use extra cash to pay off mortgage or in savings account?

Question

Should I use extra cash in my current account each month to pay off more towards my mortgage or put in a savings account?

Answer 1

mortgage, it will reduce more interest than you'd gain in interest in savings. Best bet is to get an offset mortgge if you reckon you'll have lots left over and can then keep the money available if you need it

Answer 2

It all depends on what you plan to do with the home, and the mortgage.

If you're planning to the pay the thing down to zero, then it might make a lot of sense to pay more each month. But if for any reason you may move in a few years, or refinance, it's probably wise to just pay the normal payment each month.

It also depends on your interest rate. And if you have a second mortgage with a higher interest rate.

There's a good chance you won't earn more in your savings account, but at the same time, there's no point to overpay the mortgage if there isn't a tax benefit, and/or you might move/refinance.

Learn more at http://www.thetruthaboutmortgage.com

Answer 3

One of the best things about modern mortgages is the fact interest is calculated on a daily basis, so every pound you can throw at your home loan will go to work, straight away.

Savings rarely earn as much as loans charge and by saving this cash in an account linked to your home loan, it could work to reduce the debt by that portion. Your money won't earn any interest but it won't be taxed, either, and by saving the interest you would be paying on that portion of your mortgage you could gain far more.

Put simply, £10,000 in a savings account paying 5%AER would earn £500 after one year, which, after tax would leave a higher rate taxpayer with £300, and a lower rate taxpayer with £400.

If you were to use that money instead to offset your mortgage (charging 5.5%) it would have saved you £550 in mortgage interest -- meaning you can pay down that home loan more quickly.

Answer 4

If you have a tax advantaged retirement account (IRA/401k), fund that first. If you do not have one, then start one. Even with a 0% interest rate savings rate you save your tax rate (25-30%) versus saving 5-8% that you are paying down the mortgage. Also, mortgage interest is tax deductable but making an extra payment will go directly towards principle which will cut the tax savings somewhere down the line.

If saving on mortage interest is your primary concern: mortgage rates are historically low, if you find this to be a consistent problem- I would refinance to a shorter term mortgage (10-15 years fixed if you can swing it) and then continue to fund towards retirement.

Answer 5

Always keep enough cash available so you don't go into the red. Generally savings accounts do not pay high rates of interest so usually it is better to pay off part of your mortgage. But hey! why are you asking us. Get proper financial advice from an independent financial adviser. Many will give a first free interview.

Answer 6

1. What mortgage interest rate are you paying and does it have any early redemption penalties?

2. Compare this rate with what you might get in a savings account. Say to want instant access to the money, then the best rate internet account is, I think, Icesave at 5.7% Gross. How does this compare you your mortgage rate.

Normally I would expect paying off the mortgage to be the better option, but you need to weigh up penalties etc.

Answer 7

mortgage as this is the biggest debt you have. You will not ever earn as much interest on your savings as you will be decreasing your mortgage. But if it only a small amount say £50 saving it and add to your mortgage once a year. Check that your mortgage lender does not charge you for making extra payments - they can do. If so they better of saving!

Answer 8

The only benefit to paying off a mortgage early is if you truly intend to live in the home for more than 5-10 years. If you plan on moving or upgrading to a larger home, don't pay off the second. I don't know what your payments are per month, but you probably could shorten the term of the second by just doubling payments or asking the bank if you could have bi-monthly payments...that usually shortens the term a year or two just doing that. Also consider if you "paid a point" getting the loan, you'll lose the benefit of paying the point and if you have an early pay off fee. Hope this helps.

Answer 9

It will save you thousands in interest if you pay off your mortgage quicker - far more than you could hope to get in a savings account usually. I'd say clear the mortgage.

Answer 10

I would say your house, because the interest on a savings account is a lot lower than your house interest. So I would pay off my mortgage.