital to interest ratio you'd have after half the mortgage term which would be more favourable.)
but it's certainly not as simple or clear cut as you seem to think.
It really is as simple as overpay on the highest rate loan.
There is no other answer.
No it isn't.Your reducing the term of the mortgage and hence reducing the compound interest so the total amount is relevant.
Compound interest has the same affect on every pound whether there are 100 of them or 50.
That aside, you do not typically reduce the term of a mortgage by overpaying. With most mortgages, overpayments count towards reducing the monthly payment (smaller capital, repaid at x% over your fixed xx year mortgage). The term will only be reduced when you re-mortgage / re-negotiate.
That aside, you do not typically reduce the term of a mortgage by overpaying. With most mortgages, overpayments count towards reducing the monthly payment (smaller capital, repaid at x% over your fixed xx year mortgage). The term will only be reduced when you re-mortgage / re-negotiate.
Sorry, thats just incorrect. You agree with the mortgage lender an amount you want to borrow, the rate and length to repay - that gives you a monthly figure. Regular overpayments don't mean the monthly figuire is recalculated every month - you just stop paying the same fixed monthly fee earlier.
That's true for a single repayment,, annually compounded one year loan, not a mortgage.
Of course. But the point I'm making is that the cost is a fixed % of a the loan. That is always true for the same length of loan at the same interest rate
I did some calculations on this a few years back trying to decide if we should push to pay off all or most of our mortgage. Its so blindingly obvious but but I had been deceived by all the mystic stuff about compound interest
Lets imagine that that you have £10,000 in cash now and a £10,00 mortgage that runs for another 10 years.
You can borrow at 5% or you can save at 5%. Unlikely but it makes a useful comparison.
You can either pay of the mortgage in full and have no money
Or you can put the money in a savings account at 5% and make the mortgage repayments from the savings account. The end result is the same after 10 years you have emptied the savings account, you have no money
But usually it cost more to borrow than you get from saving. This favours paying off the dept
But if the roof blows off and you need £5,000 for a new roof then you might end up borrowing at higher rate than the mortgage you paid off
Sorry, thats just incorrect. You agree with the mortgage lender an amount you want to borrow, the rate and length to repay - that gives you a monthly figure. Regular overpayments don't mean the monthly figuire is recalculated every month - you just stop paying the same fixed monthly fee earlier.
It's certainly correct for most fixed term mortgages (including my own) which I'd assumed these were (possibly incorrectly) based on the phrasing of the question.
I didn't say it was calculated monthly, it is usually recalculated yearly when you receive a yearly statement.
ain't anyone got some work to be doing....?
if you have a 100k mortgage at 2% and 50k at 3%:
In one year, the interest is 3500 making the total debt 153.5k minus whatever you've agreed to pay over the year in regular monthly payments.
Take 10k off the 100k, and the total annual interest is 3300
Take 10k off the 50k, and the total annual interest is 3200
In each case the total debt at the end of the year will be 143.3k or 143.2k respectively minus your regular repayments. It should be fairly obvious which one is preferrable.
(Yes, I'm assuming interest and principal recalculated annually once a year, the principle is the same in other cases but the sums are a bit more work.)
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAARRRRRRRRRRRRRRRRRRRRRGGGGGGGGGGGGGGGGHHHH
FFupsS just put the fuppin' numbers in the fuppin' calculator!
Why should we put the number in a calulator. We know the answer
If you want the numbers in a calculator then put them in a calculator
I did!
Hence the answer.
Can you give an example set of numbers where you have two loans and it is better to pay off the lower interest rate first?FFupsS just put the fuppin' numbers in the fuppin' calculator!
Yes the figures in the OP. Assuming they were two separate loans.
As conceded earlier in this specific instance Footflaps suggestion, in terms of paying off the two in totality then it PROBABLY makes sense to pay off the smaller first.
Huh?! So why do you write this which is stating the opposite:Yes the figures in the OP.
Get rid of the smaller loan and then work on the bigger one
in terms of paying off the two in totality then it PROBABLY makes sense to pay off the smaller first.
If the OP has to pay both loans then he should look at the effect on the total he pays.
There's no probably about it.
