Should you use your savings to pay down your mortgage?
If you have both, should you use the savings to pay down your mortgage or should you hang on to the cash?
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Twice daily
MoneyWeek
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Four times a week
Look After My Bills
Sign up to our free money-saving newsletter, filled with the latest news and expert advice to help you find the best tips and deals for managing your bills. Start saving today!
When we did the live webchat for viewers after the second episode of Superscrimpers (a Channel 4 series on personal finance which I'm co-presenting) one of the most-often asked questions was about mortgages and savings. If you have both should you use the savings to pay down your mortgage? Or should you hang on to the cash?
The obvious answer is to make sure you have six months' worth of living money in a good instant access savings account and use the rest to pay down your mortgage as fast as possible. Why? Because it will save you a fortune in cash.
Say you have a mortgage of £150,000 on a rate of 4% with 15 years left to run and £20,000 in extra cash. If you keep the mortgage at £150,000 and keep making your monthly payments (which will be about £1,110) your total interest bill for the 15 years will come to £49,715. But pay it down now to £130,000 and that comes down to £43,000.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So you'll save £6,700 and even more if you keep your monthly payments at £1,110 rather than dropping them to reflect the falling debt. Do that and you will knock two years off your mortgage term and save another £6,000 in interest along the way. So a total of not far off £13,000 saved in interest payments. You can calculate all these numbers with reference to your own mortgage here.
Obviously if you'd kept all the money in a savings account this would have been offset by the interest you would have received on it. But odds are this wouldn't have been as high as the interest rate on your mortgage. You would also have had to pay tax on it.
So clearly in a rational world, paying down your mortgage is the right thing to do. But we aren't all entirely rational about money: many of us are loath to lose control of our cash by putting it into our mortgage. We'd rather keep it where we can get at it regardless of the long term costs.
However all is not lost. For these people there is the offset mortgage. These sound complicated. But they really aren't. All you do is hold your mortgage and your savings in the same account. That way the money in your savings account is offset' against your mortgage. This means that you won't earn any interest on your savings, (and you won't be paying any tax), but you won't be charged any interest on the same amount of your mortgage either.
This can save you a fortune over the full term of a mortgage. An example from Scottish Widows. Say you have a 25-year £130,000 mortgage with a monthly payment of £824.44 and £15,000 in savings. If you offset the £15,000 you will cut three years and 11 months off your mortgage term and save yourself £38,763 in interest. And best of all you will retain full access to your cash: if you need the money you can just withdraw it.
It used to be that offset mortgages came with higher interest rates than ordinary mortgages. This is no longer really the case: according to Moneynet, the rates are now on average only 0.36% higher than ordinary rates and some lenders charge only 0.1% or so more. That makes the offset mortgage a very attractive option indeed. Think of it as the best of both worlds.
-
Average UK house price reaches £300,000 for first time, Halifax saysWhile the average house price has topped £300k, regional disparities still remain, Halifax finds.
-
Barings Emerging Europe trust bounces back from Russia woesBarings Emerging Europe trust has added the Middle East and Africa to its mandate, delivering a strong recovery, says Max King
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
