Using loan to pay mortgage faster

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guru_wannabe

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Case study using BOI and their online mortgage and loan calculators (for simplicity):

mortgage - 200000, 3%, 20 years
monthly payment 1109
total cost 266160

Before taking mortgage - take a personal loan:
loan - 20000e, , 6,8%, 5 years
monthly payment 392
total cost 23515

now you need "only" 180000e from the bank

mortgage - 180000, 3%, 20 years
monthly payment 998
total cost 239520

So by using 20000 and paying 3515e for it, I'm saving 266160-239520=26640e on interest.
mortgage monthly payment is now 1109-998=111e less than before, lowering loan monthly payment to 392-111=281e for 60 months

Why not paying 281e as an overpayment every month (if you can afford it?). Well not quite sure if I understand how it's calculated but BOI calculator gives these numbers:
mortgage - 200000e, 3%, 20 years
monthly overpayment - 281e
interest saving 18020
term reduction 5y 1m
if I understand correctly it means 14y11m * (1109+281) = 248810e (total cost)

So taking the loan (every 5 years) still looks like the best (cheapest) option? What am I missing here?
 
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Q. What is the housing circumstance in the period before you having a mortgage? Are you paying rent?
 
DuncanM7 said:
Q. What is the housing circumstance in the period before you having a mortgage? Are you paying rent?
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for the simplicity of this example (just to check the numbers) let's assume clean start, no rent, no debt, clean sheets.
In reality, I would probably try this once (with 5y loan) to reduce my mortgage, once I'm off the fixed rate (and before moving back to the fixed again).
 
RedOnion said:
Everything.

Just think about it for a minute.

How could it possibly make any sense to borrow at 6.8% instead of 3%, assuming you're making the same total repayment?

Now, look at what you're doing, and how you've calculated the interest amounts.
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I haven't calculated anything, I was using BOI calculators. Numbers are there to check the maths.
 
guru_wannabe said:
I haven't calculated anything, I was using BOI calculators. Numbers are there to check the maths.
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Have you thought about it? And the inputs you've used in the calculator? And how you've interpreted the results?

It might help if you use a more flexible calculator like Karl's mortgage calculator where you can properly input the repayments for the months you're making them:

Karl's Mortgage Calculator

Mortgage calculator with graphs, amortization tables, overpayments and PMI
m.drcalculator.com m.drcalculator.com

Your savings are from the accelerated repayments, not borrowing more expensively.
 
The whole point of using simple calculators from BOI (and for the products they offer) is to make things simple.

RedOnion said:
And how you've interpreted the results?
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I'm looking at the total costs for 2 options and one is lower. Could you be more specific please?

RedOnion said:
Your savings are from the accelerated repayments, not borrowing more expensively.
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There aren't any repayments, I'm using the loan as a one-off payment at the beginning to reduce the principal.
 
I'm getting mixed messages here... Do you want to be a Guru or not?

A simple calculator, which compares an additional payment per month for the entire term, compared to loan repayments for just 5 years, will obviously give the wrong answer.

guru_wannabe said:
There aren't any repayments
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Of course there are.... you're planning to repay the loan surely?

If you have a 200k mortgage, the repayments are 1,109 per month

If you have 180k mortgage + 20k loan, the monthly repayment is 1,392 per month (998+394)

So you are repaying an additional 283 per month. That's where the savings are coming from.

guru_wannabe said:
So by using 20000 and paying 3515e for it, I'm saving 266160-239520=26640e on interest.
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Your interpretation here is incorrect. You've completely ignored the 23,515 of loan repayments that you need to make.

If you've any specific questions, I'm happy to help guide you to enlightenment, but you have to think about what you are doing.
 
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Hi Guru

Which do you think has the lower interest charges?

A) A loan of €200k @3%

B) A loan of €180k @3%
+
A loan of €20k @ 6.8%

You don't need a calculator.

It is actually that simple.

Brendan
 
So, here's the correct maths for the scenario outlined in case anyone is confused. (Yes, I was bored).

The scenarios and monthly repayments as outlined:
1. 200k @ 3% over 20 years. Repayments of 1,109 per month
2. 180k over 20 years (998 pm) plus 20k over 5 years (394 pm). Total repayments of 1,392 per month for first 5 years.
3. 200k, but with repayments of 1,392 per month for 5 years, and 998 per month thereafter. Same monthly cashflow as #2. Mortgage is repaid 3.5 months early

ScenarioTotal RepaymentsTotal Interest
1​
266,206​
66,206​
2​
263,234​
63,234​
3​
259,723​
59,723​


Brendan Burgess said:
You don't need a calculator.
Click to expand...
Now you tell me! Thanks. I'm off for a pint (well, a can from the fridge at least)
 
Brendan Burgess said:
Which do you think has the lower interest charges?

A) A loan of €200k @3%

B) A loan of €180k @3%
+
A loan of €20k @ 6.8%

You don't need a calculator.

It is actually that simple.
Click to expand...
I'm saying it's B) and RedOnion's calculation shows it.

Here's the use case scenario - 1392e/month is above 10% overpayment limit (for BOI) but paying lump sum at the start (or between 2 fixed rate periods) is doable.
 
guru_wannabe said:
according to your calculations:
A) A loan of €200k @3% - total interest 66206
B) A loan of €180k @3%+A loan of €20k @ 6.8% - total interest 63234

B) is with lower interest charges
Click to expand...
The interest savings are from making higher monthly repayments. NOT from paying a higher interest rate. The higher interest rate loses you over half of the interest savings.

Are you trying to wind me up?
 
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