Personal Finance

Pay the Car off or Contribute to Mortgage more

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  • Oct 1st, 2013 10:09 pm
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Deal Addict
Jun 16, 2009
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Vaughan

Pay the Car off or Contribute to Mortgage more

I have a financed car for 05 years with 2.3 % finance rate . My mortgage is 3.5 fixed for 30 years . Once a while I make extra money and like to put this money towards either car or house .
From what it looks I should try to pay my mortgage as it has higher rate of interest but at the same time I want to have one less payment coming out of my pay cheque every week .
I do not have any resources to pay the mortgage off in next twenty years

What is the take of pro's in above situation and why .
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Deal Guru
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Oct 24, 2012
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Montreal
Extra payments on the house = paying less interests (compared to payments on car).
However, ending the car loan sooner = freeing up cashflow.

While freeing up cashflow sounds interesting, you are only getting this extra cashflow because you used PREVIOUS free cash flow to pay off the car faster.


TL;DR: Make payments on the house. If cashflow is an issue for you, don't make extra payments on either one and simply sock away the cash for a rainy day.
Deal Addict
Aug 14, 2007
2434 posts
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Waterloo
I am thinking most likely the house, however there would be a variety of factors for me in my decision, whats my current cashflow like with car payment, how much do I save in interest on car vs house..
i.e if it comes out to only saving maybe a couple hundred bucks over the full amortization by putting it towards the house, I would maybe put it towards the car to free up cash flow sooner, then you can start using that car payment money on your mortgage. If it ended up being thousands of savings, I would put it towards the house.

However I am thinking house would win every time, because here is another factor to consider -- your 2.3% rate is locked in for the entire amortization period of your car. Most likely(but of course no guarantees) whenever your fixed term is up on your mortgage (5 years from now?) interest rates will be higher, so the more you pay off now the less painful it will be when you renew with a higher rate, and even more you will save.

This is all assuming of course you will have zero penalties for the extra payments.
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Nov 18, 2007
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Corktown
Pay down debt with higher costs first.

But also, $100 towards the mortgage will save considerably more in interest costs over 30 years, than $100 towards the car.
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Mar 13, 2012
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Planet Earth
You don't mention how long left on the car loan but it is probably fixed and locked term. Extra on the mortgage would be my recommendation and an annual extra anniversary payment if you can afford it.
If at first you don't succeed, destroy all evidence that you even tried.
Deal Addict
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Nov 18, 2007
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Corktown
1960 + 30 = 1990. Maybe the OP's mortgage is already paid out!
Deal Fanatic
Jun 11, 2005
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Mississauga
newlyborn wrote: I have a financed car for 05 years with 2.3 % finance rate . My mortgage is 3.5 fixed for 30 years . Once a while I make extra money and like to put this money towards either car or house .
From what it looks I should try to pay my mortgage as it has higher rate of interest but at the same time I want to have one less payment coming out of my pay cheque every week .
I do not have any resources to pay the mortgage off in next twenty years

What is the take of pro's in above situation and why .
Depending on how many car payments you have left, you might want to put the extra towards the car and pay it off sooner. Then use the car payment money to pay extra mortage payments.
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Aug 7, 2010
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DrXenon wrote: Where can I sign up for a 3.5% mortgage fixed for 30 years? You haven't been able to get that in Canada since the 60s, thanks to our oligopolistic banking industry.
+ 1
Deal Addict
Jun 27, 2005
1071 posts
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Toronto, ON
alkizmo wrote: Extra payments on the house = paying less interests (compared to payments on car).
However, ending the car loan sooner = freeing up cashflow.

While freeing up cashflow sounds interesting, you are only getting this extra cashflow because you used PREVIOUS free cash flow to pay off the car faster.

