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Home improvement loan or lump some off mortgage

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  • 10-08-2014 9:57am
    #1
    WORRZELL
    Registered Users Posts: 54 ✭✭


    Hi, I have a lump sum coming to me(20k) that we want to build an extension. However I am wondering the fact that I am on a tracker mortgage and interest rates are so low at the moment, would I be better off putting the lump sum off the mortgage and getting a personal loan for the extension. we already have personal loans of roughly 25k from previous home improvement loans and car loan, and mortgage of 200k house value 260k at present. both working 1 public and 1 private sector wage.
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    #2
    peter_dublin
    Registered Users Posts: 381 ✭✭peter_dublin


    It is cheaper to spend the 20k and keep paying the tracker than pay the tracker with the 20k and take a loan by about 8 times. If you got a home loan at 11% interest and your tracker is 1 - 1.25%. You would be insane to pay the tracker and take a personal loan.


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    #3
    WORRZELL
    Registered Users Posts: 54 ✭✭WORRZELL


    but is it not better to pay off the capital of the mortgage as the interest rate is so low which will be there for the next 30years, and the home loan would only be for 5 years. Also obviously the interest rate on the mortgage is only going to go up.


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    #4
    peter_dublin
    Registered Users Posts: 381 ✭✭peter_dublin


    When is it going to do up, BOI loan rates are 11%. Your tracker is say 1.25, say 8 times cheaper, that means for every euro you borrow on your tracker it is 8 times cheaper from an interest perspective than every euro you borrow for the loan, if tracker mortage interest rates reach 11% in Ireland then you have more to worry about.

    20k saved for 4 years with KBC will get you 1k in interest, an post will give a better return again over five years, calculate the interest cost of your tracker on 200k over 20 years and do the same for 180k over 20 years, the loan will still come out on top and thats excluding the fact that you get your extension without the pressure of a Loan and mortage to pay, and that technically you could funnel the money your not now paying for a loan (20k of repayments) into the tracker anyway.

    It's just about ensuring that your HIGH interest borrowing is paid first, forget about terms as you have a set amount you can repay each month, it much the same way that there is no point in having 10k earning 1% interest in a savings account if your have 10k on your credit card at 18% interest.

    Some people will still do this because they think they are being secure and savey by having the savings but in reality they will be paying 100s per year in extra interest on the credit card over any interest earned so are down money in real terms.


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    #5
    chris85
    Registered Users Posts: 4,502 ✭✭✭chris85


    WORRZELL wrote: »
    but is it not better to pay off the capital of the mortgage as the interest rate is so low which will be there for the next 30years, and the home loan would only be for 5 years. Also obviously the interest rate on the mortgage is only going to go up.

    Its the opposite. If rates are so low on your mortgage why would you put money off a mortgage which costs very little in interest and then get a personal loan which would cost at least 5-6 times more interest. Doesnt make sense.

    If you are going to be doing home improvements anyways then its a no brainer to use the lump sum for this.


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