Questionnaire: Should I Save or Pay Off Mortgage?
If you have recently come into money or received a bonus from work you might want to think about paying of a proportion of your mortgage with the funds.
Paying off your mortgage can be a great way to reduce the debt of the loan and help bring down your loan-to-value rate which should make it cheaper when you remortgage next.
But with an increasing number of savings products in the market it can be a hard to decide between making overpayments and putting the cash in savings.
These few questions should help you decide.
1) Does your lender charge for overpayments?
- A) No
- B) I’m unsure
- C) Yes
2) How much spare cash do you have?
- A) A couple of hundred pounds each month
- B) Up to £100 each month
- C) Less than £100 each month
3) How high is your LTV?
- A) Over 90%
- B) 70-90%
- C) Under 70%
4) Will you need to access the money in the near future?
- A) No
- B) I would have no emergency savings
- C) I plan to take the money back out again in a few years
5) Do you have an interest-only mortgage?
- A) Yes
- B) Part interest-only, part repayment
- C) No
6) Are you looking to remortgage soon?
- A) Yes, within the next year
- B) Within the next few years
- C) Not in the near future
Mostly A – It Makes Sense to Pay off your MortgageIt sounds like you would benefit from using any extra money you have to pay off your mortgage. If you still have quite a large outstanding mortgage paying this off with any spare chunks of cash you have will lower your loan-to-value, which will mean you have lower monthly payments. If you are on a very high LTV, for example 100% or in negative equity it is important that you get your mortgage down as quickly as possible as this might be stopping you from moving.
Interest-only mortgages are particularly risky because you are not paying off any of the capital debt in your mortgage. If you are on interest-only and you have some spare cash moving onto a repayment method should be your number one priority. Before you start overpaying on your mortgage though you will need to make sure that your lender does not charge you for doing so.
Mostly B – You Need to do Your CalculationsYou might want to think about your options and calculate whether you would get a better deal putting the money into your mortgage or taking out a savings account. For example if the interest rate on your mortgage is 3.50% and you get 4% in a savings account it will be more beneficial to put the money into a savings account because you get a higher rate of interest.
You should also consider whether you will need the money for anything in the next few years such as home improvements or extending the property. There are other ways to invest the money into your property as well as reducing the mortgage. If you are on a high LTV or part interest-only you should think about reducing your mortgage and if possible you should put this debt before others.
Mostly C – There is no Need to Rush into Paying off your MortgageIf you do not have a lot of money to use towards paying off your mortgage and your lender will charge you for making extra payments you may be better off not adding to your monthly payments.
If you are on a low LTV and do not have a large mortgage your rate is unlikely to go down by increasing your mortgage payments. If you also plan to take the money back out of the property in the next few months you will not benefit from paying the mortgage off early.
Injecting any extra funds you have into your mortgage might seem like a good idea, but it is important to look at the bigger picture and weigh up your options.
Having said that it is also important that you treat your mortgage as you would any other debt and try to pay it off as quickly as possible. You will need to assess whether it is risky putting your extra money towards the mortgage and that you don’t need to use it for anything else.