Should I pay off my mortgage or save?
If you’re a homeowner, you may have asked yourself the question, “is it better to pay off my mortgage or save?”. It’s a valid question, and there are a number of things to consider. On this page, we’ll explore these considerations, outline the benefits of early mortgage repayment, and help you determine whether you’d be better-served paying off your mortgage or saving.
- Early mortgage repayment: Consider budget planning and strategic approaches, like making extra payments or refinancing, to pay off your mortgage early
- Financial balance: Look at individual factors such as expensive debts and pension contributions to decide whether it’s better to save or pay off your mortgage
- Optimise savings: If savings offer a better interest rate than your mortgage, you might consider saving; choose the right savings account for flexibility and emergency funds
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Is it better to have savings or pay off my mortgage?
When deciding whether to pay off your mortgage or save, it’s important to consider what makes the most sense for your current financial situation. A key thing to think about is the interest rate you’re paying on your mortgage, and how that rate might compare to the interest you could earn from your savings.
In principle, if you’re offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it’s best for you to save. However, if you’re paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.
How to pay off your mortgage early
There are a few ways you can pay off your mortgage early:
- Make an extra payment as often as you can
- Look into refinancing to get a better rate
- Get a shorter-term mortgage
- If you have a lump sum saved, pay a chunk off
- Use your annual bonus or money you inherit to pay your mortgage off
Remember, choosing the right strategy depends on your individual circumstances, as well as the terms of your current mortgage lender. For tailored advice, it can help to consult with a financial professional who can help optimise your approach to paying off your mortgage early.
At what age should I pay my mortgage off?
The majority of people aim to pay their mortgage off during their fifties so they can funnel extra money into their pension pot before retirement. This, however, is what would happen in an ideal world, and is subject to external factors such as rising house prices and whether you are shouldering the costs with a partner or family member. These factors mean that first-time buyers are now paying off their mortgage at an average of 65 years of age.
There are options if you’re paying off your mortgages in retirement, such as interest-only mortgages, which allow you to still have some disposable income.
Should I use my savings to pay off my mortgage?
Using a lump sum you’ve saved to pay off your mortgage is a big decision. If you have a healthy amount that isn’t accruing much interest, it may make sense to pay off a mortgage that’s accruing interest.
However, if you’ve locked away your savings into an account with a competitive interest rate, such as a fixed rate bond or notice account, you’re likely to be committed to growing your money long-term.
Ultimately, if you think you’ll eventually end up using your savings to pay off your mortgage anyway, it could be a no-brainer. Paying off your mortgage now will allow you to funnel the money you were spending on mortgage repayments into savings afterwards, allowing you to build up a decent retirement savings pot.
However, you shouldn’t completely wipe out your savings to do this, as experts recommend that you keep between three and six months’ worth of your salary aside as an emergency fund. This emphasises the importance of a balanced approach when deciding whether to pay off your mortgage or save cash.
Should I use my retirement pot to pay off my mortgage?
If you’ve already retired, using your pension to pay off your mortgage may be a good option. This is especially true if you have an outstanding interest-only mortgage with no money to pay off the remaining balance.
If you choose to take this route, it’s essentially the same as using your savings to repay a mortgage. However, it’s incredibly important that you exercise caution and judgement before taking the plunge, as you wouldn’t want to use up too much of your savings and be left without enough money to live on in your retirement years.
What are the benefits of saving vs. paying off my mortgage?
Paying off your mortgage early has advantages, but there are occasions when saving might be more suitable. Since a mortgage is typically a substantial, long-term debt, early repayment can significantly reduce overall interest payments. However, it’s important to balance early mortgage payoff with addressing other outstanding debts. Budget planning is an effective way to understand what you can (and can’t) afford to do. Start with our simple budget planner to figure out whether it’s best for you to save or pay off your mortgage early.
In times of low interest rates, it’s often difficult to maximise your savings. During these times, it might be best to overpay on your mortgage so you can pay your home off more quickly. If you decide to pay off your mortgage rather than save, you’ll need to check the terms of your mortgage agreement, as overpaying can sometimes incur penalties.
On the other hand, if you can earn a better interest rate on your savings than the interest rate you’re paying on your mortgage, it’s worth considering putting more into your savings rather than overpaying on your mortgage. If you decide to save, you’ll also need to consider which type of savings account is best for you. Notice accounts and fixed rate bonds both typically provide competitive rates of interest on lump sum deposits.
Whichever type of savings account you choose, it’s always worth having an emergency fund to fall back on in the event that something unexpected happens. If you’re building an emergency fund, it’s important to consider how quickly you might need to access it, as this will determine what type of savings account to use. For example, you might want to save into either an easy access account or a notice account, both of which offer you the flexibility of being able to access your money quickly and easily.
How do I know if saving or overpaying my mortgage is better for me?
Deciding whether to save or overpay your mortgage is a highly subjective choice, and it will differ from person to person, depending on several factors.
Here are some key considerations to help you choose between saving vs. overpaying your mortgage:
- Can you overpay without being penalised by your lender? Depending on your mortgage deal, most lenders will let you overpay your mortgage by up to 10% each year without receiving a penalty.
- Do you have any expensive debts? You might prioritise paying off any high-interest debts you may have, such as credit cards and loans, as they’re usually more expensive.
- Do you have an emergency pot? It can be a good idea to keep a cash emergency fund, even if considering mortgage overpayments, as it ensures financial flexibility and easy access to funds during unforeseen circumstances.
- Are you earning a competitive interest rate on your savings? Rates on savings accounts have improved, so it’s worth checking if your current savings are earning a competitive interest rate.
- Could you earn more interest on your savings? Consider whether alternative savings options could yield higher returns compared to overpaying your mortgage.
- Are you saving into a pension? Before paying off your mortgage, think about contributing more to your tax-free pension, especially if it earns higher interest than your mortgage.
- Do you have dependents who would suffer financially if you died or were unable to work? If you have dependents, you may prefer to prioritise building an emergency fund and putting funds towards savings, rather than focusing purely on paying off your mortgage.
- Do you have a flexible or offset mortgage? An offset mortgage lets you link your savings to your mortgage, reducing interest payments by offsetting the savings against your mortgage balance. In contrast, a flexible mortgage gives you the freedom to make overpayments or underpayments, offering adaptability to changing financial needs.
Is it better to pay off my mortgage or save for retirement?
Deciding whether to pay off your mortgage or save for retirement is a common dilemma, and the right choice will depend on your unique circumstances. There’s no one-size-fits-all answer, and the key is to assess your own financial situation by crunching the numbers.
It might be beneficial for you to start saving for retirement as early as possible. By investing more in your pension, you stand to accumulate greater interest, particularly if your pension plan incorporates compound interest. This approach not only helps your money grow over time but also ensures a more substantial retirement fund when you eventually reach that stage in life.
So, when weighing up whether to pay off your mortgage or save for retirement, it’s important to strike the right balance between mortgage payments and building a robust retirement nest egg. Importantly, be careful not to compromise your long-term retirement savings goals by focusing excessively on your mortgage.
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