Best. Thread. Ever.
Not that I'm a mortgage expert, but the Chartered Accountant in me would say you always pay off the higher interest loan first. It's on that basis that I never paid off my student loan quicker as any excess funds went to settling overdrafts / mortgages which attracted higher interest rates.
I'd be interested in seeing the calculations that supposedly show it's best to pay down the lower rate loan first. My guess is that there's some implicit assumption in there about future payments that isn't relevant or appropriate (especially given that the OP states hs can overpay either loan).
I'd be interested in seeing the calculations that supposedly show it's best to pay down the lower rate loan first.
and yet not interested enough to type 'overpayments calculator' in to google.
I feel I've sown a seed of disharmony here that is alien to the usual harmony enjoyed by the denizens of this forum and for that I am deeply apologetic.
Simply put someone needs to do the maths probably the OP as it's ultimately all his fault.
I went to a mortgage overpayment calculator and put in his figures. I assumed a 20 year term on both mortgages and a £250PM overpayment for each until the loan is paid.
He saves 15,153 overpaying the larger loan with lower % off
He saves 11,623 overpaying the smaller loan with higher % off
If I'm not mistaken that means paying the larger balance first saves him more.
So The stabiliser
Joolsberger I assume you have made the same mistake
Based on TheStabilisers numbers
right!
over 25 years
£200/month would save you ~£15k on the smaller mortgage or ~£20k on the larger
in interest
OK i have given i and repeated the calculation and you are not comparing like with like.
Yes the calculator gives the numbers you give. But:
You didn't mention the extra 6 years of paying £200 a month!!!!!
You've saved an extra £5000 grand but spent an extra £14,000 to do so!!!!
Your numbers are over the life of the mortgages which are different time periods
Yeah, no.
What ampthill said.
If you have a fixed monthly pot to make repayments from, then at some point one or the other loan will be the only one left being paid, and at which point all your repayments switch to that.
Always pay off the higher interest rate first regardless of duration.
Extreme example, a credit card and a mortgage. If you paid off the mortgage first, yes the term would drop, but you'd owe a bazillion pounds on the CC by the end. If you pay off the CC in month 1 and put nothing in the mortgage, then the mortgage term increases by a month (and a bit due to compound interest, maybe a few months).
Face Palm
Thestabiliser, I can certainly work out the correct answer myself, what I couldn't confidently do without seeing your working is work out why you and some others were getting it wrong. Though it looks like my guess on that score was in fact correct.
HSBC a and money saving expert both got it wrong too I suppose?
Just show your working. What site did you use, what numbers did you put in, and what answers did you get? Are you assuming the same total monthly payment (including overpayment) over the full length of the loans?
Read the ****ing thread
All you've said is this:
thestabiliser - Member
right!
over 25 years
£200/month would save you ~£15k on the smaller mortgage or ~£20k on the larger
in interest
http://www.mortgagesexposed.com/
use a mortgage overpayment calculator
Well I'm glad we are all on the same page now
Did we all manage to get through without questioning each other parentage? Yes
Did I learn stuff? Yes
Did it stop me being bored? Yes
So the final question?
When the mortgage is finally paid off and the OP rolling in cash what will he spend the money on?
T5 camper conversion
Wood burning stove
A new bike. But If so what rim and tyre size will be the latest thing?
doosuk
But I did all the other bits. Read the thread
doosukBut I did all the other bits. Read the thread
I have, but I'm right royally confused now. I thought you were disagreeing with thestabiliser.
I was disagreeing but I assumed that "face palm" was agreement/could see where he had been mislead
Basically the bigger mortgage allows bigger savings as its bigger. But only as you pay for longer
In this case you over pay the high interest loan until it is paid off. Then you make over payments on the other. Presumably these over payments would be the full value of what you were paying on the first loan and the over payment
The maths is easy. Well easyish. What makes my head hurt is if you try and factor in say needing £15,000 in 9 years time to help the kids go to uni. Do you save separatly or over pay the mortgage. Over paying the mortgage looks better on paper but you don't actually have the cash to hand over
But none of you have used the online calculators?
But none of you have used the online calculators?
I did that is where i spotted the 6 year gap!