Should you use your savings to pay off the mortgage?
With interest rates at a historically low level is now the time to use savings to pay off the mortgage.
Along with winning the lottery, paying off the mortgage is right up there on our list of favourite daydreams. Imagine what life would be like without worrying about interest rate rises or a hefty chunk coming out of your salary or savings accounts every month to meet repayments.
But if you have enough set aside to make paying off a chunk of your mortgage a reality, should you do it? According to Jason Witcombe, independent financial adviser at Evolve Financial Planning, the answer is yes. "If you have a lot of savings, you should look at paying off the mortgage as a low risk form of investment. In fact, paying down a mortgage is just as valid a way of saving for retirement as a pension or an ISA."
Money Saving Expert Martin Lewis agrees. His recommends paying off debts, including the mortgage, before saving substantial sums - for the simple reason that debts usually cost you more in interest than your savings will earn. For example, a £10,000 mortgage debt at 6% will cost you £600, while £10,000 in savings at 4% after tax will earn you only £400. Of course, in the current climate of dismal interest rates you won't even get this much from your savings.
There's even more of a reason to overpay if you're in the market for a remortgage deal. These days, borrowers seeking a loan-to-value (LTV) deal of greater than 90% are finding it almost impossible to remortgage. Even an LTV of 80% won't necessarily give you access to the best deals. But overpaying will reduce your mortgage and LTV ratio.
Paying off the mortgage may sound great, but Richard Morea, of mortgage broker London & Country, says it's wise to keep a portion in savings for yourself, as a financial cushion in case of emergencies. In fact, experts recommend having at least three months' salary as an 'emergency fund'.
He says: "You never know what's around the corner: a job could be lost or an expensive domestic disaster strike. If you use up all the savings and subsequently find yourself in financial trouble, you could be in a tight spot."
Put all your savings into the mortgage and they're gone - a frightening thought in times of record unemployment. Even independent financial adviser Jason Witcombe, a firm believer in using savings to pay down a mortgage, thinks you should ideally keep at least six months' worth of expenditure set aside.
Also, if you wanted to move home after paying off your mortgage, it's a good to keep some money back to pay stamp duty fees and to give you the large cash deposit today's lenders are looking for if you need to take out another loan.
Paying off the mortgage with savings also doesn't make good financial sense for those with credit card debts or outstanding personal loans. Mortgages are actually quite a cheap way of borrowing money, so make sure you use your savings to pay off the most expensive debt first. And besides which, many lenders won't let you overpay on your mortgage - so you could incur hefty penalties by taking this route.