Should You Use Savings to Pay off a Mortgage?

With interest rates on savings abysmally low and lenders offering better deals on mortgages, people are starting to question where the best place is to put their spare cash. If a mortgage is your only debt, clearing it quickly through overpayment may indeed be the most logical option. But be warned – there are numerous hazards that need to be taken into account.

Firstly, you need to understand the obvious: a mortgage is a debt, just like any other. Subject to a few exceptions, overpaying a mortgage is only ever a good idea if it is the only debt you have. So if you’ve yet to clear your student loan or any credit card bills, prioritise them – they tend to be more expensive.

Your mortgage is also likely to be the biggest debt you have in your lifetime, and for this reason alone it is crucial that you read the small print. Remarkable though it may seem, there is every chance that your lender will penalise you for overpaying too much. Many allow up to 10% overpayment per year without penalties but beyond that and you could incur charges that render the whole plan pointless. Do not be put off by this – 10% is still a significant sum and worth considering if the figures add up.

You need to work out exactly what your savings rates are in each account you hold. The trick is to then compare the two lots of interest and see if it’s worth putting the extra cash towards paying off your house rather than it sitting dormant. It is worth noting that the rates you currently have may not be the best ones on offer, so do some research and see if you can transfer your money to a better account before adding your mortgage into the equation.

Let’s be clear here – there is only ever any point in overpaying a debt as big as a mortgage if you have the money to do it. A rainy day fund is something that everyone should have, no matter how humble, as you can never predict the future. Should you find yourself in a more comfortable position financially speaking, remember the value of old-fashioned budgeting and aim to set aside about six months’ worth of expenses to fall back in case you need an emergency lump of cash.

If overpaying is a viable option for you then there it is crucial that you get the timings right on the installments. In short, you need to know how your lender calculates the interest: daily, monthly or annually. The less frequent it is, the more important to get the timing right. To benefit, you will need to make the extra payment after the interest has been calculated otherwise it will be pointless. Many lenders will calculate on request if you are overpaying more than the minimum requirement of around £500 – £1,000. If you accidentally miss the date then put the money into a high-interest savings account so you are still earning something on it in the meantime.

There are of course many other factors to be taken into account when making a decision that regards such substantial sums of money. However, by taking on board the basic points covered here you will be able to get a general idea of whether or not overpaying is something worth considering. If you are thinking of selling your house for cash in order to pay off debts, Jemima Poppy can help. For free expert advice, call us on 01908 232 879.