Make money by paying off your mortgage?

2 February 2012

mortgage moneyWe don’t expect a lot from Bitterwallet readers, and with good reason, but we do expect you to be able to fathom that 4.5% is more than 2.5%. However, apparently twice as many people choose to put money into a savings account ( with 2.5% representing a good rate in the current climate) rather than overpay on their mortgage, saving an estimated 4.5% in interest charges.

New research of over 1,000 mortgage-holders by First Direct found that 42 per cent regularly pay into a savings account, whilst only 21 per cent regularly make an overpayment on their mortgage.

The bank suggests that one reason for this could be that many mortgage holders are not aware of the current status of their loan. Just under a third don’t know what the interest rate is, whilst 43 per cent don’t know what the total cost of their mortgage including interest is. A quarter don’t even know whether they could make an overpayment if they wanted to. We know that all Bitterwallet readers are fully conversant with the facts of their own mortgage of course, but there are some oblivious people out there.

Of course, in real life things are not all average, and you may be lucky enough to have a mortgage at 2.5% and a savings account at 3%. Or you may want to have immediate access to your savings in case you need to rush out and buy a bargain. Or something.

Naturally, First Direct are trying to sell their offset mortgages by publishing this research, but it is a valid point to be made. If you do have savings sitting around doing nothing, it is likely to save you more money in the long run if you pay off some or all of your mortgage rather than scrabbling for poor savings rates.

Worse, if you have other lending, particularly at super-high rates like 14% plus credit cards, it is pure madness to hold savings instead of reducing the balance on these cards- most emergency purchases you would ever need to make can be put on a credit card and you could save (=pocket) an extra 10% or more in saved net interest charges.

Just a thought.

TOPICS:   Credit Cards   Economy   Mortgages

15 comments

  • Steve O.
    Without wanting to sound like some banking shithead, I've had an offset mortgage with FD for eight years now and it's saved me a fortune. It meant I could pay off the mortgage for my first house in less than 5 years, which meant I could move to a bigger house than I would otherwise have been able to afford. I've halved this mortgage in 5 years, paying less than half in interest than I was when I moved in. I suspect many people save rather than pay off because they like the comfort of knowing they have savings if they need them, but I also overpay the mortgage knowing I can draw down on it again if I need it. I'm boring myself now, mind you.
  • dvdj
    What sort of savings are you looking at for offset mortgages?
  • JonB
    What hasn't been mentioned is that you can link savings accounts to your offset mortgage, so you can have your savings cake (to buy your gadgets at will) and eat it (lower your interest payments). Much better than over-payments as you can still get at the cash in your savings account if you need to.
  • MrRobin
    As both the article and Steve O theorises, the answer most likely lies in the comfort of having some money stashed away for a rainy day. Yes, some mortgages will allow you to get any overpayment back but it's extra hassle. An offset mortgage is certainly an invention that helps both consumer and bank in this respect. @dvdj, the sort of savings will depend on your mortgage rate and the amount you can save - i.e. if you have a mortgage at 5% and savings of £1,000 then you will save £50 a year in interest.
  • Student
    Pay off student loan... currently 8k or parents mortgage... currently 28k (3 years left) thoughts?
  • Mike H.
    The banks just want their money back quicker. Steve, I expect you bought your house just before prices went fucking daft.
  • PaulS
    @Student Do not pay off your student loan quicker than the usual payments. It's interest is negligible compared to a mortgage or any other debt. Plus it doesn't effect credit scores and such like.
  • Sawyer
    I don't have a mortgage, but when I was looking at buying a house a couple of years back, many of the lenders didn't allow overpayment, or would limit it to 10% extra, or charge a stupid fee every time you do. Of course, I wouldn't have chosen one of their mortgages, but it explains why many people just pay the amount they're told and do something else with any savings.
  • Mike H.
    Also don't forget the effect of having an ISA. Some people don't want to give up their tax free benefit for the year, which may not be useful at the moment may be vital in the future.
  • Richard
    Plus if you're going to say that paying off a mortgage will be a benefit in the long run (say 25 years) then you have to consider savings rates for the same period. For example savings rates may be 2% lower at the moment but what if 5 years down the line they are 10% higher, unlikely but you get the idea, in which case the £50,000 you overpaid your mortgage with to save an extra 2% a year is now costing you 10% a year in lost interest from a savings account.
  • Tom
    Richard, it's a good thing they don't yet you out all to often. If interest rates rise the base rate will have risen so you're mortgage rate will have increased too. @Student - pay off your student loan the interest rate is ~ 4.4% which should be higher than your mortgage.
  • zeddy
    @Richard: you work for the banks, don't you?
  • tin
    As someone who's doing exactly that you've collectively hit the nail on the head. We have ISAs, Savings (both earning knack-all) and a mortgage. The mortgage is one of those where you're only allowed to pay 10% if we wanted to, but we're both saving and pumping the maximum per year into cash ISAs in case of job-related disaster where we need the money in hand quickly (mostly to continue to pay off the mortgage!!). I'd love an offset but all the mortgage companies wanted £1000 just to arrange it (last time I looked, maybe time to look again).
  • Jack P.
    This article pretty much sums up the 'turmoil' I've had over the past couple of years. Basically, my wife and I put enough away to have a cushion should one or both of us fall and the remaining surplus (of which there has been next to none over the past year or so), gets chucked at the mortgage. My theory about that is that for every pound I overpay, I'm saving two(ish) in the long run. On a similar token, I spoke with a financial advisor a number of years ago (pre-recession) who said that if I did overpay, that I was giving over my money to the lenders and if I needed it, wouldn't get it back. He had a point I suppose, but my current lender, Nationwide, lets me take it back out if I need it. Having been made redundant in the past, with no kids, mortgage or any major outgoings, it was bloody hard enough to survive for six months without the help of others. I'd not long left uni, was working in a poorly-paid science job to 'earn my spurs' and when I was getting paid, was pretty much hand to mouth and so had no savings. I was lucky enough to live with friends who had just bought a knacker of a house and everything needed doing, so I put some graft in in return for digs and hot meals. I definitely couldn't have done it without their charity. I for one value the fact that I have now have savings that if I do get the push now, at least I've got 6 - 12 months without having to properly scrat around, worrying about how my kids are going to eat and what they're going to wear as they seem to grow out of clothes before they leave the shop that the new ones were bought in.
  • teamdave
    I have the same dilemma although haven't got the benefit of an offset mortgage. My tracker mortgage is now 1.39% which is nothing and my ISA meanwhile pays 3% so by rights I should plough money into the ISA and ignore the mortgage while the interest rate is low. Luckily I've had the spare money this year to do that and have filled up the ISA. The spare is going into overpayments on the mortgage which the bank allows and lets me build the overpayments as a reserve in case of the worst. I've got 12 months of reserve payments built up now which takes the pressure off a bit if the job goes tits up. It's difficult to decide what to do though. Overpaying the mortgage feels better and watching the huge sum drop a little bit more is satisfying. But the difference between 3% and 1.39% is a draw and obviously saving the extra is 'making' me more money. However, nobody believes that interest rates are going to be low forever and the money I reduce on the mortgage now means less I'll pay in the future when interest rates return to normal. ie. significantly higher than now. This is something Richard doesn't seem to understand.

What do you think?

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