Better to own car outright? or overpay v mortgage & lease?
Discussion
Help me PH accountants! I currently own my car outright (no finance), and reckon my car is worth approx £19-20k.
I'm thinking that perhaps it would be better to sell my car and plough the £19k into my mortage as an overpayment as I'd probably save £19k in interest alone by doing this + reduce my term by 2 years.
If I were to finance a car on a PCP deal for 3 years (e.g., an M135i at £432 for 35 months + a £1000 deposit), I'd end up forking out £16.1k - effectively "rental cost" as I'd own nothing at the end of it.
Alternatively, if I keep my car, after 3 years I'd still have approx £10k to put towards the next car, but I'd have missed out on saving approx £19k on the mortgage + reducing my term.
If I sell the car and overpay, I save approx £19k interest and reduce my mortgage term, but incur a cost of £16.1k.
What's the best option financially?! I'm confused!!
If it helps the PH accountants - I'm working on the basis of calculating overpayment savings on a mortgage of £200k at 3.6% interest - Fixed.
Thanks all!!
Dave
I'm thinking that perhaps it would be better to sell my car and plough the £19k into my mortage as an overpayment as I'd probably save £19k in interest alone by doing this + reduce my term by 2 years.
If I were to finance a car on a PCP deal for 3 years (e.g., an M135i at £432 for 35 months + a £1000 deposit), I'd end up forking out £16.1k - effectively "rental cost" as I'd own nothing at the end of it.
Alternatively, if I keep my car, after 3 years I'd still have approx £10k to put towards the next car, but I'd have missed out on saving approx £19k on the mortgage + reducing my term.
If I sell the car and overpay, I save approx £19k interest and reduce my mortgage term, but incur a cost of £16.1k.
What's the best option financially?! I'm confused!!
If it helps the PH accountants - I'm working on the basis of calculating overpayment savings on a mortgage of £200k at 3.6% interest - Fixed.
Thanks all!!
Dave
daveknott5 said:
Help me PH accountants! I currently own my car outright (no finance), and reckon my car is worth approx £19-20k.
I'm thinking that perhaps it would be better to sell my car and plough the £19k into my mortage as an overpayment as I'd probably save £19k in interest alone by doing this + reduce my term by 2 years.
If I were to finance a car on a PCP deal for 3 years (e.g., an M135i at £432 for 35 months + a £1000 deposit), I'd end up forking out £16.1k - effectively "rental cost" as I'd own nothing at the end of it.
Alternatively, if I keep my car, after 3 years I'd still have approx £10k to put towards the next car, but I'd have missed out on saving approx £19k on the mortgage + reducing my term.
If I sell the car and overpay, I save approx £19k interest and reduce my mortgage term, but incur a cost of £16.1k.
What's the best option financially?! I'm confused!!
If it helps the PH accountants - I'm working on the basis of calculating overpayment savings on a mortgage of £200k at 3.6% interest - Fixed.
Thanks all!!
Dave
So,I'm thinking that perhaps it would be better to sell my car and plough the £19k into my mortage as an overpayment as I'd probably save £19k in interest alone by doing this + reduce my term by 2 years.
If I were to finance a car on a PCP deal for 3 years (e.g., an M135i at £432 for 35 months + a £1000 deposit), I'd end up forking out £16.1k - effectively "rental cost" as I'd own nothing at the end of it.
Alternatively, if I keep my car, after 3 years I'd still have approx £10k to put towards the next car, but I'd have missed out on saving approx £19k on the mortgage + reducing my term.
If I sell the car and overpay, I save approx £19k interest and reduce my mortgage term, but incur a cost of £16.1k.
What's the best option financially?! I'm confused!!
If it helps the PH accountants - I'm working on the basis of calculating overpayment savings on a mortgage of £200k at 3.6% interest - Fixed.
Thanks all!!
Dave
Option 1, you'll save £19k over the remaining term of the mortgage (not the 3 year period), will have cost yourself £16k for the car and have no car at the end. So, actually about £3k "saving".
(by overpaying you'll save, over the 3 year period, £19k x 3.6% x 3 years, approx. £2k)
Option 2, keep your car for 3 years. At the end you'll have a car worth £10k.
I reckon keeping the car is the cheapest option.
OR
Option 3
Sell car, overpay £15k, get a £4k car.
