Mortgage Clinic: Should I pay off my mortgage with savings?
Wednesday 02 July 2008
'We're approaching the end of a five-year fix with Alliance & Leicester and owe £97,000. We have roughly £70,000 in savings; would you suggest paying all this in to the mortgage and leaving us with a £27,000 debt? Or should we pay some off, or none at all? We'd like to move to a larger house in 2010'. CI, Leeds
Paying off one's mortgage early is an enduring dream for all homeowners. No more monthly home-loan repayments, an end to stressful interest-rate movements and a valuable asset to pass on to heirs – what's not to like?
In your case, that £70,000 payment would hive off a giant chunk of your home loan and shrink your monthly repayments overnight. Even better, more of your monthly sum would repay capital rather than interest.
This will be a difficult temptation to resist but diagnosis here at the Mortgage Clinic suggests you should – or, at least, keep a portion of it for yourself.
First, it'd help to be able to fall back on a financial cushion in an emergency, says Richard Morea at broker London & Country.
"It's a pessimistic view, but you never know what's around the corner: a job could be lost or an expensive domestic disaster strike. If you use up all the savings and subsequently find yourself in financial trouble, you could be in a tight spot."
Second, you might choose an offset mortgage instead, where you only pay interest on the difference between your £70,000 savings and the £97,000 loan. This would allow you to pay off your home loan quicker and offer greater flexibility.
"Because you'd only be paying interest on £27,000 and assuming you have a repayment mortgage, you'd have a choice," says Andrew Montlake at broker Cobalt Capital, "simply reduce your monthly payments dramatically, or keep them at today's level and pay off your loan quicker."
The offset option would see you pay off more of your mortgage while retaining the ability to tap in to your considerable savings if you needed to.
"You'd have complete flexibility and not need to worry about going through the sometimes lengthy process of taking out a further advance should you need the cash in the future," Montlake adds.
Among the lenders currently offering competitive offset deals is First Direct, which has a two-year "offset" fix at 5.99 per cent.
The issue for you now, of course, is your next house move in two years. And regardless of how it's funded, a large cash deposit could be immensely helpful in securing a cheap home loan, says Melanie Bien of broker Savills Private Finance.
"Although nobody knows where mortgage rates or house prices will be in two years, a bigger deposit means you'll qualify for cheaper deals." You'll also need spare cash for stamp duty, she points out.
Send us your questions and you could receive £50 to spend at Amazon
Foxed by jargon? Worried by the credit crunch? Email a question to email@example.com. We will not reveal your identity, and we cannot give specific advice. If your question is printed, you'll receive a £50 voucher from Amazon.co.uk, so you can kit out your home with anything from a lawnmower to an espresso machine. www.amazon.co.uk/homeandgarden
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