Should I Pay Off My Mortgage?
Paying off a mortgage early to own one’s home outright is a dream for many homeowners, but is it always the best option?
Firstly, your mortgage should be viewed as a debt like any other. Whilst it may have special features, it’s essentially just a long-term, cheap loan. Before overpaying on your mortgage, make sure that you’ve cleared more expensive debts such as credit cards and personal loans.
If you’re debt-free apart from your mortgage, start investigating whether you can make more through a top savings account than you’d save by paying off your mortgage. The golden rule is: If the interest rate on your savings after tax is higher than the interest rate on your mortgage, then you’d be better off keeping your money liquid.
Mortgage or savings – which is best for you?
Use our mortgage calculator and savings calculator to find out.
The flexibility inherent in keeping your money in savings is another advantage to not paying off your mortgage. Once you’ve used your money to pay off the mortgage, you can no longer access that cash in the event of an emergency. Always make sure that you have an emergency fund large enough to cover three to six months’ worth of bills stashed in an instant access account.
So, if your debts are sorted and your emergency fund well stocked, what’s to stop you paying off your mortgage immediately?
Take a close look at the small print in your mortgage deeds for any penalties that may be incurred by overpayments. Early repayment penalties, normally a percentage of the outstanding loan amount, can be particularly stringent if you pay off extra during the term of a fixed, capped or discounted mortgage deal and could means that it makes more sense to leave the money in a savings account. Some mortgage providers will allow 10%-20% overpayments per annum without charge during these deals, but these may have to be made in a specific month of the year to qualify, so be sure to read terms and conditions very carefully.
» Find out how much you could save using our mortgage calculator.
Written by Jo Dimbleby
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Last update: 22 September 2010
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