Edited by Searider on Friday 23 August 10:02
Keeping the car is probably cheapest, however that may not be true. All depends on your interest rates, the cost of the lease and the value of the car at the end of the lease (ie how much car would you own not taking the lease).
IMO make mortgage overpayments when you can, but as long as you are paying the basic payment f
k it. Unless you are trying to do something like build up equity to move life is too short. Ye, you might be mourgage free early, but also you may never get to enjoy a nice car. There is more to it other than just the financial side, otherwise you would go and get a three year old 1.0 stbox and never go on holiday to pay off the mortgage even faster.
IMO make mortgage overpayments when you can, but as long as you are paying the basic payment f
k it. Unless you are trying to do something like build up equity to move life is too short. Ye, you might be mourgage free early, but also you may never get to enjoy a nice car. There is more to it other than just the financial side, otherwise you would go and get a three year old 1.0 stbox and never go on holiday to pay off the mortgage even faster.Trade the Boxster in for a 996 Turbo it will depreciate less 
Keeping your current car is the best option as selling your car to pay £19k off the mortgage is not technically saving £19k. You will only save the interest (£2-£3k).
Leasing the car as you propose will actually cost you £16k.
If your car depreciates £10k and you save £3k your still worse off with the new car and i doubt you will lose that much in three years on the boxster and the interest saving will probably lower than £3k but this depends on your mortgage rate and how much you owe.
Keeping your current car is the best option as selling your car to pay £19k off the mortgage is not technically saving £19k. You will only save the interest (£2-£3k).
Leasing the car as you propose will actually cost you £16k.
If your car depreciates £10k and you save £3k your still worse off with the new car and i doubt you will lose that much in three years on the boxster and the interest saving will probably lower than £3k but this depends on your mortgage rate and how much you owe.
When ever the interest charged on your debt is greater than the interest earned on your savings, you should reduce your debt by any means possible.
This means that you will be much better off financially if you drive a shed and use what ever capital you have to reduce your debt.
You may chose not to drive a shed, that's fine, but it will cost you more to do so when you're sevicing a debt than it will when you're not.
Not trying to tell you what to drive, gotta be up to you as to how much of a shed you're prepared to put up with in return for getting the debt paid off faster.
This means that you will be much better off financially if you drive a shed and use what ever capital you have to reduce your debt.
You may chose not to drive a shed, that's fine, but it will cost you more to do so when you're sevicing a debt than it will when you're not.
Not trying to tell you what to drive, gotta be up to you as to how much of a shed you're prepared to put up with in return for getting the debt paid off faster.
Searider said:
Option 3
Sell car, overpay £15k, get a £4k car.
Agreed.Sell car, overpay £15k, get a £4k car.
Personally, I find it very liberating to go from something relatively expensive to something cheap & cheerful.
A 'nice' car is a great thing in many respects but driving a car that cost less to buy than a service costs on your more expensive metal means you simply don't worry about odd noises, depreciation or where you park it. Typically you can also exploit more of the car's performance without straying too far into license-losing speeds.
A more useful post...
3.6% APR, how does that work? You owe £100 you pay nothing off for a year. At the end of the year, you owe £103.6. Simple enough, your debt is multiplied by 1.036 every year. To calculate the amount owed after two years multiply your original debt by 1.036*1.036. Three years would be 1.036*1.036*1.036.
Or put another way 1.036 ^ Years. Where ^ means "to the power of".
So lets calculate the cost of borrowing £19,000 over 20 years at 3.6% interest per annum. This calculation assumes you pay nothing off the 19K for 20 years (if you have a £200K 25 year mortgage, it's fair to assume that you'll still have £19K owing after 20 years.)
Amount owed = Initial Debt * 1.036 ^ Years.
Amount owed = £19000 * 1.036^20
Amount owed = £19000 * 2.0286 = £38,543 (see footnote)
So the original £19K has accumulated £19,544 in interest at 3.6% APR over 20 years. Or put another way, if you reduce your mortgage by £19K today, you will owe £38,543 less in 20 years, resulting in a net saving of £19,544.
Lets go with the suggestion of buying a a £4K car (and running it for zero cost over 20 years), that pays off £15K from your mortgage. To make this easy, work out how much it would cost you to borrow £15K over 20 years, that's your saving.
