Maths/mortgage question

[JapanRed]

I've got 2 mortgages.

One is 130k outstanding at 4% interest
Other is 210k outstanding at 1.8% interest.

If I have a lump sum which is best to pay it off?
To complicate matters the 4% one is buy to let so I can offset 75% of the interest charge.

Should be a simple maths question but it hurts my head. Please don't just give me the answer; provide your workings/method where possible please. It's a pretty decent lump sum I'm going to be paying off so want to make sure it's the correct decision.

Thanks in advance.

[Saleen836]

JapanRed said:

I've got 2 mortgages.

One is 130k outstanding at 4% interest
Other is 210k outstanding at 1.8% interest.

If I have a lump sum which is best to pay it off?
To complicate matters the 4% one is buy to let so I can offset 75% of the interest charge.

Should be a simple maths question but it hurts my head. Please don't just give me the answer; provide your workings/method where possible please. It's a pretty decent lump sum I'm going to be paying off so want to make sure it's the correct decision.

Thanks in advance.

I might be wrong but from next month I believe the amount you can off set drops to 50%, then to 25% next year then 0%, so the small amount you can claim becomes negligible, if it were me I would pay the lump off the £130k then use the money saved on the monthly payment to over pay the £210k balance

[anonymous-user]

What's the LTV on both?

[essayer]

Does either have an early repayment charge?

[tigger1]

Badda said:

What's the LTV on both?

This ^^^^ - especially if you're on any sort of fixed-mortgage rate at the minute, as bringing the LTV down will allow you a cheaper rate at renewal time (and / or make you more flexible if you decide to sell one property).

Paying off debt at a higher rate will usually make most sense, but having money that you can use in the future (rather than further borrowing) can be sensible too.

It all depends...there's no formula to say what's best, because everything else isn't equal.

[JapanRed]

Thanks everyone.

LTV doesn't matter a great deal as both mortgages will be paid off within 2 years (very fortunate I know).

Offset on the BTL does indeed drop to 50% next month.

No early repayment fee on either.

Thanks for the help.

[The T Boy]

What is your top rate of income tax?

Every £1,000 paid off the 1.8% loan will save you £18 per year.
Every £1,000 paid off the 4% loan will save you £40 less the tax saving foregone.

i.e if your top rate of tax is 20% you will lose £4 (50% of 20% of £40) so net saving £36.
If your top rate of tax is 40% you will lose £8 (50% of 40% of £40) so net saving £32.

All other things being equal (ltv bands, repayment charges etc) you're better off paying down the 4% loan first.

Edited by The T Boy on Tuesday 20th March 03:34

[JapanRed]

Thanks T Boy that's exactly what I needed. I will pay the lump sum off the BTL