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Getting repeat loans to pay a mortgage... nonsense or worthwhile?

  • 09-01-2019 4:20pm
    #1
    [Deleted User]
    Posts: 14,344 ✭✭✭✭


    Howdy do folks.


    Want to start off by saying this is a conversation I had with a friend, and I've no decent interweb action at the moment (so struggling to access mortgage/interest calculators, and have a dreadful head for math, so struggling to actually work out if this approach makes sense or not.


    My calculations are done on a phone calculator and unsure if I'm even getting the calculations right there or not to be honest.

    Pretty much, the gist of a conversation I had with someone, was that (in theory) you'd be better off getting small personal loans, lumping them off the mortgage, and then clearing the personal loans, repeatedly, rather than just paying your mortgage properly.


    So we took my example, which is a 'mortgage' of €70k, at 6.06% (Credit Union).

    If I could get a loan of, say, 5k off Bank Of Ireland, at 6.8%. For argument sake, we'll say it takes me 6 months to pay back that loan.


    In 6 months, interest on a loan of 70k (@ 6.06%) would be ~€2,121
    In 6 months, interest on a loan of 5k (@ 6.8%) would be ~€170

    However, I wouldn't actually be paying interest on a 70k loan, as Idl have used the 5k loan to pay off it, so..


    In 6 months, interest on a loan of 65k (@ 6.06%) would be ~€1,969.

    This figure needs to be added to the 5k figure (170) meaning, to my head, you'd be worse off each year by about €20 if you did this? And the more your mortgage reduces, the worse off you'd be routinely (as the interest on the 5k won't change, but the % of the mortgage will reduce each 6 months).



    Obviously, the interest on the 5k reduces each time you pay some off it, so it's not actually going to cost €170 (or is it.. maybe I've put that together wrongly).


    Again, not great with the maths of it all, so unsure if I'm missing something obvious, but the chap I was talking to (who I'd hazard a guess is also poor with maths :P ) was full sure he'd done similar calculations and it worked out better off for him doing it that way.


    Anyone with a better head on their shoulders thought this through at all?


Comments

  • #2
    AlmightyCushion
    Moderators, Education Moderators, Technology & Internet Moderators Posts: 35,087 Mod ✭✭✭✭AlmightyCushion


    You're borrowing money at 6.8% to pay off a loan at 6.06%. There is no way you are saving money here.

    What they probably mean is that the 5k you pay off the mortgage is saving you money for the entire length of the mortgage (not just the 6 months like you show above). So paying 5k off your mortgage would save you a lot more than €170. It actually saves you about 300 a year. If you have 20 years left on your mortgage, it would save you about 6k, so it can seem like a good idea. Borrow 5k and save 6k over the life of the mortgage. But if you took the monthly repayments of the loan and used them to pay off the mortgage then you would save a lot more. I couldn't be arsed doing the maths though.

    Borrowing money at a higher interest rate to pay off a lower interest rate loan will never save you money. You should also look at moving your mortgage, 6.06% is a scandalous rate right now.


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