£15000*2.0286 =£30,429
So the original £15K has accumulated £15,429 in interest at 3.6% APR over 20 years.
Buying a £4K car saves you £15,429 in interest on your mortgage.
What about the rental option?
Well we've already shown that you'll save £19,544 in interest over 20 years by paying off £19K now.
But you'll lose £16.1K of that replacing your car with a rental.
So you'd save £19,544-£16,100 = £3444
Which of course you'll need to buy a car with at the end of the lease period.
From a purely financial perpective, you are much better off in the early stages of your mortgage running as cheap a car as you can get away with. Pay off as much capital as you can. The BMW rental option is financial lunacy. If you can afford £430 on top of your mortgage, spunk it on mortgage overpayments.
Its boring as hell and will take sacrifice, but long term you will be tens of thousands better off. However as I tried to say in my earlier post, you still gotta live. YOU have to balance how much sacrifice you're prepared to make now in order to be better off in the future. Its a balancing act and its up to you to sort it out.
Hopefully these quick calculations will help give you the tools you need.
Footnote:
Don't forget that in 20 years time £38,543 won't buy you what you can get for £38,543 today. None of these calculations take into account inflation, which will reduce the effect of any savings you make by early repayment.
Taking inflation into account is tricky as you don't know what it's going to do. The current rate is 2.8%, so your mortgage is actually costing you 3.6%-2.8% = 0.8% at constant currency. In other words if you borrowed £100 at 3.6% for one year, you'd owe £103.6. But if you put the £100 in a savings account at 2.8%, you'd have £102.8% saved. Your net loss is £103.6 - £102.8 = 80p, it has ACTUALLY cost you 80p to borrow the £100, which is 0.8%
IANAA, but I hope that helps.
3.6% APR, how does that work? You owe £100 you pay nothing off for a year. At the end of the year, you owe £103.6. Simple enough, your debt is multiplied by 1.036 every year. To calculate the amount owed after two years multiply your original debt by 1.036*1.036. Three years would be 1.036*1.036*1.036.
Or put another way 1.036 ^ Years. Where ^ means "to the power of".
So lets calculate the cost of borrowing £19,000 over 20 years at 3.6% interest per annum. This calculation assumes you pay nothing off the 19K for 20 years (if you have a £200K 25 year mortgage, it's fair to assume that you'll still have £19K owing after 20 years.)
Amount owed = Initial Debt * 1.036 ^ Years.
Amount owed = £19000 * 1.036^20
Amount owed = £19000 * 2.0286 = £38,543 (see footnote)
So the original £19K has accumulated £19,544 in interest at 3.6% APR over 20 years. Or put another way, if you reduce your mortgage by £19K today, you will owe £38,543 less in 20 years, resulting in a net saving of £19,544.
Lets go with the suggestion of buying a a £4K car (and running it for zero cost over 20 years), that pays off £15K from your mortgage. To make this easy, work out how much it would cost you to borrow £15K over 20 years, that's your saving.
£15000*2.0286 =£30,429
So the original £15K has accumulated £15,429 in interest at 3.6% APR over 20 years.
Buying a £4K car saves you £15,429 in interest on your mortgage.
What about the rental option?
Well we've already shown that you'll save £19,544 in interest over 20 years by paying off £19K now.
But you'll lose £16.1K of that replacing your car with a rental.
So you'd save £19,544-£16,100 = £3444
Which of course you'll need to buy a car with at the end of the lease period.
From a purely financial perpective, you are much better off in the early stages of your mortgage running as cheap a car as you can get away with. Pay off as much capital as you can. The BMW rental option is financial lunacy. If you can afford £430 on top of your mortgage, spunk it on mortgage overpayments.
Its boring as hell and will take sacrifice, but long term you will be tens of thousands better off. However as I tried to say in my earlier post, you still gotta live. YOU have to balance how much sacrifice you're prepared to make now in order to be better off in the future. Its a balancing act and its up to you to sort it out.
Hopefully these quick calculations will help give you the tools you need.
Footnote:
Don't forget that in 20 years time £38,543 won't buy you what you can get for £38,543 today. None of these calculations take into account inflation, which will reduce the effect of any savings you make by early repayment.
