Should I Pay Off My Mortgage?

Article Category: Finance

Paying off a mortgage early to own one’s home outright is a dream for many homeowners, but is it always the best option?

Advantages to paying off your mortgage include no more monthly payments to the mortgage company, lower interest charges and, afterwards, no more worry about negative equity, a valuable asset to pass on to your heirs and a large percentage of household budget freed so you can enjoy a few more of the finer things in life. Seems like a no-brainer, but it’s important to consider the bigger financial picture before slapping that inheritance cash into your mortgage.

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