Whats the best thing to do with my fianance's?

Question

We have a mortgage of 118k over 23.5 yrs and a loan amounting to 14k over 3.5 yrs left. My mortgage payment is 689 at a rat of 4.99 and the loan is 389 at a rate of 4.2. I saw a financial advisor last night who said that i may be better off putting the loan onto the mortgage and paying the current loan amount ie 389 as an overpayment. He said that would save me an awful lot of money BUT, my plan was to keep the loan seperate so that it is not still effectivly there in 23.5 yrs. Je said that i should overpay for the same duration that the laon would run for ie 3.5 yrs. Does anyone have a proffesional opinion on this. Is he right?

Answer 1

Combine as much as you can at the lowest interest rate. perhaps towards the home will give you a tax break as well. What you were paying in multiple payments, channel it towards the combined loaned (called a power play) and aggressively pay it down. Shaving off extra dollars from the tax refunds or what you saved in lower percentage rates target that towards the loans(amount) you could not combine.

Play hard ball with the lenders and tell them you are packing up unless they can give you a lower rate and absorb the other loan.

Answer 2

The key thing to consider in such circumstances is how much each set of borrowing is costing you - that is, what interest is being charged on each one. Then look to pay off those with the highest rates as quickly as possible.

So in theory it would not make sense to swap a £14k loan at 4.2% for one at 4.99% as this would cost more.

But at the moment, those numbers in your question don't quite add up. The first thing to make sure you have the correct interest rates for your analysis. Having carried out a very quick calculation (ignoring any other charges etc) it shows that on a repayment mortgage of £118k over 282 monthly payments of £689 is an interest rate under 5%. But a loan of £14k over 42 monthly payments of £389 is an interest rate of about 9%. At about 4.2% the payments would be about £360.

If the loan payments cover other things than just repayments, then this will need to be factored in. Otherwise, if the rate really is this high then it would make sense to add it to the mortgage and get the loan at the much lower rate.

In addition you should ensure that your mortgage product allows you to add the loan to it and to make over payments.

Answer 3

well it could work as the mortgage would be paid off over a shorter period and therefore even tho the loan rate is lower than that of the mortgage, paying it off over a shorter period would save a lot of interest, but you have to be prepared to continue paying the extra until the mortgage is paid off.

but however, you would pay more over the 3.5 years that the loan would run for because the interest rate is slightly higher on the mortgage.

this is assuming that you would pay the £389 on top of the £689 for at least the 3.5 yrs the loan runs for and once the 3.5 years is up, you stop paying the extra £389 so that you have £389 extra in your pocket each month, which is what I think you are getting at.

so i my opinion, I wouldnt do it unless you are prepared to continue paying the £389 until the mortgage is paid off early.

note that the interest on the mortgage is more at the start of the mortgage than it is at the end as the amount owed gets lower.

you need to do the calcs as you would be paying more out, but it all depends on what the interest element works out at over the reduction in the mortgage term.

Answer 4

If you don't have any problems with the monthly payments, then do nothing.

Combining the two may bring down your monthly costs, but the loan will cost you more over a longer period if you merge the two.

Secondly, why would you want to combine, and make the loan secured against your property as this increases the risk to you, and at the same time, increases the interest rate you pay. It doesn't make sense to me.

Answer 5

Loan rate (4.2%) is lower than Mortgage rate, (4.99%), so this does not make sense (unless the FA gets a nice fat commission for arranging your re-mortgage perhaps :-) )