Taking inflation into account is tricky as you don't know what it's going to do. The current rate is 2.8%, so your mortgage is actually costing you 3.6%-2.8% = 0.8% at constant currency. In other words if you borrowed £100 at 3.6% for one year, you'd owe £103.6. But if you put the £100 in a savings account at 2.8%, you'd have £102.8% saved. Your net loss is £103.6 - £102.8 = 80p, it has ACTUALLY cost you 80p to borrow the £100, which is 0.8%
IANAA, but I hope that helps.
I did similar in march, sold my evoque before they started to loose much money and bought a brand new heavily discounted octavia vrs estate.
I bought a few things and then paid 8k off my mortgage, the overpayment only knocked £40 a month off my mortgage as its on quite a low rate but that is £40 a month for 24 years 8 months (assuming rates stay the same and we all know there likely to go up) so my 8k over payment works out at £3880 interest saved over my mortgage term.
I will also save during ownership with an extra 10mpg, 3 years free servicing as opposed to expensive RR ones and generally lower running costs. that is of course until i get border and change cars again lol
I bought a few things and then paid 8k off my mortgage, the overpayment only knocked £40 a month off my mortgage as its on quite a low rate but that is £40 a month for 24 years 8 months (assuming rates stay the same and we all know there likely to go up) so my 8k over payment works out at £3880 interest saved over my mortgage term.
I will also save during ownership with an extra 10mpg, 3 years free servicing as opposed to expensive RR ones and generally lower running costs. that is of course until i get border and change cars again lol
Using the Money Saving Expert Mortgage Overpayment Calculator if you chucked £19k into the mortgage (assuming £200k mortgage at 3.6% over 20 years), you'd save £18,220 in interest and shave 2 years, 8 months off the term.
Alternatively, chuck £19k into the mortgage (same assumptions) and then £250 a month (leaving you £200 to rent a car which should get you something reasonable) will save you £33,575 in interest and shave 6 years, 8 months off the term.
Who knows the best route - if you I had a crystal ball, I'd not be posting the answers on here!!
Alternatively, chuck £19k into the mortgage (same assumptions) and then £250 a month (leaving you £200 to rent a car which should get you something reasonable) will save you £33,575 in interest and shave 6 years, 8 months off the term.
Who knows the best route - if you I had a crystal ball, I'd not be posting the answers on here!!
mikeveal said:
A more useful post...
3.6% APR, how does that work? You owe £100 you pay nothing off for a year. At the end of the year, you owe £103.6. Simple enough, your debt is multiplied by 1.036 every year. To calculate the amount owed after two years multiply your original debt by 1.036*1.036. Three years would be 1.036*1.036*1.036.
Or put another way 1.036 ^ Years. Where ^ means "to the power of".
So lets calculate the cost of borrowing £19,000 over 20 years at 3.6% interest per annum. This calculation assumes you pay nothing off the 19K for 20 years (if you have a £200K 25 year mortgage, it's fair to assume that you'll still have £19K owing after 20 years.)
Amount owed = Initial Debt * 1.036 ^ Years.
Amount owed = £19000 * 1.036^20
Amount owed = £19000 * 2.0286 = £38,543 (see footnote)
So the original £19K has accumulated £19,544 in interest at 3.6% APR over 20 years. Or put another way, if you reduce your mortgage by £19K today, you will owe £38,543 less in 20 years, resulting in a net saving of £19,544.
Lets go with the suggestion of buying a a £4K car (and running it for zero cost over 20 years), that pays off £15K from your mortgage. To make this easy, work out how much it would cost you to borrow £15K over 20 years, that's your saving.
£15000*2.0286 =£30,429
So the original £15K has accumulated £15,429 in interest at 3.6% APR over 20 years.
Buying a £4K car saves you £15,429 in interest on your mortgage.
What about the rental option?
Well we've already shown that you'll save £19,544 in interest over 20 years by paying off £19K now.
But you'll lose £16.1K of that replacing your car with a rental.
So you'd save £19,544-£16,100 = £3444
Which of course you'll need to buy a car with at the end of the lease period.
From a purely financial perpective, you are much better off in the early stages of your mortgage running as cheap a car as you can get away with. Pay off as much capital as you can. The BMW rental option is financial lunacy. If you can afford £430 on top of your mortgage, spunk it on mortgage overpayments.
Its boring as hell and will take sacrifice, but long term you will be tens of thousands better off. However as I tried to say in my earlier post, you still gotta live. YOU have to balance how much sacrifice you're prepared to make now in order to be better off in the future. Its a balancing act and its up to you to sort it out.
