Whether to put savings agains mortgage or improvements work on the property?

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NightOwl668

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We're buying a property which requires some renovation work. We secured a small mortgage (70k) to buy the property. My partner has recently been gifted a sum of money(10k) by the parents and we are now considering whether to:

(a) reduced our mortgage requirement to 60k ,and borrow 10k short term* to 'fix up' the house - an additional 10k on our deposit will not improve our LTV interest rate applicable 4.29% variable (60%-80%) , term 15 years

or

(b) draw down the mortgage at 70k as originally planned and use the additional 10k for the renovations job.

*The bank is quoting a 10k personal/home improvement loan @11.5% over 60 months

We're not great on the maths so would be glad of any advice from posters here. Our instinct tells us to keep the mortgage borrowing as low as possible and finance the refurb by way of short term borrowing as proposed above , but we would welcome other views.
Many thanks!
 
No, no, no, no, no, no, no,no.

4.29% is lower than 11.5%, so you borrow the money where it is cheapest.

You can overpay a variable rate mortgage at any time.

So if, for some reason, you want to repay the extra €10k over 5 years, you borrow it on the mortgage, and overpay it.

This will save you around €700 a year at the start. €10,000 @ 7% (11.5%- 4.3%)
 
As Brendan says, would be madness to borrow at the higher rate while reducing the mortgage which is at a lower rate.
 
You haven't asked this question, but it's something you should think about. If you are not married what is the arrangement in relation to ownership, who is putting in what, and have you a written agreement if you two should split up. I'm assuming, but could be wrong, that this low mortgage means the property is worth a lot more, so it's not so important in your situation.

(post edited)
 
Useful example Bronte ! In somewhat a similar position myself. So probably will stay away from the short term loan and use the savings for the extension I'm planning
 
Not the way to look at this really. If you simply repay the full loan at the end of the 5/15 years Bronte's interest numbers are correct. That's why the calculation appears to show an unusual result. (Even then 100 euro in 15 years is worth far less than 100 euro today.)

Reality is a loan is (generally, interest only loan excluded) repaid in equal instalments over its life, so re-doing the numbers:

10k, 5 years, 11.5%: Repay 220 per month = total repayments 13,200, consisting of loan repaid 10k and interest of 3,200.

10k, 15 years, 4.29%: Repay 75 per month = total repayments 13,600, being 10k loan repaid and 3,600 interest.

However, to Brendan's point:

Borrow 10k on the mortgage at 4.29% but repay that portion over 5 years (i.e. overpay a portion of the mortgage corresponding to the 10k). In this case:

10k, 5 years, 4.29%: Repay 185 per month = total repayments 11,100, consisting of loan repayment 10k and interest 1,100. Save

Saving is 2,100 compared to the loan at 11.5% (save 220-185 = 35 per months times 5 years/60 months being the total saving of 2,100).

While not directly comparative the saving would be 2,500 compared to simply repaying over 15 years (in purely money terms, ignoring inflation).

No contest I'm afraid. On purely money terms the obvious answer is borrow the extra 10k on the mortgage and make extra repayments such that this 10k is repaid over five years.

Hope this helps!
 
Bronte said:
10K @ 4.29% = 429 interest annually. For 15 years the cost of this money is 6435
Click to expand...

Gerard123 said:
10k, 15 years, 4.29%: Repay 75 per month = total repayments 13,600, being 10k loan repaid and 3,600 interest.

!
Click to expand...

Folks, as I said, 4.29% is lower than 11.5% - that really is the end of the matter.

There is a real danger that someone might try to understand your numbers and come up with some other conclusion. These "total cost of credit" numbers should be banned. You are adding up today's euros with 2029's euros which are completely different things. These calculations are worse than meaningless.
 
Brendan Burgess said:
These "total cost of credit" numbers should be banned.
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I couldn't agree more.
Lending should be advertised by APR only and deposits by CAR only.
On the deposit side, banks like to advertise 5% gross after 2 years and that kind of stuff, it makes it very difficult for the average person to compare like with like.
Surely this is the kind of thing that the financial regulator should have sorted out years ago.
 
Thanks everyone for your considered responses.
If I'm reading the postings correctly, the consensus seems to favour diverting our 10k to the refurb and leaving the mortgage as originally proposed, while overpaying the mortgage to offset the higher borrowing ?
 
Brendan Burgess said:
There is a real danger that someone might try to understand your numbers and come up with some other conclusion. These "total cost of credit" numbers should be banned. You are adding up today's euros with 2029's euros which are completely different things. These calculations are worse than meaningless.
Click to expand...

I've deleted my calculations as I agree they could confuse people and there are a lot of other factors that come into play.
 
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