Should I pay off my mortgage or save?

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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, you’ll find out what those considerations might be, the benefits of paying off your mortgage early and whether you’ll be better off if you pay off your mortgage or save.

Is it better to pay off my mortgage or save?

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.

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What are the benefits of paying off my mortgage early?

There are pros and cons to paying off your mortgage early. A mortgage is probably the largest debt you have. You’ll typically be paying it off over many years, and this means you might be paying large sums of interest. Paying off your mortgage early can help reduce how much interest you’ll pay, but you’ll also need to balance paying off your mortgage early with paying off any other debts you might have.

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 pay off your mortgage early or save.

How to pay off your mortgage early

There are a few ways you can pay off your mortgage early:

  1. Make an extra payment as often as you can
  2. Look into refinancing to get a better rate
  3. Get a shorter-term mortgage
  4. If you have a lump sum saved, pay a chunk off
  5. Use your annual bonus or money you inherit to pay your mortgage off

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 or not you are shouldering the costs with a partner or family member. 

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.

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. For example, in the case where 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 really don’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?

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.

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 you use to grow your fund. 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?

Choosing whether or not to save or pay off your mortgage is an entirely subjective scenario, meaning it really will differ from person to person, depending on several factors. 

These factors include things like whether you have any outstanding debt with high levels of interest, whether or not you have enough savings aside for an emergency fund and what position you might leave your family in should something happen to you or your earnings. 

To help you decide whether saving or overpaying your mortgage is better for you, here are some of the things to consider: 

  • Can you overpay without being penalised by your lender?
  • Do you have any expensive debts?
  • Do you have an emergency pot?
  • Are you earning a competitive interest rate on your savings?
  • Could you earn more interest on your savings?
  • Are you saving into a pension?
  • Do you have dependents who would suffer financially if you died or were unable to work?
  • Do you have a flexible or offset mortgage?

Is it better to pay off my mortgage or save for retirement?

Another consideration is whether it’s best for you to pay off your mortgage or save for retirement. Again, it depends on your personal circumstances, but you may want to consider starting to save for retirement as early as possible. 

The more you can invest in your pension, the more interest you’ll earn, especially if you’re saving into a pension which offers compound interest, and the more money you’ll have when you reach retirement. 

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If you have any further questions, our UK-based Customer Services Team is happy to help.

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