It’s a common dilemma for many people — should you reduce the size of your mortgage by using your savings? In general you should, but there are exceptions to this rule.
A mortgage is a debt like any other, and debts have higher interest rates than savers can get from their savings accounts. Therefore, since it is almost always a good idea to use savings to pay off debts, is it also sensible to use one’s savings to pay off the mortgage? The simple answer is yes…but mortgages are not so simple as other debts.
When You Should Use Your Savings to Pay off the Mortgage
Basically, if the mortgage rate is higher than the after-tax savings interest, it would be better to pay off the mortgage. Also, those looking to remortgage may get a better deal if they lower their mortgage borrowing. However, mortgage overpayments should be correctly timed. The home owner should always ask their mortgage provider when the interest is calculated, as it may be monthly or annually. If this is the case, making a repayment too early means that the home owner will not gain any extra interest, and would have been better off keeping the money in a savings account for a little longer.
When You Should Not Make Mortgage Overpayments
Mortgages are cheap compared to other ways of borrowing money, so other debts should be repaid before making any mortgage overpayments.
Home owners should check if they are allowed to make mortgage overpayments. Sometimes there are penalties for doing so, which effectively negate the interest saved.
It is only a good idea to pay off part of your mortgage if you can afford to do so. Money put into a mortgage is usually gone for good, so those who think they might need to borrow more in the foreseeable future would be better advised to keep an emergency savings fund, since any other form of borrowing is likely to be more expensive than a mortgage.
The Ideal Solution – the Flexible Mortgage
Some people have mortgages with very flexible features. They can over-pay or underpay, or even borrow back the money when they need it. For those homeowners who have a mortgage like this, it is advisable to put all their spare cash into the mortgage, for there will be no problem borrowing it back if they need to. These mortgages may seem like the perfect solution, but they tend to have higher interest rates than other types of mortgage.
Paying off a mortgage can save a substantial amount of money over the long term. However, it is something which should be looked at carefully by every home owner, since there are many different factors to be considered.