Source
r/UKPersonalFinance•
Rufty1

Is it worth paying off my car with savings to increase overpayment of mortgage?

Budgeting

Hi all,

I have recently gotten the financially responsibility bug. I've been guilty in the past of spending far too much.

I've studied the flow chart and I think I am already doing the majority of the things recommended by it.
I'm 26 and currently contribute 6.5% of my salary into my pension, which my employer matches for a total of 13%.
I've got an emergency fund of 6 months of expenses (mortgage, council tax and utilities) in a savings account, and I regularly save 25% of my 4 weekly income. (approx. £3300 every 4 weeks after all deductions)

I currently have only two debts to my name, which are my car payments and my mortgage.

The car payment is on 0% Apr and is £200 pcm, and I'm currently overpaying my mortgage (base payment £590) by roughly £110 per month to round it up to £700pcm.

My question is, would it be worth paying off my car now (I have the funds available to do so) and put the extra £200 towards increasing the overpayment on my mortgage? Balance of mortgage is approx. £135k (with 25 years left), the house was recently valued at £190k. As far as I can remember the only limit on overpayment on my mortgage is that it can't exceed 10% of the balance per year.

Any advice would be appreciated.

Posted Aug 19, 2018, 12:34 AM UTC

28
gemushka53•

If the car is on 0% finance why not use the savings to pay off a chunk of your mortgage? You seem to be adding in an extra unnecessary step.

Having said that, I can’t see in your post what your mortgage interest rate is. If it is 2% or less you can probably get better returns by investing that money in an index fund and using that to pay it off later. Although I do totally understand the desire to be mortgage free....

9
Rufty1OP•

!thanks

Appreciate the response

2
sobrique108•

There's pros and cons to effectively leveraging your house to invest. I am not convinced it's a good idea overall. You do in theory get better returns, but with the "drag" of mortgage interest and the risk that is security on your house.... I think I would tend to just overpay instead.

2
gemushka53•

That’s the way I would lean too as I would prefer not to have the baggage of a mortgage but I think it is at least worth considering other options and deciding what is right for the circumstances. Some might prefer the increased liquidity and the option to use the money for something else if needed.

1
Rufty1OP•

Currently on a five year fixed rate at 2.79%, with approximately 4 years 6 months left to run, and yeah like you say it’s just the thought of the mortgage hanging over me that has me wanting to pay it ASAP.

1
I-am-sheepdog9•

Wow, I’d say you’re doing great.

I've got an emergency fund of 6 months of expenses (mortgage, council tax and utilities) in a savings account

Is there a reason you don’t include food and car expenses in there? I consider my EF as income replacement for a major disaster so I would cut out discretionary spending but I’d still have to eat and tax the car

1
Rufty1OP•

My wife works, and the weekly shop is her contribution to household bills. I pay road tax and car insurance annually.

1
I-am-sheepdog9•

Ah, okay I see.

My SO is also my business partner so I tend to assume that any income loss from business failure would happen to both of us.

And as I tend to think in catastrophic terms, if one of us was in a major car accident for example the other may have to cut back on work to become a carer for months.

1