Naz Financial

A Personal Financial Blog from Naz Miller

“Should I Overpay the Mortgage, Save or Invest the Cash?”

Overpay the mortgage and you could save a lot of interest payments and even pay it off early. That sounds tempting to most of us, but are there better options for using the cash? Savings rates remain at rock-bottom, so if you overpay the mortgage it looks sensible. But that’s not the whole story, there are negatives, too. These include repayment penalties, losing your emergency fund and more. Let me guide you through the pros and cons; as ever, it’s not as straightforward as it first seems…..

Only Overpay the Mortgage if the Maths are Right

Overpaying means you make the same gain as saving at your mortgage rate. If you’ve a 3% mortgage, you’d need savings paying at least this. And, if you’ve used up your personal savings allowance, or a higher rate tax payer, you need savings paying even more.

But savings accounts are not the only way of putting money aside. For most of us, our pensions represent the most important aspect of our savings. These are typically invested for higher returns. So, maybe investing is a better option for the cash?

See what returns you’ve been getting on your invested savings, or what providers have delivered in the past. Do the maths add up? Are you willing to take the risk?

MoneySupermarket have a great little mortgage overpayment calculator to help you get the numbers right.

overpay_the_mortgage | invest_or_save |

Lastly, check that your mortgage company allows you to overpay some of your mortgage. Most will allow you to repay up to an extra 10% of the mortgage amount per year, but anything above this may result in an early-repayment charge that negates your gains.

It’s Not Just About Numbers

No one can give you a guarantee on an investment. You can put your money in the stock market and lose it. You can put your money into property, and it doesn’t perform as well expected. Your attitude to risk is important here.

If you’re risk-averse then you probably find paying down the mortgage a better option. There is a psychological burden coming associated with debt. Also, there’s a great relief and sense of achievement when you repay the last penny. Some people, understandably so, prefer to be debt-free.

housing_market | NazFinancial view

Also, what are you saving for? If you have a specific goal to achieve, such as buying a new car in two years, or saving for school fees when your child starts their education in three years’ time, then you are probably better off saving money for that, rather than locking it up in your mortgage.

If it’s overpay the mortgage vs. pension, then  consider when you need the pension and also what you’ll do with the cash freed up if you clear the mortgage early, before you start drawing your pension.

If you do decide to overpay the mortgage, another choice you’ll need to make is whether your repayments go towards reducing your mortgage debt, rather than reducing your monthly payments.

Pros and Cons

Pros

  • Cut the monthly amount going toward your mortgage, freeing up useful cash, especially during retirement.
  • Save money on interest, potentially ££ thousands.
  • Receive a predictable rate of return, equal to the interest rate on the debt being paid.
  • Enjoy peace of mind with lower debt.
  • It’s possible to use the equity in your home if you need money later.

Cons

  • Ties up a good chunk of your liquidity and net worth in your home, and it might be harder to access it later.
  • It can be difficult to sell the home quickly if you lose a job or if there’s an emergency and you need money fast.
  • You miss out on the potential for higher returns from other investments.

In Conclusion, Overpay the Mortgage if it’s Right for YOU

Overpaying the mortgage seems to be the safest option right now while savings interest rates are low. Overpayment is not necessarily the option that pays better, though. If you’re more concerned about returns, I’d consider putting the money to work by investing. Although investments come with higher returns right now, they have their short-term bumps, so be aware.

Everyone’s situation is different. What about yours? I’m happy to talk to anyone faced with this dilemma of “Should I Overpay the Mortgage, Save or Invest the Cash?”. Just give me a call or drop me a line, any time.

Further Reading

MoneySavingExpert

This Is Money

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

Glossary of Personal Financial Terms

AAA Rating

In short, AAA ratings (‘triple-A‘ ratings) are the highest credit rating available for an investment, such as a bond or company.

AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.

Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.