Savings or Mortgage?
There’s no doubt that the recession has hit a large number of people in many different ways, affecting everybody from the unemployed to self-employed and from the common worker to the entrepreneur. Another group of people who have not been left unscathed by the uncertain economic climate is homeowners with savings.
Being in the position of holding a mortgage and a savings account raises an interesting question: should I use my savings to pay off my mortgage? In the past the answer would have been a clear ‘No’, but with interest rates on savings at a near all-time low, and with mortgage interest rates falling nowhere near as fast, it is a question that many are considering.
Could You Switch Your Mortgage?
The first question you should ask yourself is whether you are getting the best mortgage rate. Perhaps the reason why your savings look so poor is because your mortgage interest is needlessly high, so check the deals, search the web, speak to your current lender and don’t settle for second best.
If you have the best mortgage rate available and it is still significantly higher than the return you receive on your savings, then it may be time to ask yourself the next question.
Are Your Savings Working Hard Enough?
Simply comparing your savings rates to your mortgage is not enough as you could be in possession of a poorly performing savings account. Though in general terms, interest rates on savings are pitiful, there’s no reason why you shouldn’t hunt out the best deal possible.
Again, wear down your virtual leather by pounding the pavements of the web in search of the best possible savings account. Whether that is a regular savings account, an instant access option, an ISA or something more long term, make sure that you have the best possible rate for your circumstances.
If your savings would still perform poorly when compared to the best mortgage deal, it’s definitely time to consider the next question.
How About Penalties?
This, unfortunately, could be a deal breaker. The chances are that your current mortgage includes some kind of early repayment penalty – especially if you took the mortgage at a special rate or as part of a fixed term deal. Lenders don’t want you to leave (they especially don’t want you to jump ship as soon as the introductory rate has ended!) so lace their terms and conditions with penalties.
Fortunately most penalties are on full repayment only so if you are planning to use your savings to pay just a portion of your mortgage, or if your mortgage is penalty free, then you should move onto the last question.
And What About Other Debts?
If you have any other debts at all, it’s highly likely that the interest you incur on those far outstrips that of your mortgage. The absolute golden rule of debt repayment is to pay the most expensive (i.e. those with the highest interest rate) first.
It’s simple: pay your store cards, credit cards, loans and hire purchase agreements before you even consider repaying your mortgage.
So if you already have the best mortgage rate, are currently in possession of the highest possible savings rates, your mortgage has no penalties and you have no other debts, then, yes, you should use your savings to pay off your mortgage.