Advice please on best mortgage repayment options

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jonathan18

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Topic # 230658 7-Mar-2018 10:03

We currently have three fixed loans on our house, and I’m keen on knowing which one (or ones) I’m better to put lump-sum repayments against.

Loans 1 and 3 are half the size of loan 2; interest rates on them are 4.8, 4.79 and 5.4% respectively. The proportion of each payment going towards principal for each of the three loans is currently 85, 75 and 78% respectively.

Am I best to pay lump sums against loan 3 as it currently has the lowest proportion of payments going towards principal? (This is what I have been doing.)

Or against loan 2 as it’s the largest?

Or am I better to focus on getting loan 1 paid off, given it’s already the one with the shortest pay-back time (4.5 years vs 6.5 for the other two)?

I’m sure this could be modelled, but I’m just interested in a straight-forward explanation as to which is the most advantageous approach.

Thanks for any suggestions…

ren1316

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Reply # 1970397 7-Mar-2018 10:09

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To me, it is common sense to repay the loan with the highest interest rate, so that would be loan #3 (same as what you are doing but for different reason)

Bear in mind most fixed mortgage loans only you to repay up to 10% of loan without penalty although you are still charged admin fees.

mentalinc

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Reply # 1970406 7-Mar-2018 10:23

When do they roll off the current terms?

If all the same ish time pay off highest interest rate debt first (assume you have no credit card/car loans/personal loans as these would be better options)

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Dulouz

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Reply # 1970413 7-Mar-2018 10:31

@ren1316 I have a loan on a fixed rate and because the rate is quite low the bank is happy for me to pay as much as I want off with no penalty.

Amanon

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Reply # 1970419 7-Mar-2018 10:40

I would get - in writing - a statement from the bank as to the extent of any fees/penalties that would be payable in respect of the matter before you decide anything!

jonathan18

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Reply # 1970420 7-Mar-2018 10:41

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My situation is that the bank allows us to repay up to 5% of the balance each year (based on the loan's anniversary date) without any fees or charges, but this includes any additional payments made above the minimum repayments (and we're currently paying more than the minimum for all three loans, but still have additional amounts we can make on all three without penalty).

MikeAqua

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Reply # 1970423 7-Mar-2018 10:44

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I would reduce the loan with highest interest rate and maintain the current level of repayment of it.

This way you will reduce the highest interest loan and pay it off faster.

Mike

jonathan18

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Reply # 1970563 7-Mar-2018 12:56

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mentalinc:
When do they roll off the current terms?

If all the same ish time pay off highest interest rate debt first (assume you have no credit card/car loans/personal loans as these would be better options)

Sorry, didn't answer this question.

Fixed terms come due in Sept18, May 19 and Dec 19 (deliberately spread to mitigate impact if rates rise). We have no other debts.

At this point, the recommendations appear to be putting extra payments towards loan 3; once we max out repayments on that, would the next one to tackle be loan 2? (Virtually the same interest rate as loan 1, but current repayments towards principal as a proportion of overall payments is considerably lower.)

Thanks for the advice...

jnimmo

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Reply # 1970570 7-Mar-2018 13:08

Sounds like a good plan

tripper1000

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Reply # 1970671 7-Mar-2018 13:48

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Highest interest rate would be my choice.

Sounds like you have your head screwed on straight and have made good decisions. Any advice you get is at best going to be fine tuning and if any money can be saved, it isn't going to be a lot.

If the banks stop trying to compete with the other banks and changes it's mind on the penalty free extra payments, or if you start to exceed their maximum thresholds as the principle gets smaller you will want to have the 2 larger mortgages fixed and expiring out of synch like you already do, and have the 3rd smallest mortgage floating (or fixed on short terms) to facilitate penalty free extra payments. When you have cleared the smallest, repeat on the next smallest, or if that it too big to float comfortably, slide some cash across into the 3rd paid off mortgage. This is the advice I was given 17 years ago and it worked very well for me.

Paul1977

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Reply # 1971832 9-Mar-2018 13:30

I'm late to the party, but I don't think the ratio of principal to interest of your current repayments makes any difference in regards to which loans you should increase repayments on. Those ratios are just a result of the size of the current repayments in relation to the outstanding balance.

Always pay the highest interest loan first (assuming there are no penalties for doing so).

jonathan18

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Reply # 1971844 9-Mar-2018 13:40

Thanks all for the advice.

Hopefully I'll soon be able to put it into action, but not right at the moment: we found out yesterday my wife is going to be made redundant in three months so that money we'd otherwise be putting into our mortgage may be needed to put food on the table instead!