Eddie Hobbs - Show me the Single Mum

So - the mortgage top-up scheduled over roughly the same term as the original personal loan(s) is cheaper. Isn't that what I said? My point was that if the loan to mortgage consolidation top-up is scheduled over the full/remaining term of the mortgage (as many people do and, in the absence of any qualification from Eddie, this punter was being encouraged to do) then this will cost less per month but much more in the long run in interest compared to the original higher rate but shorter term personal/unsecured loan(s). Is that not the case?

ClubMan said:

So - the mortgage top-up scheduled over roughly the same term as the original personal loan(s) is cheaper. Isn't that what I said? My point was that if the loan to mortgage consolidation top-up is scheduled over the full/remaining term of the mortgage (as many people do and, in the absence of any qualification from Eddie, this punter was being encouraged to do) then this will cost less per month but much more in the long run in interest compared to the original higher rate but shorter term personal/unsecured loan(s). Is that not the case?

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No. The correct way to compare loans is to compare the lending rate, i.e.
a loan at 3.5% (or at 1% for that matter) is much cheaper than a loan at 10%.

Take two loan examples:

• LoanA: €20K at 10% over 3 years

• LoanB: €20K at 1% over 40 years

Following your flawed logic, Loan A is cheaper than LoanB because:

Total Interest on LoanA ( €3232.37 ) < Total Interest on LoanB ( €4274.18)

Laurie said:

No. The correct way to compare loans is to compare the lending rate, i.e.
a loan at 3.5% (or at 1% for that matter) is much cheaper than a loan at 10%.

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I disagree. You have to factor in the term as well. A lower interest rate over a longer term can be more expensive than a higher interest rate over a shorter term. That was my original point and I don't see that you have shown that I was wrong. If I am I am perfectly willing to admit that. However I don't see how your arguments so far and the mention of NPV earlier make any difference to what I have been saying. Feel free to clarify.

Laurie said:

No. The correct way to compare loans is to compare the lending rate, i.e.
a loan at 3.5% (or at 1% for that matter) is much cheaper than a loan at 10%.

Take two loan examples:

• LoanA: €20K at 10% over 3 years

Monthly Repayment = €645.34 pm
Term = 36 months
Total Interest = €3232.37




​

• LoanB: €20K at 1% over 40 years

Monthly Repayment = € 50.57 pm
Term = 480 months
Total Interest = €4274.18





​

Following your flawed logic, Loan A is cheaper than LoanB because:

Total Interest on LoanA ( €3232.37 ) < Total Interest on LoanB ( €4274.18)

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Are you not talking about cashflow? Surely loan A is cheaper than loan B

OK - maybe the confusion arises her from my non technical use of the term "cashflow" in the post linked above? Maybe "cashflow" has a technical meaning different to my casual use to refer to the fact that the mortgage consolidation may result in lower monthly repayments (and thus more cash available to the punter each month) than the original personal loans. Even if the mortgage consolidation may cost more in the long run especuially compared to higher headline rate loans over a shorter period of time?

What you need to do is compare the two total interest sums in today's euros - in other words adjusted for inflation. For instance the sum of €7,838 in twenty years time, assuming inflation rate of 3%, is €4,299 at today's values. At the same inflation rate, €3,232 payable in three years time is worth €2,954 today.

However you need to compute this comparison allowing for the payment being made over time. [broken link removed] might be of use. Enter the amount of interest paid in each year, from 1-3 in one scenario, then 1-20 in the other, and compare the two totals. I'm sure there are some others out there if you look for them.

I realise that but even allowing for the future value of money etc. I don't think that it's inherenty incorrect or flawed logic to point out that a top-up for consolidating higher cost unsecured loans onto the mortgage payable over the full term of the mortgage will often work out more expensive in the long run than the original loans over a shorter period.

I think the point is that you can't decide which is more expensive unless you express the total interest paid in some meaningfully comparative form such as today's values. Generally speaking the higher the interest rate the higher the cost. But the difference can be severely affected by inflation for example.

But certainly if the long term payment plan DOES prove more expensive, sure, it is of course correct to point that out. However you cannot necessarily use total interest paid as the yardstick for measuring expense.

extopia said:

I think the point is that you can't decide which is more expensive unless you express the total interest paid in some meaningfully comparative form such as today's values. Generally speaking the higher the interest rate the higher the cost. But the difference can be severely affected by inflation for example.

But certainly if the long term payment plan DOES prove more expensive, sure, it is of course correct to point that out. However you cannot necessarily use total interest paid as the yardstick for measuring expense.

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Extopia, thank you. You have just explained succinctly the very point I was trying (in a very ham-fisted way admittedly!) to make.