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My car loan is 6.49% but it costs $12 a month for every month you pay it off early. It is a 60 month loan, I have been on it for 6 months and have paid off $2500 (From $14 000 to $11-500.

My Mortgage is about 500,000 at a 3.860% interest rate. I am tempted to re draw the extra $7000 I've paid off the house and throw as much as I can at the car, then, when it's paid off, add the car payment to the mortgage payment, but then I lose the redraw!

I have 29 years left on my mortgage.Can't get my head around the numbers so help please!!!

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    In general, you cannot withdraw money that you have used towards paying off the mortgage from the mortgage account and use that money for other purposes. Do you have any documentation showing that this is possible for your mortgage in your country? If the $7000 has been put into a (mortgage-offset) savings account that effectively reduces the interest rate being charged on the mortgage (as is possible, I believe, in the UK and perhaps some other countries as well), say so. – Dilip Sarwate Nov 24 '16 at 14:21
  • Hi Dilip - with almost all mortgages these days you can easily "withdraw" by just taking out more as a line of credit. Banks love lending out money. – Fattie Nov 25 '16 at 13:48
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Your current interest on the car loan is about $68 a month. The penalty is only $12. You should put as much on the car loan as you can until you get the interest payment down to $12. I threw it into a spreadsheet and found that number to be the last nine payments, when the principal is around $2200 remaining. For those final payments, you're better off paying the interest than the penalty.

If you add in the rate on the mortgage, it changes things a bit. If you switch to overpaying the mortgage when you have $5500 left on the car, the penalty becomes more than the difference in the interest rates. So you may be better off with keeping the whole gain of the lower rate rather than the penalty reduced on the car loan.

Technically we should also consider the Net Present Value of the penalties. $12 two years from now is worth less than $12 now. But it's not a lot less, so I'm just ignoring it. Including it would slightly favor paying the car loan early.

Note that my spreadsheet is a rough calculation based on a monthly payment of $273.86. They may give you better information in your receipt. Also, check with them if you can reduce your payment to reduce the penalties. If you can pay $1300 a month now and pay $15 a month for the last four years of the loan, that would be even better from your perspective. But they may not allow that nor similar alternatives.

If you can only redraw once on the mortgage, I'm not sure that I'd pick this as the time to do it. I'd prefer to save it for an emergency. And if you would have to pay fees, it's probably not worth it even if you could redraw as often as you want. If you pay $7000 of the car loan immediately, that saves you six months of payments and about $200 in interest. Reduce the interest savings by $72 for added penalties. That's only $130 in savings from using the redraw.

In the past six months, you overpaid the car loan by about $1300 and the mortgage by $7000. Just keep overpaying $5000 over the next four months and put it all on the car loan. You'll have it down to the point where the penalty starts to hurt. Then switch the overpayment to the mortgage and pay the minimum on the car loan until it finishes. That's simpler than anything involving the redraw and still gets you good savings.

I said this above but will repeat it here. The goal is to pay the car loan down to $5500 in principal. At that point, overpaying the mortgage is a better deal than overpaying the car loan and taking the early payment penalty at the end. More than $5500 and it looks like you're better off paying the car loan even with the penalty.

  • Thankyou all for helping me have a better understanding of the situation. I am not a numbers girl and appreciate the advice. – Betty Nov 26 '16 at 10:47
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    I never added an answer on the question because there is another factor at play here, I don't know where for tax purposes the OP is located. In the US, mortgage interest is deductible. Depending on the tax bracket, that will change your calculation on how much the mortgage interest actually costs. – Nathan L Nov 30 '16 at 22:21
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I see three different options:

  1. Keep what you have paid in the mortgage, keep paying extra to it.

  2. Keep what you have paid in the mortgage, pay future extra to car loan.

  3. Redraw extra payments from mortgage, pay them and future extra to car loan.

Of these, 1. clearly doesn't make sense as the car loan has higher interest.

Considering 2. and 3., note first that the 2.63% difference of interest on $7000 amounts to $184 in a year. If the redraw and early payment fees are less than this, it can make sense to do 3.

Whatever you do, it makes sense to make future extra payments to the car loan. Because of the $12 early payment fee, you'll probably want to save up money for 3-6 months and then pay a bigger amount at a time.

  • Thankyou! Sorry I was not clear, when you pay the vehicle out, the payout cost is $12 every month left on the term of the loan. – Betty Nov 24 '16 at 12:23
  • @Betty So no matter what you do with the car loan, you end up paying a minimum of $12 per month of the remaining term of the car loan? – a CVn Nov 24 '16 at 12:35
  • No, the $12 per month is the calculation they use as a payout fee. So if I pay it off with, say, 15 months left on the loan, I have to pay 15x $12. – Betty Nov 24 '16 at 12:51

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