Hopefully these quick calculations will help give you the tools you need.
Footnote:
Don't forget that in 20 years time £38,543 won't buy you what you can get for £38,543 today. None of these calculations take into account inflation, which will reduce the effect of any savings you make by early repayment.
Taking inflation into account is tricky as you don't know what it's going to do. The current rate is 2.8%, so your mortgage is actually costing you 3.6%-2.8% = 0.8% at constant currency. In other words if you borrowed £100 at 3.6% for one year, you'd owe £103.6. But if you put the £100 in a savings account at 2.8%, you'd have £102.8% saved. Your net loss is £103.6 - £102.8 = 80p, it has ACTUALLY cost you 80p to borrow the £100, which is 0.8%
IANAA, but I hope that helps.
Blimey! You can't get more comprehensive than that. 3.6% APR, how does that work? You owe £100 you pay nothing off for a year. At the end of the year, you owe £103.6. Simple enough, your debt is multiplied by 1.036 every year. To calculate the amount owed after two years multiply your original debt by 1.036*1.036. Three years would be 1.036*1.036*1.036.
Or put another way 1.036 ^ Years. Where ^ means "to the power of".
So lets calculate the cost of borrowing £19,000 over 20 years at 3.6% interest per annum. This calculation assumes you pay nothing off the 19K for 20 years (if you have a £200K 25 year mortgage, it's fair to assume that you'll still have £19K owing after 20 years.)
Amount owed = Initial Debt * 1.036 ^ Years.
Amount owed = £19000 * 1.036^20
Amount owed = £19000 * 2.0286 = £38,543 (see footnote)
So the original £19K has accumulated £19,544 in interest at 3.6% APR over 20 years. Or put another way, if you reduce your mortgage by £19K today, you will owe £38,543 less in 20 years, resulting in a net saving of £19,544.
Lets go with the suggestion of buying a a £4K car (and running it for zero cost over 20 years), that pays off £15K from your mortgage. To make this easy, work out how much it would cost you to borrow £15K over 20 years, that's your saving.
£15000*2.0286 =£30,429
So the original £15K has accumulated £15,429 in interest at 3.6% APR over 20 years.
Buying a £4K car saves you £15,429 in interest on your mortgage.
What about the rental option?
Well we've already shown that you'll save £19,544 in interest over 20 years by paying off £19K now.
But you'll lose £16.1K of that replacing your car with a rental.
So you'd save £19,544-£16,100 = £3444
Which of course you'll need to buy a car with at the end of the lease period.
From a purely financial perpective, you are much better off in the early stages of your mortgage running as cheap a car as you can get away with. Pay off as much capital as you can. The BMW rental option is financial lunacy. If you can afford £430 on top of your mortgage, spunk it on mortgage overpayments.
Its boring as hell and will take sacrifice, but long term you will be tens of thousands better off. However as I tried to say in my earlier post, you still gotta live. YOU have to balance how much sacrifice you're prepared to make now in order to be better off in the future. Its a balancing act and its up to you to sort it out.
Hopefully these quick calculations will help give you the tools you need.
Footnote:
Don't forget that in 20 years time £38,543 won't buy you what you can get for £38,543 today. None of these calculations take into account inflation, which will reduce the effect of any savings you make by early repayment.
Taking inflation into account is tricky as you don't know what it's going to do. The current rate is 2.8%, so your mortgage is actually costing you 3.6%-2.8% = 0.8% at constant currency. In other words if you borrowed £100 at 3.6% for one year, you'd owe £103.6. But if you put the £100 in a savings account at 2.8%, you'd have £102.8% saved. Your net loss is £103.6 - £102.8 = 80p, it has ACTUALLY cost you 80p to borrow the £100, which is 0.8%
IANAA, but I hope that helps.
Without checking the sums he is right of course. Lease borrowing costs are more expensive than mortgage interest rates so of the two it's better to keep it in the mortgage. As most people have suggested its better to pay down your mortgage and buy a cheaper car...of course! But if you have to balance financial providence with the luxury of owning a nice car. Only you can make that decision. Me? I'd balance more towards a nice car because it would give me enjoyment, but I'd find a reason why it made financial sense...that's why I love man maths!!
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