Should you pay off your morgage? (From Worcester News)

Should you pay off your morgage?

9:57am Thursday 25th June 2009 in

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“SHOULD I pay off my mortgage if I have any spare cash?” is a question that’s always jammed my e-mail bag. In previous years, overpaying has usually won out.

Yet repeated slashing of interest rates has left many mortgages at unthinkably cheap rates. These cuts make it less attractive to repay a mortgage rather than save, as home loans are cheaper.

DEAL WITH OTHER DEBTS FIRST

For most people, it’s a question of overpaying their mortgage with spare cash and savings rather than clearing the whole lot in one go. Before tackling overpaying, it’s crucial to ask if you have any other debts. Always repay the most expensive debts first – mortgages are cheap compared with most credit cards or loans, so clear them first.

THERE ARE THREE EXCEPTIONS:

● Struggling to get a new deal?

Clearing your existing mortgage means you’re borrowing a lower proportion of your house’s value. If that puts you in a better loan to value (LTV) threshold, it could improve the rate you get on the whole of your mortgage.

● Student loans beat mortgages.

Official Student Loans Company loans, which are usually set at the rate of inflation will, depending when you studied, drop to 0 per cent or MINUS 0.4 per cent in September, so these easily undercut any mortgage.

● Credit cards. If you have a good credit score and shift from one 0 per cent deal to another, then you’ll be undercutting your mortgage so should pay that first.

IT’S ALL ABOUT THE MORTGAGE RATE

If you have £10,000 of mortgage debt at 5 per cent interest, the annual cost is £500. If you have £10,000 of savings, earning you 2.5 per cent after tax, the interest you accumulate would be £250.

Financial logic says if you use £10,000 of savings to pay off £10,000 of mortgage debt, you would be £250 a year better off.

Try my calculator moneysaving expert.com/repaymortgage.

The crucial rule is if your mortgage rate is higher than the after-tax rate on your savings, don’t save, pay off the mortgage.

If it is lower, put your money in a top savings account, see money savingexpert.com/topsavings, as you’ll earn more from saving.

LOOK BEFORE YOU LEAP IN

1. Are you allowed to overpay?

Some mortgages charge penalties for overpayment, most commonly if you’re on a special offer, such as a fixed or capped rate.

2. Keep an emergency fund. Once you’ve used cash to pay off a mortgage the money has gone.

You can’t access it (unless you’ve a special type of flexible mortgage), so you can’t easily borrow the money back.