Lump sum payment to mortgage or new vehicle?

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undiscovered
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Lump sum payment to mortgage or new vehicle?

Post by undiscovered »

Hi everyone,

Looking for some financial insight.

I have a lump sum of 25k which I'm deciding on putting towards my mortgage or buying a new vehicle. Baby number 3 is on the way and we need a larger vehicle.

Option 1 - Currently have a mortage of 267k (paid 530k) with accelerated doubled bi-weekly payments. Rate of 2.54% for 4 more years. If I continue this plan the house will be paid off in 11 years (age 43). By adding the 25k lump sum this year I would save 9k in interest (based on current interest rates) and shave off 2.5 years of payments (8.5 years mortgage - age 41 mortage free).

Option 2 - I will be buying a new van (approx 35k) and keep it until it dies (est. life span of 10 years). I was considering financing it over 5 years at a rate of 2% or putting the lump sum of 25k and make the remaining payments over 5 years.


With the interest rates being so close to each other I wasn't sure which option would be ideal, however, my thoughts are that option 1 may be best as mortgage interest rates are on the rise and who knows what they will be like in 4 years. I will also save 9k in interest now by making that additional payment to the mortgage.

Thoughts? Am I missing something?

Thanks guys!
queerasmoi
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Re: Lump sum payment to mortgage or new vehicle?

Post by queerasmoi »

Under the scenario of Option 1, do you still end up buying the new vehicle eventually but via financing?

In which case it's just a question of whether you're paying mortgage interest or car loan interest. If your car loan will be only 2% guaranteed for the whole term, then yeah you save money by paying off the mortgage instead of buying the car outright.

But - are there any additional fixed costs associated with the car loan beyond just the interest? Additional things you must buy if you're leasing? Higher insurance requirements? You would want to count these in your analysis.
pmj
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Re: Lump sum payment to mortgage or new vehicle?

Post by pmj »

Is the 2% interest on the car loan the true interest rate? IE did you forgo any cash incentives to get that rate? I checked several "offers" for a friend recently, and for some the true rate was in the 5% - 6% range.
Peter

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undiscovered
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Re: Lump sum payment to mortgage or new vehicle?

Post by undiscovered »

1.49% through Honda. I just rounded up to 2% for simplicity sake.
kostya
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Re: Lump sum payment to mortgage or new vehicle?

Post by kostya »

Undiscovered,

Without going into math:

1) Sounds like you will still need that van either way
2) Your car financing rate is appx. 1% better than the mortgage rate for the next 4 years

The logical conclusion would be to put the money into the mortgage

Some math-related aspects:

Something in your mortgage calculations doesn't add up. With same payment amount you can not shave off 2.5 years with your downpayment of 25K, its more like about one year. If you tell what are the amounts of payments that you base these calculations upon, it would help to see where the difference is coming from. I use my loan/mortgage calculator at http://www.interestlogix.com to do the math.

In any case, the above conclusion seem reasonable to me, given the information that you've provided.

I hope this helps
Last edited by kostya on 14 Dec 2016 14:58, edited 1 time in total.
undiscovered
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Re: Lump sum payment to mortgage or new vehicle?

Post by undiscovered »

Thanks for the input.

Attached are two images of the mortgage schedule. One contains the simplified version without the lump payment over 12 years and the other contains the lump sum payment illustrating 10 years.

I calculated wrong but it's approximately 2 year difference.
undiscovered
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Re: Lump sum payment to mortgage or new vehicle?

Post by undiscovered »

Pictures below
Attachments
IMG_3647.JPG
IMG_3648.JPG
kostya
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Re: Lump sum payment to mortgage or new vehicle?

Post by kostya »

I got very close numbers to yours only when I calculated the "simple mortgage" from your screenshot with regulat monthly payments (appr. estimated $2150 per month) and the "calculated mortgage" with accelerated by-weekly with amount from your screenshot. This is not really apple-to-apple comparison because you are effectively making bigger $ amount of payments every year with accelerated. If you make both calculations with same amout and payment schedule, then the difference in interest will be roughly 7.5K and the in terms of time about 1 year and 2 months.

Either way, the key to answer your original question would be in differences in interest rates between the car loan and the mortgage.

BTW. Congrats on the comming 3rd baby. When we had our second child I also upgraded our car to a larger one, this made our traveling routines a bit more convinient.
Spudd
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Re: Lump sum payment to mortgage or new vehicle?

Post by Spudd »

Basic math says if you're paying 2.5% on the mortgage and 1.5% on the car, put the money into the mortgage and finance the car. I'm trying to think of something that might make the decision end up differently but I cannot.

The only thing is, like someone pointed out, ask your Honda salesman for the bottom line price with both the financing and cash, to make sure that you're not actually paying a higher bottom line by financing it.
BRIAN5000
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Re: Lump sum payment to mortgage or new vehicle?

Post by BRIAN5000 »

Spudd wrote:Basic math says if you're paying 2.5% on the mortgage and 1.5% on the car, put the money into the mortgage and finance the car. I'm trying to think of something that might make the decision end up differently but I cannot.

The only thing is, like someone pointed out, ask your Honda salesman for the bottom line price with both the financing and cash, to make sure that you're not actually paying a higher bottom line by financing it.
Generally, to buy a car the cheapest is to pay cash or money borrowed from somewhere other than the dealer, you need to be able to negotiate and calculate if the dealer buydown of the interest rate is better than borrowing rates you can obtain compared to the discount for paying cash.

0.99% APR# leaseΩ for 48 months or finance† for 60 months OR $2,500 CLEAROUT BONUS ON SELECT 2016 ODYSSEY MODELS£ (BC)
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
kostya
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Re: Lump sum payment to mortgage or new vehicle?

Post by kostya »

Spudd wrote:Basic math says if you're paying 2.5% on the mortgage and 1.5% on the car, put the money into the mortgage and finance the car.
Correct. This is what I meant in my previous response, updated it accordingly.
BRIAN5000
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Re: Lump sum payment to mortgage or new vehicle?

Post by BRIAN5000 »

Looking for some financial insight.
What vehicle do you have now, what is your plan for the future, 5, 10 years, making do with the vehicle you have now is most likely the most financial optimal idea. Buy buying the new vehicle now what do you give up in the future.
(est. life span of 10 years)
Honda's reasonably looked after will last 20 years and 300,000 + km's.*


* I have a 1998 Accord with 260,000KM, I also have a 2016 Accord with 3300km.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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