TL;DR: Make payments on the house. If cashflow is an issue for you, don't make extra payments on either one and simply sock away the cash for a rainy day.
+1

Freeing up cash-flow buy paying off your car quickly only makes sense if you need the extra-cash flow to put into something else, otherwise put it into your mortgage.
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Aug 12, 2007
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Waterloo
DEF put the extra payments into your mortgage, you will save a lot of interest on 30 years even at 3.5%.
As others have pointed out while the term of your mortgage might be 30 years ,Typicaly canadian mortgages have have a fixed rate period of 1-6 years. usually most people set it at 5. So consider that the 3.5% is not expected to stay at that forever, you're actually actually paying off something on which you may have to pay 6-7 % ( maybe even more ) interest.
Deal Addict
Apr 4, 2013
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Depends on what your personal financial goals are and how long you are planning to stay in your home. While many people believe that to live debt free is the ultimate goal, the interest rates on your car loan and mortgage are quite low. You may want to consider just leaving them both alone and investing any extra money elsewhere where the return would be higher.
Deal Addict
Nov 24, 2004
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OP, how much time is left in your car loan, and what fraction of it do you still have to pay off?
Deal Guru
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Oct 24, 2012
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antigua1999 wrote: Depending on how many car payments you have left, you might want to put the extra towards the car and pay it off sooner. Then use the car payment money to pay extra mortage payments.
That makes absolutely no difference to how much you can pay off your total debt.

I think a lot of people don't see the big picture, where both the car loan and mortgage loan are one big debt and there is only 1 source of cash flow. Throwing money at the smallest loan just to close it faster won't make a difference as to how much money you can throw at your total debt.

What matters is the interest rate. It does not matter which loan can be closed the fastest
Pay the MINIMUM on the lowest rate loans and MAXIMUM on highest rate loans.
Member
Feb 7, 2012
331 posts
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Toronto
alkizmo wrote: That makes absolutely no difference to how much you can pay off your total debt.

I think a lot of people don't see the big picture, where both the car loan and mortgage loan are one big debt and there is only 1 source of cash flow. Throwing money at the smallest loan just to close it faster won't make a difference as to how much money you can throw at your total debt.

What matters is the interest rate. It does not matter which loan can be closed the fastest
Pay the MINIMUM on the lowest rate loans and MAXIMUM on highest rate loans.
+1, take the emotion out of it, pay off your highest cost debts first.
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Aug 12, 2007
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Waterloo
alkizmo wrote: That makes absolutely no difference to how much you can pay off your total debt.
.
alkizmo wrote: What matters is the interest rate. It does not matter which loan can be closed the fastest
Pay the MINIMUM on the lowest rate loans and MAXIMUM on highest rate loans.
+1
exactly people tend to think if a smaller loan is paid off, their over all picture will improve. While you may feel better about having a smaller number of loan accounts open, The wise choice is not fall for this trap.
Member
Mar 31, 2013
396 posts
84 upvotes
Toronto
Just adding another vote to paying off the highest interest debt first (the mortgage in this case). Without actual numbers since not sure of amounts of the loans and extra payments:

Scenario 1: Put extra payments on the mortgage, while paying minimum for car for 5 years
Scenario 2: Put extra payments on the car, when that is paid off in under 5 years, put all the payments you would have made to car to the mortgage

At the end of 5 years, the car will be paid off in both scenarios, but scenario 1 will have a lower mortgage amount remaining.
Deal Addict
Jun 16, 2009
4517 posts
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Vaughan
Thanks everyone for endorsing my views hence clearing my doubts due to emotions of having one less debt over all .
Sorry for not writing clearly . My mortgage is for 30 years but amortization is 5 years with a fixed rate of 3.5 % . I financed my car for close to 40 % of value for 05 years . Did some early payments and am left with roughly 04 more years of payments .
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Deal Expert
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Oct 26, 2003
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only 2.3% financing on the car? that's less than prime, don't pay it off and inflation will take care of it ;)
Deal Guru
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Oct 24, 2012
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Montreal
DrXenon wrote: For me, I paid VW Finance the remaining $13k I owed them, and this freed up $650 in monthly cash flow which I use to make extra payments on the mortgage.
This is where your logic is flawed.
What you did is use up 13,000$ reserve that you had in cash just so you can re-allocate 650$ per month to your mortgage 2 years earlier than planned (because you had 2 years left on the car loan had you continued with regular payments).
How would that have been different than taking that 13,000$ and putting it to your mortgage right away?
Deal Fanatic
Jun 11, 2005
8633 posts
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Mississauga
DrXenon wrote: I don't know about that. The interest differential is not high, and you get a lot of bang for your buck in terms of cash flow when you pay off an auto loan. For me, I paid VW Finance the remaining $13k I owed them, and this freed up $650 in monthly cash flow which I use to make extra payments on the mortgage.
That`s my thoughts also.

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