Should you overpay your mortgage or keep your money in savings?
Adapted from an article in our October Newsletter
Making extra mortgage payments could help you become mortgage-free sooner. But with savings accounts offering interest too, is paying more towards your home loan always the smartest move? Here’s why speaking to your mortgage broker before making a decision could be worthwhile.
For many homeowners, becoming mortgage-free is one of their biggest financial ambitions.
The prospect of paying off your mortgage years ahead of schedule, saving interest and freeing up money each month, is certainly appealing.
And if you have built up some savings or find yourself with a little extra money left over at the end of the month, putting it towards your mortgage might seem like the obvious choice.
But is it always the right one?
Depending on your mortgage interest rate, the returns available on savings and your wider financial circumstances, keeping your money in a savings account could sometimes leave you better off.
Before making additional mortgage payments, it is worth understanding how the numbers stack up and what the decision could mean for your financial flexibility.
This is where speaking to your mortgage broker can make a difference, helping you understand your current mortgage, the options available and the potential implications of overpaying.
Could overpaying your mortgage save you thousands?
When you make your monthly mortgage payment, part of that money generally goes towards interest, while the rest reduces the outstanding balance if you have a repayment mortgage.
Making an additional payment reduces what you owe, which can help lower the amount of interest charged in the future.
Over time, regular overpayments could help you repay your mortgage sooner and reduce the overall cost of borrowing.
For example, a homeowner with a substantial mortgage balance and several years remaining on their deal might benefit from making relatively modest additional payments each month.
But the amount saved will depend on factors including their interest rate, outstanding mortgage balance, remaining term and how the lender applies overpayments.
Some lenders allow borrowers to use overpayments to reduce their mortgage term, while others may recalculate their monthly repayments.
Understanding these differences matters, particularly if your goal is to become mortgage-free sooner.
A mortgage broker can help you review your current mortgage arrangements and understand how making extra payments could affect your longer-term plans.
But could your savings earn more elsewhere?
It might sound surprising, but paying off your mortgage faster is not always the most financially advantageous use of spare cash.
Imagine you have a fixed-rate mortgage charging 2 per cent interest, but can earn 4 per cent on your savings.
In this simplified example, keeping money in savings could provide a greater financial return than the mortgage interest you would avoid by overpaying.
However, the comparison becomes less straightforward when you consider the tax that may be payable on savings interest, whether the savings rate is fixed or variable, and when your existing mortgage deal expires.
If you are paying a higher mortgage interest rate than you can earn on savings after tax, overpaying could potentially be more attractive.
There is also another important consideration: access to your money.
Savings held in an accessible account can usually be withdrawn if unexpected expenses arise.
Money paid towards your mortgage, however, may not be readily available again without arranging further borrowing.
To find out more, please click here to read the full article.
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What to do next
Russell Green will personally deal with your enquiry.
Tel 01934 442023
Email russell@westonmortgagesonline.com
Our initial mortgage consultation is free and with no obligation; should you proceed to an application, there will usually be a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances, but will range from £ 290 to £490, and this will be discussed and agreed with you at the earliest opportunity.
Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.
