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Does this make sense?

Help and discussions for strategies to get out of debt
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Does this make sense?


Postby lizzydripin » January 21st, 2018, 10:02 pm

Does this actually make any sense?


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Re: Does this make sense?


Postby nmdhqbc » January 21st, 2018, 10:13 pm

I couldn't concentrate on anything watching this.

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Re: Does this make sense?


Postby vrdiver » January 21st, 2018, 11:27 pm

lizzydripin wrote:Does this actually make any sense?



Seriously, no! You could do what she describes, and it would be better than just making minimum payments, but it's an expensive way to go about it.

She's told a story about paying off a repayment mortgage (as opposed to an interest only mortgage) where, in the early years, the majority of the repayment goes towards interest. So far so good. She then doe some "refinancing" after four years, but doesn't explain whether this was to buy a bigger house, renovate, take a holiday, reduce payments or what. Her example assumes payments stay the same but that the repayments are now servicing the original mortgage, not the mortgage 4-years-on. So, problem #1 is her assumption that "people" will just keep maxing out their mortgage and spending whatever equity they had built up. (The same people who can then magically control their finances and save 2k a month!)

She then talks about a "line of credit" i.e. a credit card, on which she has 12k of debt and in her original plan, was making minimum payments. In her new plan, she pays off the credit card with her full salary (5k) of which 2k is excess over spending. This 2k was magicked up, as it existed in the first scenario, but she didn't recognise it. She pays down a 12k credit card debt in 6 months (good) but then suggests borrowing 12k ON THE CREDIT CARD to pay off 12k on the mortgage. Now she's got a cc type monthly interest payment again! At this point she forgets to "refinance" after a further four years, so again not comparing apples with apples in the two scenarios.

She doesn't differentiate between the ANNUAL 6% mortgage rate, and the MONTHLY 5.5% line-of-credit rate. I'm assuming it's a monthly rate, as why would a bank loan you short term at a better rate than they let you have a mortgage?

She uses her monthly salary to offset her cc balance, paying it down as much as possible, then letting it build back up as she spends during the month. That bit makes sense, provided you make sure all your outgoings on the cc are credit payments and not "cash advances", otherwise the interest will be punative. Once the cc is paid off, it's fine to keep spending on it, so long as you pay it off in full every month! i.e. a monthly interest-free loan and cash flow/ convenience.

There is a simple way to look at this:

1. Save up an emergency fund
2. Pay off your debts - highest interest rates first
3. Pay off mortgage or save / invest for future self.

Step 1. Save enough cash for an emergency - look back over the last say, 10 years and ask "how much cash did I need in an emergency?" Don't include stuff that you are currently insured for. Don't include discretionary emergencies (i.e. buying a nice car as opposed to a utilitarian car that will equally do the job, should the old one pack up).

Step 2. Rank your debts in decreasing monthly interest rates (not total payment, but % interest charged). Throw all excess cash at the first one until it's wiped out. Then start on the next one. Kepp going until all non-mortgage debt (and student debt if applicable) is gone.

Step 3. Understand your mortgage Ts&Cs. Some allow overpayment, some only up to a certain %, or certain % per year. Others may have wierd and wonderful rules about how you need to go about paying off capital, as opposed to interest. Read the details or ask the bank to confirm in writing what the repayment rules are. Once you know the rules, you can make a payment off of the capital element of the mortgage.

If the mortgage was interest-only, you will now be overpaying the interest. Find out if these overpayments will be credited against the capital immediately, or accrued but not applied (i.e. you have a "credit" at the mortgage company, but it doesn't get any interest). Decide whether it is better to reduce payments back to interest only (the bank will tell you the correct figure) and to save the difference (e.g. mortgage drops from £500pcm to £490pcm, so you could save £10pcm) in an interest-bearing account, ready to pay down the mortgage again when you have the next lump sum ready, or to leave the overpayments with the bank and let them apply them to the mortgage as per their rules.

For much better advice, take a look at Martin Lewis's MSE page: ... vs-savings

If you are still unsure, try and map out your specific situation in a spreadsheet, month by month. It may take a little while, but better to "prove" what you are doing is right than to make an expensive mistake!


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Re: Does this make sense?


Postby melonfool » February 1st, 2018, 3:46 pm

I fell asleep listening to her whiney voice.

A better way to do it would be to stop spending money you can't afford in the first place. Why do they have a $12k debt (plus a similar size car loan) and how are they going to stop spending $1k pm more than they earn (in order to have the money available to pay off the debt). And why are they saving $1,400pm when they have a $12k debt anyway?

I happen to think her figures are iffy, I doubt the average American has $5k take home pm. Not that it matters for the principles to 'work'.

The one bit of good advice in there for 'Mercans is to stop refinancing every four years and resetting the clock to 30 years. I used to remortgage every few years as the deals ran out but each time I would try to remortgage for at least a year *less* than I had left on the original term anyway. Not more!

I now have no mortgage.....


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Re: Does this make sense?


Postby swill453 » February 1st, 2018, 5:09 pm

Far too much (American) jargon and irrelevant calculations.

Almost got there by paying down the highest interest first, but then immediately blew it by borrowing on the credit card again. Also assumes you can pay your mortgage and car loan payments with a credit card, which is unlikely in this country. Possibly with balance transfer, but again, why would you want to pay credit card interest?

SImplify - pay down credit card first, then overpay mortgage. Er, what everybody's been saying here forever.


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Re: Does this make sense?


Postby lizzydripin » February 2nd, 2018, 7:28 pm

I am just a grass hopper :)

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