Given the opportunity, it may seem the obvious decision to pay off your mortgage early. But is it? Unfortunately it’s not that simple, there are a number of things to check first.
Are you allowed to repay your mortgage early?
Some mortgages penalise you for paying them off more quickly, especially if you have a special offer fixed or discount rate deal.This is because lenders want you to stick with them once the cheap rate ends, as at that point their rates shoot up. Thus it’s not in their interest to let you pay off the mortgage more quickly – after all the longer it takes you to repay, the more they earn.
Check whether there are any penalties or additional costs to making extra or higher repayments. If there are these are likely to outweigh the gains from repaying the mortgage in which case it’s time to start saving. Thankfully these penalties are becoming rarer, though most mortgages will allow you to make “overpayments” (i.e. paying more than the regular amount) in some form.
What if you need to get to your money?
Put your money into most mortgages and it’s gone – you’re effectively locking it away, losing the ability to use it in the future. Therefore the interest gain must be balanced against this limited flexibility.
Good old fashioned budgeting logic says it’s always worthwhile having a cash emergency fund. While for people with expensive card and loan debts I generally disagree, if you’re debt free apart from a mortgage, this is a good idea.It’s worth having three to six months worth of cash stored away; enough to live on if you lost your job or had other issues. Mr Hallis, my A Level economics teacher would probably have called this “a premium for liquidity”, in other words you’re sacrificing some interest for easy access to the cash if needed.
Consider the potential outcome with no emergency fund. Put all your cash in the mortgage, and something happens and without savings you would need to fund this with credit card or loan borrowing for easy quick cash – and that’s expensive.
Therefore only start dumping cash in the mortgage once your emergency fund is up and running.
The big exception – mortgages with flexible featuresThe big exception – mortgages with flexible features
Some people have mortgages with flexible features (or super-flexible offset or current account mortgages), meaning you can overpay or borrow-back (i.e. put the money in to pay off the mortgage but then withdraw it without penalties when you need it). If that’s the case there’s no problem putting all spare cash in the mortgage – as it can be used as a high rate savings account.
This may prompt you to think flexible mortgages are therefore always best. Yet the problem is their interest rate is usually higher than standard mortgages, and the extra cost of the debt more than out-balances the gain on savings for most people.
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